No Easy Resolution Of Carbon Tax

BMI View : We had previously highlighted that a coalition victory in the Australian elections was likely to lead to a review and the possible abolishment of the carbon tax, a view that is currently playing out. This is because the abolishment of the carbon tax is one of the main factors driving the party's popularity. That said, we note that this plan to repeal the carbon tax still faces a number of challenges. We also believe that the country is unlikely to meet its emissions reductions target should the carbon tax be abolished.

The Liberal-National coalition was awarded an overwhelming majority in the House of Representatives in the Australian federal elections held on September 7, defeating the ruling Australian Labor Party (ALP) that has held power for six years. This victory means the coalition now holds more than 76 seats in the lower house, giving it sufficient political clout to form a government on its own.

One of the first moves by Prime Minister-elect Tony Abbott was to instruct his department to begin drawing up the legislation to dump the carbon pricing scheme. Mr Abbott's spokesman - and likely minister - for the environment, Greg Hunt, said that scrapping the carbon tax will be the new government's 'first order of business'. The coalition is already piling pressure on the Labor Party to 'honour' the new government's mandate to repeal the carbon tax, with the Australian federal parliament scheduled to resolve the issue once it resumes in late October or early November.

Swinging To The Other Side...
Australia - Seat Allocation In House Of Representatives After 2010 (RHS) & 2013 Elections

BMI View : We had previously highlighted that a coalition victory in the Australian elections was likely to lead to a review and the possible abolishment of the carbon tax, a view that is currently playing out. This is because the abolishment of the carbon tax is one of the main factors driving the party's popularity. That said, we note that this plan to repeal the carbon tax still faces a number of challenges. We also believe that the country is unlikely to meet its emissions reductions target should the carbon tax be abolished.

The Liberal-National coalition was awarded an overwhelming majority in the House of Representatives in the Australian federal elections held on September 7, defeating the ruling Australian Labor Party (ALP) that has held power for six years. This victory means the coalition now holds more than 76 seats in the lower house, giving it sufficient political clout to form a government on its own.

One of the first moves by Prime Minister-elect Tony Abbott was to instruct his department to begin drawing up the legislation to dump the carbon pricing scheme. Mr Abbott's spokesman - and likely minister - for the environment, Greg Hunt, said that scrapping the carbon tax will be the new government's 'first order of business'. The coalition is already piling pressure on the Labor Party to 'honour' the new government's mandate to repeal the carbon tax, with the Australian federal parliament scheduled to resolve the issue once it resumes in late October or early November.

Swinging To The Other Side...
Australia - Seat Allocation In House Of Representatives After 2010 (RHS) & 2013 Elections

We had previously highlighted that a coalition victory was likely to lead to a review and the possible abolishment of the carbon tax (see 'Spending Growth Likely To Slow Under The L-NP Coalition', April 23 2013). One of the key policy changes that Abbott had promised during his campaign was the repealing of the carbon tax by mid-2014. In our opinion, this electoral promise was one of the main factors driving his party's popularity as the majority of households experienced higher costs of electricity since the carbon tax was implemented in July 2012. Abbott had promised that average families would save more than AUD550 in 2014 from lower electricity and gas prices should the carbon tax be repealed. Many businesses have also been affected by the tax, and are in favour of repealing the carbon tax. For instance, Australian airlines Virgin Australia reported that the carbon tax would incur a pre-tax cost of between AUD40-45mn for FY2012/13 (July - June), translating to a negative impact on financial performance.

Carbon Tax Driving Electricity Prices Up
Australia - Electricity Prices By Region, AUD per MWh

That said, we note that Abbott's plan to repeal the carbon tax still faces a number of challenges. This is because the bill to repeal the tax will have to pass through the 76-seat Senate (also known as the upper house), which is able to block bills passed in the coalition-controlled lower house. With the counting of votes and preferences for the 40 senate seats up for elections held on September 7 still underway, there is much uncertainty as to the ease at which Abbott can achieve his aims. Of the possible scenarios, the one which the coalition will face the greatest difficulty would be if the ALP and the Greens maintain a sizeable presence in the Senate (in the previous senate prorogued on August 5, the ALP held 31 seats, the Greens nine, as compared to the coalition's 34 seats). That said, the Australian Financial Review reported on September 11 that support for the repealing of the carbon tax within the ALP is growing, with two right-wing members of the ALP saying that the party should respect the coalition's mandate to scrap the policy.

A more likely scenario, however, is for Abbott to seek out support from the independent parties and candidates, which have been widely forecasted to control the balance of power in the senate. While likely to be a more effort consuming route susceptible to prolonged negotiations ( see 'Policy Changes May Be Held Back By Senate Politics', September 9), there is a possibility of the coalition will be able to strike deals that would allow it to pass the repeal without diluting its other policy pursuits.

There remains a distant possibility that Abbott's threat of a double dissolution (where both the upper and lower houses are dissolves and elections are held) should the senate reject a piece of legislation twice could materialise. While we believe that this is unlikely scenario is unlikely in view of the adverse impact it will have on political certainty, the coalition is likely to keep the option on the table to keep the heat on negotiating parties.

Effects Of Abolishment

We believe that Australia is unlikely to meet its emissions reductions target should Abbott's bill to repeal the carbon tax be passed. The country has to reduce emissions to 5% below 2000 levels by 2020 under the Kyoto Protocol ratified by the government in November 2012. Government projections show that without policy action, Australia's emissions are projected to continue to increase from the current 580 Mt CO2-e to 686 Mt CO2-e in 2020, 24% above the level in 2000 ( see 'Carbon Policy: Implications Of EU Carbon Crash', April 23).

To meet this target, Abbott is proposing a 'direct action' policy, but we believe that this is likely to be less effective than the carbon tax. The 'direct action' policy proposes to award incentives and subsidies to promote carbon sequestration in soil and vegetation. However, we highlight that there are certain clear limitations of the policy:

  • Carbon sequestration is still relatively unproven, and the long-term effects have yet to be seen. Additionally, current sequestration methods are relatively expensive and could drive up costs for the industry.

  • The policy would incur additional costs for the government. Mr Abbott has made it clear that he will not spend more than AUD3.2bn over four years to cut emissions, even if his climate plans do not achieve the 5% cut.

In contrast, the carbon tax has already been extremely successful in reducing emissions. Government statistics show that emissions from electricity have fallen by about 7%, coal use for electricity is down by about 17%, and renewable energy generation is up by 25% since the tax came into effect. A shift to the direct action policy could therefore be an unproven and possibly ineffective way of controlling emissions.

We note that the abolishment of the carbon tax would have a positive impact on the majority of households, businesses, and utilities. This is because it would lead to lower electricity and gas prices, resulting in cost savings for the majority of the Australian economy - the Australian Energy Market Commission forecasts that the carbon tax contributed to a 14% hike in power bills.

We highlight that the Abbott administration will also have to undertake a review to recommend a 2020 target for Australia by May 30 2014, as part of the Clean Energy Act passed by the previous government. In the review, the government will have to choose a number (between 5-25%) that will become Australia's legally binding cap on carbon pollution for 2020. The figure would take into account what is required to keep global warming below two degrees, and Australia's fair share of the international effort.

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Sector: Power, Renewables
Geography: Australia
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