Will Australia’s carbon price last? A 2013 update

Australia’s carbon price has now been in effect since 1 July 2012. Yet,
with a change of government looking likely after the 14 September federal
election, some believe it inevitable that the world’s newest carbon
market will not last the distance. This White Paper updates our December
2011 analysis – Will Australia’s carbon price last?

● We estimate that there is only a 32% chance that Australia’s carbon
price will be repealed after the 14 September federal election. The
Coalition will have to win a majority in the House of Representatives and
control enough votes in the Senate to successfully pass legislation through
parliament to rescind the Clean Energy Act.

● Current polling suggests that the Coalition will win government and
Tony Abbott will become Prime Minister. If he secures a majority of votes
in the Senate, the earliest he could rescind the carbon price is H2 2014
after the Senate changes hands on 1 July 2014.

● If the Coalition wins government but fails to control a majority of
votes in the Senate, it would have to manoeuvre itself to call a double
dissolution election and hope to win its majority in a second poll. Usually
this process takes around nine months to engineer, making the earliest
likely point of repeal H1 2015, immediately before the floating-price
period is due to begin.

● Winning a majority in the Senate is difficult as only half the
state-based senators contest their seats at each election. If Labor and the
Greens win a combined 42.9% of the first preference vote in each state, it
would be impossible for the Coalition to control the upper house provided
both parties have done a close preference deal.

● Abbott has repeatedly said he is prepared to go to a double dissolution
to remove the carbon price, yet a narrow election result would cast
significant doubt over his chance of success. There have only been six
double dissolutions in Australia’s history and on two occasions they
resulted in the sitting government being cast out by the electorate. Having
only just been returned to government after being in opposition since 2007,
this would be a very bold move.

● Some commentators have argued that if Abbott will not risk a double
dissolution, he may try to reengineer the scheme in order to undermine its
economic impact. However, the so called ‘Abbott Proof Fence’ appears
secure and any efforts to try to push the carbon price to zero, remove the
penalty for non-compliance, or adjust the eligibility threshold for liable
entities, could be blocked by a hostile Senate.

● While businesses must comply with current obligations under the Carbon
Price Mechanism, it must also manage the ongoing political uncertainty.
Some firms are actively looking to acquire EUAs while prices languish in
record-low territory while others appear to be waiting for a definitive
political signal they are hopeful will come in September. Our analysis
suggests that if the Coalition gains power, the uncertainty is likely to
continue until H2 2014, with government auctions starting earlier in 2014.
Hence, for the time being businesses will have to focus on compliance to
ensure that trading operations and risk management systems are set up.