What's happened?

New Prime Minister Kevin Rudd has announced plans to move from the fixed price ‘carbon tax’ to emissions trading on 1 July 2014 instead of 1 July 2015. The generous income tax cuts and pension increases designed to compensate for the higher initial ‘carbon tax’ would be retained.

The carbon price would drop sooner

Under this plan the carbon price would drop sooner, from $24.15/t this financial year to closer to the international price, currently below A$10/t, for next financial year.  

This would significantly reduce carbon costs to business and consumers. It would allow business to retain the accounting and invoicing systems they have developed. This earlier move has been called for by some lead business voices, including the Australian Industry Group.

Can it happen? – not before the election and uncertain after

The change cannot happen before the election, as Federal Parliament has stopped sitting. Even if Parliament did sit again, it would be unlikely to pass: opposed by the Greens (who prefer the higher fixed price) and the Coalition (committed to repeal the carbon price in full). This makes the change an ALP election platform and dependent on the election result.

The most likely election result on current polls is a Coalition win. The Coalition will not be able to pass legislation to repeal the current carbon price until the new Senators take their seats on 1 July 2014, as the ALP and Greens control the Senate until then and will oppose a repeal. Whether a repeal after 1 July 2014 is possible will depend on the Senate numbers following the election. Current polling suggests that a repeal will be possible with the support of SA independent Nick Xenophon, assuming the WA Nationals candidate and Bob Katter’s Australia Party candidate in Queensland win Senate seats from the Greens and back a repeal. Senator Xenophon’s position on a repeal is uncertain. But a Rudd led increase in ALP popularity could affect the Senate voting, especially in Queensland, which may make it more difficult for the Coalition to obtain the necessary Senate votes to pass repeal legislation. The Coalition could push for a double dissolution election if unable to pass repealing legislation, but that would likely take some time, possibly years if repealing legislation was tied up in Senate committees. Moving to emissions trading sooner could be a political circuit breaker, as it would be supported by the ALP. It would also meet the Coalition’s commitment to ‘scrap the tax’, by moving past the fixed ‘tax’ phase, and give the certainty desired by business. 

If the ALP won the election and Tony Abbott was replaced as Coalition leader by Malcolm Turnbull, who supports emissions trading, it is possible that the early move forward to emissions trading could be expected to pass Parliament with ALP and Coalition support. 

Either party in government would face budget issues, as dropping or repealing the carbon price would reduce government revenue, especially if the generous income tax cuts and pension increases are retained.

Details of the changes

The fixed price period was to have continued into 2015/16 at $25.60/t CO2 equivalent, after $23/t in 2012/13 and $24.15 in 2013/14. Unlimited carbon units are available from the government to liable entities for surrender at these prices, but they cannot be traded or banked for future years. No international emissions units and only limited Australian carbon offset units can be used.

Under emissions trading the government will auction a limited number of carbon units each year, up to a set cap. They can be traded and banked for future years. International emissions units can be used, but only to set limits of 50% of a liable entity’s total liability and only 12.5% from Clean Development Mechanism projects. The ability to use international units will significantly drop the applicable carbon price as they are currently trading at much lower levels.

International developments

Moving sooner to emissions trading in Australia is in step with the recent global climate change action, including the commencement of pilot regional emissions trading schemes in China, emissions trading in California and Barrack Obama’s recent announcements that the USA will move to greater greenhouse gas emissions restrictions.

Legal implications

Commercial arrangements need to contemplate a possible move to emissions trading or repeal of the carbon price.