Carbon tax will define our politics

Julia Gillard

THERE is a brave fatalism about Julia Gillard - from the weakest ever position of any prime minister she introduced this week the complex carbon pricing bills, the reform that will make or break the current Labor generation.

Australian politics now moves with a grim inevitability. For Gillard, sinking on a 27 per cent primary vote and doomed in her alliance with the Greens, this is a heroic moment for Labor.

Speaking to the historic Clean Energy Bill 2011, Gillard told parliament the vote of every MP would be judged before history.

Invoking the tradition of Labor reformism and mocking the negativism of Tony Abbott, she said: "The final test is not: are you on the right side of the politics of the week or the polls of the year? The final test is: are you on the right side of history?"

Her words capture Labor's crisis. Confronting defeat on the politics, Gillard appeals to the judgment of history hoping debate on the policy merits can grab victory from the jaws of defeat.

Labor is now committed. Gillard will remain PM to legislate the scheme and try to stage a revival. If she is replaced later any new Labor leader inherits the policy. For better or worse, Labor has made its generation-defining policy decision. The story of the Rudd and Gillard governments is dominated by the climate change saga and, above all, how the 2007 bipartisan Labor-Coalition support for carbon pricing fell apart in one of the most spectacular and least understood transformations of public opinion in Australia's history.

In the parallel universe of current politics Abbott's reply to Gillard was ferocious, almost frightening, in its intensity. He offered an opposing story: this was "a bad tax based on a lie". Gillard was "on the wrong side of truth" and her bills were "the longest suicide note in Australian history".

Abbott intends to win the next election opposing the tax. It is now the core of his political persona. He must repeal the bills in office, otherwise he would be destroyed as prime minister. This is his bond with the people and it will drive any Abbott prime ministership. It means a two-election strategy if needed, a first election followed by a double dissolution. Abbott is thinking along these lines.

If Labor tries to support carbon pricing post-election from the opposition benches, Abbott would intensify his campaign with the prospect of destroying Labor as a viable political force for many years.

Is Gillard's legislation the beginning of carbon pricing? Or is it the beginning of its end?

Australia has been heading towards carbon pricing since the late 1990s. In 2003 the Howard cabinet debated and rejected a scheme. In 2007, in the biggest reversal of John Howard's prime ministership he embraced the idea based on a committee report chaired by his departmental head, Peter Shergold. The team of bureaucrats that advised Howard also advised Kevin Rudd and Gillard on the same sort of market model.

As incoming PM, Abbott would find himself having to check and reverse one of the deepest policy convictions in the senior ranks of the public service: that carbon pricing is far superior to his own direct action agenda.

Beyond that, he would need to replace an economy-wide scheme that priced carbon, treated emission permits as a property right, granted tax cuts and transfer payments as compensation and created an elaborate new structure of governance with a Clean Energy Regulator, a Climate Change Authority and a Clean Energy Finance Corporation.

Comparisons with Work Choices are false. Acting on its 2007 mandate, the Rudd government with Gillard as relevant minister replaced Howard's laws with the Fair Work Act. But dismantling Labor's clean energy structure is a far more formidable task. It penetrates to issues that will alarm business, face possible rejection in the Senate and could finish in the High Court. Gillard's purpose is to entrench the new system and create a new status quo.

Labor's scheme is one of the most elaborate in the world. The initial price of $23 a tonne from July 2012 will be fixed rising at 2.5 per cent per annum in real terms. From July 2015 it will transition to a flexible price estimated at $29 a tonne en route to an 80 per cent emissions reduction target by 2050. The coverage will be wide, reaching two-thirds of Australia's emissions.

Upwards of 500 of the biggest polluters must pay for each tonne of carbon pollution they release. The flexible price means our scheme will be linked with other carbon markets. The heart of the policy is that companies can take action at home or purchase an international unit, thereby reducing carbon pollution abroad. This recognises that climate change is a global phenomenon and ensures domestic action occurs at the lowest cost.

