Perfect storm for carbon crusader

Perfect storm

THE trap for the Gillard government in complaints now being made by industry and unions about pricing carbon is that they constitute a series of tests that cannot be met and that will justify opposition to the scheme.

It is premature to say that a perfect storm has emerged against Julia Gillard's pledge to legislate a carbon price. But Gillard's policy is in jeopardy. Because she made a carbon price her principal objective for this year and the ultimate test of her Labor-Green alliance this is not just a test of Gillard's authority. It goes to the survival of her government.

If Gillard fails to carry the package in parliament then Tony Abbott will say it is tantamount to a failure of confidence. Presumably, he would call upon Gillard to either resign or call an election and, in such a situation, his call would have credibility.

The ability of Gillard and Climate Change Minister Greg Combet to salvage their position should not be underestimated. But such a salvage would be against the trend.

The omens are now unmistakable - the government's effort to price carbon is a policy that is losing support in the community, within industry, inside the trade union movement and silently within the Labor Party.

The origins of the problem are identifiable; Gillard's decision to price carbon this term was a political decision driven by Labor's political needs. It was about the Labor Party. These needs were to "correct" for Kevin Rudd's retreat, to cater to progressive support for climate change action and to inject meaning into her minority government based upon alliance with the Greens.

So Gillard switched from her highly cautious pre-election stand to a post-election carbon price crusade. This reversal misjudged the far more adverse outlook for pricing carbon.

There are three basic obstacles now plaguing Gillard's plan. First, the global situation post the 2009 Copenhagen conference is more daunting for an emissions trading scheme. The Obama administration no longer seeks to price carbon, a legacy of the global financial crisis, though some states are moving on this front. "Cap and trade was just one way of skinning the cat," Obama said in late 2010.

Obama's ditching of a carbon price is a pivotal problem. Yes, China is acting and investing big time in cleaner energy but China will not impose a carbon price and it opposes a global legally binding scheme. There is no successor to the Kyoto Protocol when it expires next year.

Combet admits the UN framework convention can be "painfully slow, overly bureaucratic and plagued by an outdated paradigm that pits developed and developing countries against each other" (sense a few problems?) yet he says all major economies have made pledges to reduce their pollution. Yes, that's right, but these are non-binding political intentions subject to revision by political whims. Hopes for a new global agreement, still alive when Rudd pursued his scheme, are dead for the foreseeable future.

This change towards "bottom-up" national agendas weakens Australia's momentum for a carbon price. The growing alarm of the Business Council of Australia was displayed in the April 15 letter from BCA chief Graham Bradley to Gillard saying that Australia accounted for only 1.5 per cent of global emissions and it "must act in tandem with international action not ahead of it". This is Abbott's future script, namely, that it is irresponsible to price carbon when the US and China do not.

Second, the resources boom and high dollar have intensified the competitive pressures on much of the non-resources sector. Industry operates under tighter margins and has less scope to absorb the carbon tax than before. This change in corporate conditions between 2009 and 2011 is fundamental to the more critical response.

The BCA says industry compensation under Rudd's scheme is insufficient "to offset the impact of a carbon price" in future years. Given the absence of carbon prices in competing nations and "current pressures" on Australia's economy, the BCA deems it "essential" that Gillard now "fully offsets" any carbon price imposed on such industries. It says failure to act threatens manufacturing, agricultural and resource-based businesses and puts jobs at risk. But this is a demand that Gillard cannot meet at face value.

Such fears have now ignited some unions, notably the Australian Workers Union under Paul Howes. Rank-and-file pressure drove Howes' dramatic statement that his union will withdraw support from pricing carbon if the scheme costs one job. Here is another demand Gillard cannot meet at face value.

To reinforce this momentum nearly 40 senior industry executives and heads of six industry associations (including mining, food, plastics and small business) wrote to the PM, again on April 15, wanting measures that "fully preserve" Australia's international competitiveness. Again, this is a demand that Gillard cannot meet at face value.

Such orchestration from wide sections of business and industry, along with union alarm, constitute the most serious turn of sentiment against carbon pricing since the BCA's historic change of policy in late 2006 that encouraged the Howard government to its ETS. The politics of climate change hover on the edge of going into reverse.

There are two realities in this debate - pricing carbon from next year will see job loses and falls in international competitiveness. The claims now being lodged on Gillard represent a negotiating position that can also be used down the track as justification for opposing her scheme.

Combet and new Treasury secretary Martin Parkinson argue the price impact of any scheme will be modest. Parkinson said recently the total CPI impact of Rudd's scheme was only 1.1 per cent over two years. Labor's plan was always to begin with the most modest scheme but even this plan is now in the balance.

The third obstacle is the power sector. It is staying silent for the moment. But it calculates that under Rudd's scheme it faced a $10 billion loss in asset value in the coal sector with the risk that brown coal generators would breach their debt convenants.

This is compounded because the scheme will also increase the industry's working capital requirements. At the end, the struggle over policy in relation to the generators may become the most difficult for Gillard and Combet in getting a deal with the Greens.

The enduring moral is that Labor and most of the media are addicted to misreading Abbott. They always fail to read the match. They savaged Abbott for the sin of appearing beneath some offensive banners but missed completely how he targeted and turned the workers against the carbon tax. Don't expect such misjudgments to be rectified.

Finally, remember that industry has its eyes and its ears open. Beyond this, it can smell the weakness of Gillard Labor, the loss of its authority, the stench of Labor's vulnerability. It is emboldened because Labor is weak and because Labor is weak it is failing to consult properly with industry.

This is a lethal political atmospheric for Julia Gillard.