Clever tactic, poor policy

KEVIN Rudd has offered a compromise Carbon Pollution Reduction Scheme with ambitious political goals: to win its passage through the Senate, to entrench divisions within the opposition and launch himself on the global stage to try to salvage the Copenhagen talks.

Climate Change Minister Penny Wong has presided over a generous revised CPRS offer to the Coalition that should be sufficient to obtain the Senate's support. The government has given Malcolm Turnbull more than enough. It negotiated in good faith and Rudd obviously wants his policy legislated. It has loaded the CPRS with special deals for electricity generators, trade-exposed industry, the coal companies, manufacturing and mining that further undermine its policy quality. Given this situation, failure by Turnbull to carry his party is likely to prove fatal for his leadership.

In political terms, rejection of the government's final compromise would be an act of folly by the opposition, flouting the recommendation from the shadow cabinet and Turnbull as leader.

In a dramatic day of national politics, there were three manifest messages. First, Rudd is proving a master of climate change politics. His media conference yesterday morning pressed every button: the potency of the threat to Australia, the utopian appeal for action in the name of our children and grandchildren, the need to secure Australia's "long-term survival as a country", the obligation on Australia to respond as a good international citizen, and his ruthless, contemptuous dismissal of sceptics among the Nationals for their betrayal of farmers and the land.

In Rudd's hands, the climate change cause is legitimised by science, by environmental responsibility and by economic argument. He appealed to the Coalition to vote for the CPRS in the national interest, yet dismissed its sceptics with scorn. Coalition politicians who think that fighting Rudd on a climate change election actually makes sense are deluded.

Second, the government has discovered a magic accounting trick via exchange rate movements to dish out an extra $7 billion in assistance to industry and generators out to 2019-20 yet show a net cost to revenue of only $769 million. This seems to make the magic pudding a reality. It is the dream of every politician. It is the latest short-term gift to government from the beauty of climate change mitigation and emissions trading design. The fiscal folly is to think there will be no accounting down the track.

The trick is explained by a revised lower projected carbon price due to appreciation of the Australian dollar (adjusted from $29 a tonne to $26 a tonne in 2012-13) outlined in the recent midyear outlook. The government did not include in the midyear review the downward revision for household compensation that flows from the lower forecast carbon price. That revision appeared for the first time in the CPRS estimates yesterday.

The savings from lower household compensation to 2019-20 finance an extensive wish list: an extra $3bn for the electricity sector, an extra $750m for the coal industry, an extra $1.3bn for trade-exposed industry, an extra $610m for the liquefied natural gas sector and an extra $800m to assist manufacturing and mining business adjust to higher electricity prices.

The exchange rate adjustment helps to meet Rudd's test that any new concessions had to be fiscally responsible. But exchange rates are notoriously volatile. What happens when the dollar falls?

The government says it will review annually at budget time the level of household assistance.

Presumably, the government has two options: it could increase the monetary compensation to households or it could reduce its policy pledge to compensate low-income householders to 120 per cent of the cost-of-living increase they will confront.

With its compromise package, Rudd, Wong and Greg Combet secure several goals under the cover of offering Turnbull enough to pass the CPRS. Labor has almost doubled assistance to the electricity sector. Wong and Treasurer Wayne Swan say this would "ensure Australia's security of energy supply". Rudd says it is about "security of supply".

Under pressure from a Victorian government worried the lights might go out and analysis from Morgan Stanley, the government has moved to ensure generators do not exit the market, threatening power reliability. The adjustment period for the electricity sector will extend from five to 10 years. Assistance to the coal industry has been doubled. The boost in assistance to the trade-exposed sector is significant.

The compromise package is riddled with politics at two levels: to secure its passage by giving Turnbull enough leverage to prevail and addressing the lobbying pressure from the generators and other industries.

Third, the compromise package entrenches the interpretation of the CPRS as brilliant short-term politics and dubious long-term policy. The policy problems are immense. The extent of fiscal assistance imposes an enduring burden on the budget. The scheme's design raises doubts about whether the price effect will be sufficient to generate new investments in clean energy and secure the expected environmental dividend. The Greens will depict this as the ultimate sell-out. And the entire process risks the image of the government as a corporatist outfit based on deal-making lobbying.

Last night the opposition parties were still meeting. The fates of Rudd and Turnbull are linked in this paradoxical contest. Turnbull must carry his partyroom to retain any leadership credibility. Yet Turnbull's success would deliver Rudd one of his greatest political victories: it would secure Rudd's 2007 election mandate, affirm Labor as the party of climate change action, invest Rudd with fresh leverage at next year's election and give him new momentum in the global negotiations. No wonder some Liberal MPs want to vote against the CPRS.

Rudd and Wong have played a ruthless hand. They maximised pressure on Turnbull, squeezed the timetable for final decisions, slammed the critics within the Coalition partyroom but delivered a compromise that, if logic prevails, should carry the day.