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By extending a lifeline to Direct Action, independent senator Nick Xenophon may yet sneak in a carbon price. By Sophie Morris.

Nick Xenophon’s ploy to price carbon

The independent senator for South Australia, Nick Xenophon.
Credit: SCOTT BARBOUR / GETTY IMAGES

From Team Canada to Team Australia, with love, or at least respect. Earlier this year, Treasurer Joe Hockey scored a unique gift of a Nike “Team Canada” ice hockey jersey.

More intriguing than the jersey itself, gifted by the then Canadian finance minister Jim Flaherty, was the fact it was accompanied by a “handwritten congratulatory message on opposing the carbon tax from Minister Flaherty and Canadian Prime Minister, the Right Honourable Stephen Harper”.

Hockey has declared he received the gift in March, before the Coalition had fulfilled its promise to axe the carbon tax, but that little note betrays much about where Australia stands internationally on climate action.

Team Canada and Team Australia are on a unity ticket against carbon pricing. As United States President Barack Obama attempts to rally international action against the “growing and urgent threat” of climate change, Australia and Canada are perceived as climate wreckers.

When Foreign Minister Julie Bishop addressed the United Nations Secretary-General’s Climate Summit last month, she made a good fist of declaring Australia had plans for reducing emissions. She spoke of “serious” action, “significant funds” and an “ambitious target”.

But she failed to mention that, since July, Australia has had no convincing legislated policy for achieving that target and no certainty of securing the passage through the senate of its $2.55 billion Direct Action scheme.

The scheme spurns a market-based approach in favour of using taxpayer funds to buy emissions abatement, which is likely to fall short of Australia’s target of reducing emissions by 5 per cent of 2000 levels by 2020. 

“A recipe for fiscal recklessness on a grand scale,” was how Malcolm Turnbull described Direct Action after it was first announced in February 2010, two months after Tony Abbott toppled him as opposition leader with the backing of climate sceptics.

Abbott’s chief-of-staff, Peta Credlin, was reported to have referred to the policy privately as a “fig leaf”, although she vehemently denies this.

Now its senate reckoning looms. Behind the scenes there have been talks about turning the much-maligned policy into a scheme that would have a better chance of reaching Australia’s target and of securing senate support. Otherwise, Australia will be left without even a fig leaf as the rest of the world intensifies efforts ahead of next year’s UN climate meeting in Paris, where there will be pressure to increase Australia’s target.

Environment Minister Greg Hunt this week said he was “very hopeful that in the next sitting fortnight, we’ll have that [legislation] finalised”. 

“This is about reducing emissions without an electricity tax,” he said on Wednesday. “And I am increasingly confident that we can strike an agreement with the crossbench.”

His timeline may be optimistic in a senate that has more possible permutations than a Choose Your Own Adventure story, not to mention the predictably unpredictable wildcard of the Palmer United Party.

In a week in which Tony Abbott declared coal was “good for humanity” while opening a new mine, it is also unclear how committed the prime minister really is to his expensive emissions reduction policy.

Yet in recent weeks there have been signs that Direct Action could survive the senate, if the government will compromise.

It will need crossbench support, as Labor remains implacably opposed. Labor’s climate spokesman, Mark Butler, says the policy lacks discipline in reducing emissions. “All we’re left with is a dressed-up slush fund that will hand billions of taxpayer dollars to big polluters with no guarantee of achieving any meaningful reduction in Australia’s overall carbon pollution levels,” he says.

The crossbench is where things get interesting. Independent senator Nick Xenophon has extended a possible lifeline to Direct Action. The catch is that what he is proposing looks suspiciously like a future carbon pricing framework. Just don’t expect Xenophon to publicly acknowledge this. He knows that to do so might scare the horses.

In devising his amendments, Xenophon has worked closely for months with Hunt’s office. Hunt says he is heartened by the contribution of Xenophon and of the PUP, which proposes its own “dormant” emissions trading scheme that would only become active when major trading partners take similar action.

The Greens are also trying to deal themselves into the debate, though they insist their support for Direct Action depends on no “browning down” of the renewable energy target (RET). The Coalition and Labor are in talks about the future of the RET, with Labor prepared to exclude aluminium, but opposed to a push to scale it back to a “real 20 per cent”.

Greens leader Christine Milne says she will go over Hunt’s head and seek a meeting with Abbott, arguing that the environment minister has “zero clout in cabinet to get a deal done which includes retaining the RET”.

“He is shackled by the prime minister who, in turn, is shackled by the coal industry, which is a big worry,” Milne says.

A Coalition-Greens alliance on climate would seem extraordinary, given Abbott has long attacked the former Labor government for dealing with the Greens.

But next week Milne will also meet Xenophon to discuss his amendments to the Carbon Farming Initiative Amendment Bill, which establishes the Emissions Reduction Fund that underpins the Direct Action policy.

The real war

“Don’t mention the war!” was the line immortalised by John Cleese in Fawlty Towers. In the current political climate in Australia, mentioning the war is most acceptable, preferably in combination with “death cult” or “humanitarian air strikes”. Yet the real war, which only the very brave will discuss, is the electorally dangerous topic of carbon pricing.

