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Labor’s disaster scenario now is that the political climate for a carbon price has deteriorated, rather than brightened, since the 2010 federal election. The mood may darken further.

ARE these the signs that Labor’s climate change policy is heading for a second disaster? Big unions and big business are in revolt as the mining boom’s strong dollar squeezes the rest of the trade-exposed economy. Households are up in arms over surging power bills.

And since the shambles of the late 2009 Copenhagen climate summit, Labor hasn’t doused worries that its carbon tax would put Australia in front of the world, a critical risk for a carbon-intensive economy.

This treble of jobs, cost of living and international competitiveness engulfs Julia Gillard and Greg Combet as they attempt to reverse Kevin Rudd’s humiliating 2010 retreat on his emissions trading scheme. It is replete with political and policy failures, some of which are only now becoming evident.

Facing a revolt among steel industry members, Australian Workers Union secretary Paul Howes last week vowed to oppose Labor’s carbon tax if it cost just “a single job”, even with unemployment below 5 per cent. Remember this is Wayne Swan’s union, which was mostly responsible for replacing Rudd with Gillard. Helped by a $US1.07 Aussie dollar, Tony Abbott has hammered a wedge between the blue-collar AWU and Labor’s Green alliance, echoing what John Howard did to Mark Latham over Tasmanian forests.

Big business this week joined the rebellion, including a terse return fire of letters with Gillard. Business Council of Australia president Graham Bradley objected to Combet’s April 13 National Press Club promise to quarantine more than half the carbon tax money to overcompensate mostly low-income households.

Business fears that Combet’s vow to “put households first” will leave a cash-strapped minority government with less to protect industries threatened by the carbon tax, particularly compared with Rudd’s 2009 emissions trading scheme deal with Malcolm Turnbull.

Yet the Labor-Greens carbon tax design looks costlier and more uncertain for business than the Rudd-Turnbull plan, for instance by ruling out industry access to international emissions permits that would eat into Canberra’s carbon tax revenue.

And the Greens rejected the Rudd-Turnbull deal in part because they reckoned it was too generous to big carbon “polluters”.

As well, Gillard needs to hand over more to households because electricity price cost-of-living pressures have worsened. Since late 2006, capital city average household power bills have jumped 52 per cent, or 35 per cent more than the consumer price index. While still a small share of family income, the power bill hikes send out a jolt of sticker shock.

This is before any general carbon price. And it is not happening in other developed economies. Labor’s climate change adviser Ross Garnaut figures that real electricity prices in the seven big advanced nations rose only 5 per cent between 2006 and 2009.

This Australian peculiarity is a material change since 2007, when Howard proposed his own emissions trading scheme for an economy that generates 80 per cent of its electricity by burning coal.

Already since then, the power bill shock helped force Rudd’s February 2010 backdown and was embodied in Abbott’s August 2010 election campaign slogan against a great big new tax on everything. And it is ongoing, bewildering for voters and largely self-inflicted.

NSW households will be slugged with a further 17.6 per cent hike in electricity bills from July 1 following last week’s ruling by the state’s Independent Pricing and Regulatory Authority. In the coming financial year, NSW households on average will pay between $228 and $316 more for power.

Of this 18 per cent jump, 10 percentage points will come from higher “network” costs and six percentage points from recent changes to the federal government’s own renewable energy target, says IPART chairman and adviser to Labor’s multiparty climate change committee, Rod Sims.

Sims and Garnaut suggest this reflects two critical policy failures.

The first is the $39 billion five-year electricity network investment surge by mostly state government-owned transmission and distribution monopolies such as Ausgrid (NSW), Energex and Ergon (Queensland) and Aurora (Tasmania). […]

The second failure is Labor’s Renewable Energy Target, which requires 20 per cent of energy to be generated from renewables such as wind and solar by 2020.

Garnaut notes that Labor’s RET originally was estimated to add 4 per cent to electricity prices between 2010 and 2015, or less than 1 per cent a year. Yet Sims’s IPART ruling says the splitting of the RET into large-scale and small-scale renewable energy early this year alone will increase NSW electricity bills by 6 per cent.

“Green schemes have emerged as a new driver of price increases,” warns IPART.

It’s the result of federal and NSW incentives for households to install solar panels on their roofs. The bigger than expected take-up has overtones of Labor’s disastrous home insulation program. It serves the yearning by higher-income environmentally aware consumers to save the planet by acting locally while getting other consumers to subsidise their power bills.

Sims slams the combination of federal and NSW solar panel incentives as “an expensive, cost-ineffective way of reducing carbon emissions”. “Its cost will be borne either by consumers or taxpayers for many years to come,” the IPART ruling says. Of course, the whole point of a carbon tax is to eliminate the need for such high-cost abatement. Yet the power price increases fuelled by high-cost green schemes are inflaming the catch-22 backlash against a lower-cost carbon price.

The pre-carbon tax power price surge also is aggravating the cost and hence jobs squeeze on carbon-intensive industries – including steel, aluminium and motor vehicles – exposed to the strengthening exchange rate. Imposing a carbon tax on top of a mining boom means a double hit for manufacturing and processing industries.

Swan this week made the business case by blaming the strong dollar for reducing non-mining company profits in 2010 and, in turn, hitting his budget tax revenues. The dollar averaged US78c in the mining boom mark I before the financial crisis hit. The day after Swan’s pre-budget speech, it broke up through $US1.07.

This two-speed economy tension also is provoking claims that Labor is putting Australia in front of global climate change efforts. The notion that Australia should act in tandem with the rest of the world remains central to the nation’s climate change policy. While Australia is a heavy per capita emitter, it accounts for only 1.5 per cent of global emissions. Getting out in front may only shift carbon-intensive industries and their pollution offshore.

This risk has been brewing since Rudd’s self-inflated hopes of helping to broker a post-Kyoto global climate change deal collapsed at Copenhagen. Recall his private remarks about being “rat f . . ked” by the Chinese.

Combet’s suggestion that countries such as China, the US and India are in front of Australia is not yet convincing and is undercut by Productivity Commission analysis. Labor is setting expectations of an initial $20 to $26 per tonne carbon tax before the Productivity Commission has reported on the effective carbon price in other key countries, as required by the country independents’ deal with Labor.

In one of his two letters to Gillard, Bradley said Australia “must recognise this reality” that a meaningful cut to global greenhouse gas levels required “international action led by major emitting nations”.

He warned that a unilateral carbon price penalty on trade-exposed manufacturing. agricultural and resource sectors would “damage Australian businesses with no net benefit to the world environment”. And a carbon price that hit the asset values of coal-fired power generators would require higher rates of return for future generation investment and so lead to higher electricity prices that would undermine productivity across the economy.

In quick reply, Gillard demanded to know whether the Business Council still supported Australia’s bipartisan target for reducing emissions by 5 per cent by 2020 and whether it still preferred “using a market mechanism by putting a price on carbon”.

Gillard appears to have figured that Rudd’s big mistake was to have abandoned his emissions trading scheme, even if it was at her own urging. With the Greens due to get the power balance in the Senate, reviving a carbon price became a political key to her 2011 year of minority government decisiveness.

Yet doing this with the Greens also required her to break her election promise not to introduce a carbon tax.

Labor’s disaster scenario now is that the political climate for a carbon price has deteriorated, rather than brightened, since the 2010 federal election. Last month’s NSW election wipeout included big Labor losses in its Illawarra and Hunter Valley industrial heartlands and setbacks for the Greens. And the mood may darken further after Swan’s budget belt-tightening in two weeks.

The Australian, 23 April 2011