Boom or bust for ALP's ideology

THIS weekend's carbon pricing statement by Julia Gillard constitutes the ultimate test for Labor of the path it embraced in 2007 to make climate change policy the defining feature of modern Labor's ideological identity.

Kevin Rudd pursued his carbon pricing policy in the teeth of the 2008 global financial crisis and Gillard now pursues her policy despite the vast economic dislocation caused by the terms-of-trade boom and its legacy of the two-speed economy.

This era of Labor governance could have prioritised these two great economic challenges and the productivity, infrastructure, restructuring and employment challenges they represented. But Labor made another call. Relying on its reading of politics, public opinion and the national economic interest, Labor enshrined climate change policy at the heart of its administration.

Labor is correct in saying every industrialised nation is devising climate change mitigation policies. It is equally true, however, to say no other industrialised nation has been so consumed with this issue and so tormented by its politics as Australia. Witness its victims: Rudd as prime minister, Malcolm Turnbull as opposition leader, Brendan Nelson, who was partially ruined on this issue as opposition leader, and now Gillard, whose prime ministership will be made or broken on this issue. No other nation remotely gambled such high stakes on climate change. The story of Australia's struggle with this policy since 2001 has four features constituting a unique experience.

First, under Rudd, climate change was not merely a policy but was incorporated into Labor's soul, becoming integral to its moral and political legitimacy. Rudd's 2010 retreat left Labor tormented, only to decide, eventually and reluctantly, to redeem itself by legislating a carbon price this year.

Second, in Australia, the push for carbon pricing originated from the Treasury as a pro-market economy-wide reform whose great advocates were Ken Henry, Martin Parkinson and Ross Garnaut with their ideas holding sway with John Howard, Rudd and Gillard as successive PMs. Indeed, among insiders the power of carbon pricing as the next stage in Australia's pro-market reform process has been fundamental to its traction.

Third, the notion of the inevitability of global action based on the science is critical to Australian insider calculations. It fed the conviction that Australia must act, prove its credentials as a responsible global citizen and protect itself against retaliation as the rich world's highest per capita greenhouse gas emitter via cheap coal.

Rudd wanted the Coalition as his legislative partner to secure his scheme. This was a sensible decision but brought undone by the late 2009 convulsion in conservative politics that catapulted Tony Abbott to the leadership and converted the Coalition to an anti-carbon price war, the fourth defining event in Australia's story because it ruined bipartisanship between the major parties.

The consequence is that Gillard, unlike Rudd, has the Greens as her partner. She has had a victory -- Labor will win the parliamentary support to legislate her scheme, thereby surmounting the hurdle at which Rudd fell.

But Gillard's situation of being aligned with the Greens and at war with the Coalition is truly ugly politics for Labor. It is far harder than Rudd's unrealised plan of having the Coalition as partner while living with attacks from the Greens.

One problem is that the actual policy gulf between Labor and the Greens on climate change is immense. Gillard faces the risk of being continually undermined by her partners as they declare their aim of closing down the coal industry, moving beyond gas, seeking 100 per cent of energy supply from renewables, insisting the inclusion of petrol is inevitable and demanding far higher targets than Labor can tolerate. This is political manna for Abbott. He can assault Labor by reference to the ambitions of its partner whom Gillard herself has previously criticised for extremism.

The electoral issue for Labor is momentous. It is whether the political constituency Labor has so brilliantly sustained since the early 1970s' Whitlam era remains viable or whether it has expired. This is the alliance of the tertiary educated, socially progressive vote keen on climate change action with the working-class and lower-middle-class traditional Labor voter facing cost and job pressures from de-carbonisation of the economy.

It is extraordinary that Labor was so slow to grasp the lethal strategic risk climate change policy posed to its political foundations. This is because the debate over 2004-08 was dominated by climate change activists invoking a faith-based imperative for action and an alleged brand of new politics that worked a treat against the wearying Howard government.

The shock has been to discover there is no new politics. Even worse, climate change policy means higher costs for business and households already under cost-of-living pressures. Ultimately, people realised the joke was on them: the entire debate only meant they had to pay higher power prices. This has become an old-fashioned contest about the hip-pocket nerve. Rarely in history has such a glorious call to arms -- literally to save the planet -- been reduced to such sordid horse-trading over tax rates, compensation, exemptions, special deals, fixes and rorts.

The trade-off Gillard seeks has no precedent for bizarre difficulty: to price carbon now in the cause of clean air and to prevent dangerous increases in greenhouse gases over the next 100 years.

Merely to state the proposition is to invite scrutiny and, dare one say, scepticism.

Much of Labor's problem lies in the climate change lobby and Greens that define this issue: for too long they patronised people over climate change "virtue", championed schemes that were rip-offs and were contemptuous of legitimate public concerns about higher power costs, jobs and competitiveness. Seen in context the public backlash is completely understandable. Abbott was handed a political opening and he made the most of it. The backlash Abbott now cultivates is deeply embedded. It will not easily fade because it reflects underlying cultural and economic forces. It is by no means obvious that the public, when it sees the details, will say: "OK, we're now reassured."

The recent Lowy Institute poll showed that while 41 per cent of people believed global warming was a pressing problem requiring action, 59 per cent felt action should either be modest or delayed pending global events.

Abbott campaigns against Labor adopting the mode of a traditionalist Labor leader, his aim being to smash the post-Whitlam voting alliance that has made Labor successful in recent decades. So Abbott symbolically claims that if ALP icon Ben Chifley were alive today he would be voting Liberal. He chases the blue-collar, manufacturing, resource industry and lower-middle-class ALP vote and his appeal stretches from an update of the Menzian "Forgotten People" to hip-pocket resistance to new taxes and hostility to green philosophy.

Gillard now faces the decisive moment of her leadership. The next 10 days are pivotal. It is almost unknown for a government with such an announcement not to generate momentum.

Yet Gillard seeks to recover by reinventing the issue on which the public has turned against her. Since she formed minority government Gillard has tried to operate from strength yet she has been undermined at each point by her minority status, poor decisions and doubts about her core beliefs.

The risks for Labor arise because Gillard enters this new phase of the contest with weak ratings and a credibility problem. She cannot afford any mistake in selling a complex package because that would reinforce the notion of an incompetent government -- witness pink batts, the cattle industry, the boats.

The gravest risk, however, lies in the integrity of the policy. This package, by definition, is a compromise. But it is not a Labor compromise. It is not a compromise driven by the caucus and cabinet. It is, rather, a minority government compromise. It is the work of a PM in alliance with the Greens and the work of a committee that involves Labor, Greens and independents. Such shared political ownership is riddled with traps.

The scheme's design seeks to counter Abbott's political scare and the alarm of industry facing pressures arising from the high dollar and weak domestic demand. As a result, it will look less substantial than Rudd's scheme.

Petrol is exempted, supposedly "forever". The number of companies directly affected has been cut from 1000 to 500. There will be over-compensation for low-income households and special deals for the steel industry. Renewables are likely to emerge winners with a new $3.2 billion agency to co-ordinate support for renewable energy, a Green priority. The projected CPI impact will be modest, far below the inflation effect of Howard's GST.

There are two iron rules here. First, the more exemptions and concessions, the more inefficient the scheme and the higher the cost of abatement. Second, the weaker the policy framework, the more Abbott will say it's a tax that won't achieve its purpose.

The policy and political constituency Gillard must hold together around this package is daunting. But staring into her own doom Gillard must operate from one principle: backing her package with a Thatcherite resolution.