PM boxed in by Rudd on the rebound

Leak 9 April

THIS week Kevin Rudd assumed a new status: it became apparent that his inexorable political revival is occurring at the expense of Julia Gillard's credibility as leader and as climate change reformer.

Gillard seems powerless before this new nexus. The Labor caucus watches it emerge with a mixture of horror, fatalism and confusion.

The Rudd factor only adds to the crushing burden Gillard now faces to devise an effective carbon pricing policy and win its political acceptance.

The pivotal event this week was Rudd's public acceptance, for the first time, of responsibility for his 2010 mistaken climate change retreat. Such concession is fundamental to Rudd's political rehabilitation given the Australian people credit confessional declarations of past blunders.

Its effect, surely, is to liberate Rudd in psychological terms but to impose new pressures on Gillard.

The world knows what happened in 2010 because Rudd told the caucus the day he was deposed. He said Gillard and Wayne Swan had argued against his carbon pricing scheme while Lindsay Tanner and Penny Wong had wanted to press ahead.

Rudd's comments this week on the ABC's Q&A program did not include names. But the names are known. Later in the week Rudd explained that "when it comes to the period of the government that I led, I will always act as appropriate to set correctly the record".

This statement will cast a long shadow. So Rudd, whenever asked, is a constant reminder that under his leadership Gillard opposed the type of scheme she champions under her own leadership. Given the ferocity of Tony Abbott's anti-carbon tax campaign Rudd is now a symbol of Gillard's credibility problem.

The truth is Gillard had very good reasons to oppose the scheme in 2010 but cannot explain them now because that would only detonate relations with Rudd.

She is trapped, unable to defend herself, with Rudd writing the history while she lacks the leverage to pull him into line.

The bigger issue is the leadership. Rudd is not leaving politics. Indeed, he is an activist Foreign Minister with a high media profile and in constant demand. Now heading Gillard in the polls as preferred Labor leader, Rudd defends his legacy while ready to concede his mistakes, a powerful pitch. He is quarantined from the minority government's domestic policy mire that is starting to sink Gillard.

Have no doubt, Rudd's entire persona radiates an obvious yet unspoken message, that the faction chiefs and the caucus made the wrong call in June 2010 when they deposed him for Gillard. This is the template Rudd pursues with all of the energy and intelligence he possesses.

Does he want to return to the leadership? Only a fool or somebody ignorant of Rudd would doubt the obvious answer.

There are distinct signs of public sympathy for Rudd, notably in Queensland, one of federal Labor's areas of chronic weakness. To the extent sentiment builds for Rudd, it tolls against Gillard.

Such opinion should not be over-estimated but Labor would be mugs to underestimate it or Rudd's skill at his own rehabilitation. The caucus, however, recognises it must sink or swim with Gillard this term.

Rudd would know the chances of a leadership recall are remote, yet he also knows John Howard spent six years in the parliament before his own recall by the Liberal Party once it reached the point of desperation.

The caucus, unsurprisingly, is clueless about how to handle the Rudd revival. Some MPs pretend nothing is happening, others express outrage at what Rudd is doing and some say he is only answering questions when asked. The caucus is impotent.

Gillard's history with Rudd handicaps her as advocate for carbon pricing as does her broken promise on the carbon tax. They blend into the same narrative.

Remember Rudd's longevity on climate change exceeds that of Gillard's. What happens down the track if Rudd, being loyal to the cabinet position, is a more effective public advocate for this policy than Gillard?

Meanwhile the task facing Gillard only grows more daunting. To be viable her carbon pricing scheme must win the backing of the Greens, the independents and the bulk of the business community. This is a difficult coalition to construct and hold together. It can only be achieved from a position of strength. That must be underwritten by the coming budget because business sentiment towards the Gillard government is now highly equivocal.

Abbott has two polemical positions to unleash upon Labor. He will ask why Australia is pricing carbon when the big emitting nations, despite their various schemes, are not taking comparable carbon pricing action. And he will ask, given Australia is responsible for only 1.4 per cent of global emissions, how the cost sacrifice made by Australians will make any difference to the overall problem.

