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G’Day (Stale)Mate

Students of US Congressional gridlock and low esteem for politicians will find much to admire in the evolving drama in the Australian capital, Canberra.

Attempting to improve his electoral prospects, Kevin Rudd (who is once again Prime Minister after a party coup against Julia Gillard, who led a similar coup against him 3 years ago), announced July 15 that he was ‘terminating’ the Australian “carbon tax”.

In fact what Rudd is proposing is to end the fixed price phase of their cap and trade system a year early, in 2014 rather than 2015, and move then to the variable cap and trade rate. Expectations are that the carbon price will fall from its current fixed rate of about A$25 to something closer to the prevailing (sub A$10) rate in the EU system, to which the Australian system will be linked. (More on this linkage, below.) All this is being pitched as great news for consumers and industry.

Small print: Rudd can only do this if he wins the impending election (September 7), and then gets Green Party support to get it through Parliament, where the Senate (elected, as in the US, on a 1/3 per election cycle) is likely to be the main obstacle. The Greens, who are almost certain to remain in a swing vote position in the Senate, are not enthusiastic about substantially reducing incentives for emission reductions. They may also have wider reasons for not cooperating with Rudd, who, at least at this stage, shows no interest in formal cooperation with them, unlike Gillard,

The Australian opposition, known as the Coalition, is pledged to repeal the program entirely and replace it with a program of incentives and command and control measures. But they are also unlikely to be able to get this through the Senate, for much the same reasons.

So the likelihood is that the program continues and moves to the variable phase on the original schedule. If Rudd wins the election he will probably swallow the delay without too much anxiety. The Coalition leader (and current narrow electoral favorite), Tony Abbott, will have a trickier road. He has said he will dissolve parliament and call fresh elections for both houses if his repeal proposal is defeated.

One feature of the Australian program which may get more attention in the post-electoral debates is the planned link to the EU system. If (as seems likely once the EU parliamentary standoff is resolved) the EU successfully raises the ETS price and therefore Australia’s, it would be reasonable expect some public concern about Australian sovereignty, especially since the public has been told that the “termination of the carbon tax” will lead to substantial savings.

There’s another angle as well. Right now this would be a one-way street – Australia is allowed to buy EU allowances but the opposite is not yet the case. The EU Commission, enthusiastic from the start about creating a global market – which the Commission will inevitably dominate, absent inclusion of the US or China- is likely to reciprocate before long. The Commission will hope the additional demand from Australia will further inflate the low EU ETS price. Whether spillover from the Euro crisis will give Australian – or indeed European – politicians any concerns about establishing another financial mechanism forcing connections between divergent economies is another question.