The opposition is fixated on winning the political battle and how to unscramble the scheme in office. It has legal advice suggesting the issue may end in the High Court. The question is whether an Abbott government would be liable to compensation for removing property rights that were created only by this legislation. It is, unsurprisingly, a grey area.

"This is an attempt to sabotage the democratic process," shadow finance minister Andrew Robb told The Australian yesterday. "We won't be intimidated and we won't be bullied. We will repeal this. If we have to return to the people at another election then we will."

This raises another question: might Abbott in office be trapped by the High Court the way Gillard has been trapped by the High Court over asylum-seeker policy?

The Coalition believes that on carbon pricing and the National Broadband Network, Labor wants to limit in office its legal options. The depth of conflict over carbon pricing is guaranteed to intensify. The longer this parliament lasts the more complex is Abbott's unscrambling operation. This reinforces his quest to obtain an election ASAP. For Gillard, denying an election becomes a victory in its own right.

Labor dismisses Coalition claims of attempting to fireproof its scheme. It says the property rights provision on carbon units is similar to Rudd's earlier scheme. A Labor spokesman said: "Property rights are fundamental for any efficient and well-functioning market, whether it is a carbon market, the sharemarket or the housing market."

This is about far more than brawling over a new tax. Indeed, that misconstrues the nature of the contest. It is turning into a battle that encompasses climate change, economic ideology, democratic practice and legal obligations.

As he repeated this week, Abbott believes Gillard became PM last year on the false claim of "no carbon tax" and this made the difference in a razor-thin poll result. It is an accusation of political betrayal. He demands an immediate election about a policy designed "to change the way every single Australian thinks and works".

Abbott says Labor has misread the times. With economic crisis engulfing the US and Europe, he argues it is the worst time to legislate a carbon tax. Abbott rejects Labor's core justification: that the rest of the world is moving. The collapse of any "cap and trade" momentum in the US is his prime exhibit. Abbott says: "Since Copenhagen, if anything, the rest of the world has been moving against carbon taxes and emissions trading schemes."

His core argument, however, lies elsewhere: he says the policy will not reduce emissions at home because the scheme involves international trading. At this point Abbott rejects the market-based philosophy that has guided Australian government policy thinking for the past decade. It is a pointer to his suspicion of market solutions. It is, however, reinforced by another possibly valid fear: that global emissions trading remains suspect in terms of its integrity and utility. In short, Abbott thinks Australia has jumped the gun.

Gillard is desperate to shift the conflict on another plateau: which scheme is best, Labor or Coalition, to meet the bipartisan goal of a 5 per cent emission reduction by 2020. Labor is convinced of its policy superiority despite the poor electoral ratings for carbon pricing.

Treasury's July 14 minute to Wayne Swan gives the expected answer on costs: Abbott's direct action scheme "would roughly double the economic cost" of hitting the target. Why? Because of Abbott's refusal to embrace the market mechanism.

Treasury explains: "First, direct domestic action would forego opportunities for cheaper, internationally sourced abatement. Second, direction action programs are generally less effective at driving take-up of all potential abatement opportunities."

Treasury explains that direct action is funded on the budget. It pays polluters to cut pollution. By contrast, carbon pricing, though more complex, raises revenue to be used in variety of ways. Unlike direct action, it sends a price signal across the board to investors and consumers.

Gillard's concession in February this year that her scheme equated to a carbon tax is the tipping point in her leadership. She misjudged Abbott's ability to seize this concession and destroy her on the issue of trust.

Labor is now close to the brink. These bills constitute its greatest policy and political investment since returning to office in 2007. An earlier scheme was lost under Rudd in 2009. This time Gillard will succeed where Rudd failed: she will carry the parliament.

That guarantees a greater test. The next election will be a verdict on the competing policy and ideological identities Labor and Coalition now represent. This looms, unlike 2010, as a defining election. The chasm between the parties is wide. The winner will face the challenge to make their agenda work and the loser will sink into a profound identity crisis.