The descent into populist politics has just begun.

Labor's task, as Resources and Energy Minister Martin Ferguson says, is to oversee massive new investment in power generation while simultaneously moving away from greenhouse gas emissions. Ferguson says Australia needs $94 billion in new power investment over the next five years to deliver reliability of supply.

He warns while there is "nothing wrong" with deploying renewable energy this "can challenge the operation of the National Electricity Network". He says electricity prices have risen 40 per cent in the past three years. They will rise 30 per cent over 2010-13, the latter being the scheduled election year, driven by ageing plant and new capital needs.

With prices rising anyway, Labor must strive for lowest cost climate change abatement.

Ferguson brands as a "massive task" the combination of reducing emissions growth yet meeting rising demand within a competitive system.

"We must avoid impairment that would see generation assets go into administration," he says. "Administration could see existing financial market contracts re-opened and difficulty in entering into future contracts."

This constitutes a serious test of Labor's governing competence.

Gillard's core political problem is that Labor's base is already disillusioned. Witness the August 2010 election, the recent NSW election and the polls showing Labor's primary vote in the 32-36 per cent range.

Climate change was a dream issue for Rudd in the 2007 election against Howard. Yet in 2010 it has a different meaning: it is a wedge issue that divides Labor's socially progressive middle class from its lower income, regional and resource-states base.

The NSW election sent an unequivocal message. The workers and battlers are leaving Labor, deserting in Western Sydney, the regions, the Hunter and the Illawarra. The risk is the carbon tax only affirms this trend.

Even its intellectual validity assumes wedge proportions as Labor leaders and Greens deliver lectures to "ordinary" people on the wisdom of carbon pricing now to achieve a cleaner world for their grandchildren.

On climate change, idealism is fading to cynicism. It is cynicism, not scepticism, that is Labor's real problem on the issue.

This highlights the vexing issue of price where there are two truths.

First, the starting price for carbon will be modest (though it must rise far higher to be effective). Second, Labor's credentials on carbon pricing are damaged big time.

For too long Labor, state and federal, has pushed ineffective green schemes at high cost as part of pro-green gesture politics. They are now being documented and scaled back.

Witness Gillard's ditching the Cleaner Car Rebate Scheme (known as cash for clunkers), winding up the Car Green Innovation Fund and Greg Combet bringing an end to Labor's rooftop solar panels credit scheme.

This week's report from the think tank, the Grattan Institute, showed a litany of failed schemes from Labor and the Coalition. Grant tendering programs worth $7bn and rebate programs totalling $5bn were judged as wasteful and producing little abatement.

The cost of some solar programs was a direct fiscal fraud with estimates of the net cost of emission reductions up to $300 per tonne.

The bipartisan Renewable Energy Target, actually backed by the Grattan report, had its subsidy cost estimated at a high $30-$70 per tonne. The previous week Minister Ferguson broke ranks to warn the RET came "at a high cost to the community".

Meanwhile another Gillard cabinet minister (not Ferguson) told me: "Large sections of Australia's rich are engaged in a conspiracy to screw the poor in the name of saving the planet."

He was talking about feed-in tariffs, a classic rort. They are applied to a better or worse (usually worse) extent in most states and function as a regressive tax. Under this policy high income earners are subsidised to supply renewable energy to the grid from their installed solar panels.

Where is the rort worse?

Exactly where you would expect: in the Australian Capital Territory, home of income re-distribution towards the better-off in the name of clean energy. Indeed, it is calculated that wealthy Canberrans will receive a 900 per cent subsidy for every kilowatt hour of electricity they supply to the grid. Yes, this is the socially progressive Labor Party in action.

The point is that Labor, for too long, betrayed its base with green programs that were regressive and ineffective. This is recognised and being corrected by the Gillard government. Yet much of Labor is still in denial. It needs to get its house in order in preparation for its coming attack on Abbott's direct action scheme.

In the daunting task ahead Gillard must ensure her carbon policy is cognisant of the financial interest of Labor's base and is devoid of the usual "insider" cultural superiority of climate change politics.