When opposition leader Bill Shorten ventures that Labor will go to the next election with some sort of carbon pricing policy – not a tax, he hastily adds – the government cannot resist the opportunity to revisit its scare campaign on electricity prices.

So it is that the reason Xenophon gives for his amendments is “to strengthen the Emissions Reduction Fund in achieving environmental outcomes, as well as providing greater certainty to industry over the longer term”.

But those who have, for more than a decade, watched the bitter debate over climate policy know that his amendments could lead to the introduction, by stealth, of emissions trading.

Indeed, elements of Xenophon’s plan hark back to a model that he has supported for years. Back in 2008, he and Danny Price, from Frontier Economics, travelled by Greyhound bus around Canada to investigate an emissions trading model, known as a “baseline and credit” scheme, which was then proposed in Canada.

Canada ditched the scheme but Xenophon and Price kept working away at it. Now Price is advising Hunt on options for Direct Action and the RET. And Xenophon has proposed amendments to Direct Action that resemble a baseline-and-credit framework. He wants to strengthen “safeguard” provisions, involving emissions baselines for about 130 companies and penalties for those that exceed them. Under the government’s legislation, decisions on details of the safeguards have been deferred until next year, amid pushback from industry. 

The penalties are so weak that, when Abbott was asked during the election campaign whether they could be passed on to consumers as higher prices, he replied: “We don’t believe that in practice any business is likely to fall foul of this.”

The government’s preference is to pay companies, rather than penalising them. But Xenophon wants to introduce more rigour, to ensure funds aren’t spent on reducing emissions, only to see them rise elsewhere. Xenophon and those advising him are loath to admit it, for fear of conjuring up a political bogyman, but what he is proposing is the skeleton of a future carbon pricing regime. Some might even say – shock, horror – a carbon tax of sorts.

Frank Jotzo, the director of the Centre for Climate Economics and Policy at the ANU’s Crawford School, says there is discussion about the possibility of transitioning Direct Action into a scheme that prices carbon.

“If those penalties are set in a way that most emitters would have to pay them except the very good performers, you would have something that looks awfully like a carbon price,” Jotzo says.

“If the penalty is high enough – $20-$30 a tonne – you would have a quasi carbon price in the guise of a penalty for a Direct Action scheme.”

He adds that Xenophon’s amendments, which have been released for consultation, are weak and would leave much of the detail to the environment minister, but would “leave open the possibility of having a sensible meaningful penalty regime in future”.

If, rather than paying a penalty, companies that exceed their baseline could buy credits from those who reduce emissions, then Direct Action could morph into emissions trading.

Another market-based element of Xenophon’s amendments is his “strategic reserve” proposal that up to $500 million be spent on purchasing international credits to help meet Australia’s emissions reduction target.

Business and environmental groups support this proposal and have sought to convince Abbott of its merits. In 2011, Abbott argued that buying international credits was “money that shouldn’t be going offshore into dodgy carbon farms in Equatorial Guinea and Kazakhstan’’.

Another interesting dimension of the Direct Action debate stems from the fact its establishment is via legislation relating to the Carbon Farming Initiative (CFI), a bipartisan scheme to reward farmers for sequestering carbon in soil.

Already there are 160 emissions abatement projects authorised under the CFI. The demise of emissions trading killed the market for the carbon credits they generate. Without Direct Action, those farmers will be left high and dry.

So it is that the Nationals, who led the campaign against Labor’s carbon tax, are among the staunchest supporters of Direct Action.

Even if Direct Action does secure senate support in coming weeks, deputy CEO of The Climate Institute, Erwin Jackson, warns that what is really needed is a bipartisan approach that holds major emitting industries liable, rather than relying on taxpayer funds.

“Setting a baseline is one way to do that but it really depends how stringent that baseline is,” he says. “Without bipartisan support for an effective climate policy, it is not sustainable in the long term.”

In the three months since Australia axed its carbon price, emissions have started to climb. Hugh Saddler, energy analyst with Pitt & Sherry, says emissions from electricity generation were 1.3 per cent higher in September 2014 than in June. “Demand went up, low emissions generation went down, so coal-fired generation went up and emissions went up,” he summarises.

It is too soon, he says, to conclude that the increased demand was caused by people responding to lower prices. After all, most are only now seeing their bills.

But the reduction in low-emission power generation was partly due to the abolition of the carbon price: hydro power generators, which had taken advantage of the carbon price to pump large volumes of energy into the market, have since reduced their supply.

If Direct Action passes the senate, Saddler says it will take quite some time for consequent emissions reductions to occur. If it doesn’t pass the senate, then the government will have to drop the pretence Australia is on track to meet its 2020 target. That is, unless it finds a way to cut a deal on the crossbench without mentioning the war.

This piece was updated on October 20 to include Peta Credlin's denial that she called Direct Action a "fig leaf".

This article was first published in the print edition of The Saturday Paper on Oct 18, 2014 as "Xenophon’s ploy to price carbon". Subscribe here.

Sophie Morris
is The Saturday Paper’s chief political correspondent.