Australia: What will happen to Australia's Carbon Pricing Mechanism if the Coalition is elected?

Commercial property landlords and managers are (indirectly) affected by Australia's Carbon Pricing Mechanism ("CPM") in that suppliers will seek to pass on increased carbon-related costs. For example, councils may increase their landfill waste disposal rates, whilst the CPM has already resulted in around a 10% increase in the cost of electricity bills. So, is the CPM here to stay, or is it just a temporary phenomenon?

Legislation establishing the CPM came into operation on 1 July 2012. The CPM is a market-based instrument designed to regulate emissions of greenhouse gases and much of its architecture is borrowed from the European Union's flagship Emissions Trading Scheme ("ETS"). The legislative package making up the CPM was effectively the product of over a decade's worth of intense political wrangling between Labor, the Liberal-National Coalition and the Greens. Though hard won, many commentators believe that Labor's CPM will not last the distance. This presumably explains the observation that the vast majority of the CPM's 'Liable Entities' (which now number well over 300 in the Liable Entity Public Information Database) continue to perform the barest minimum of obligations in order to comply with the law.

The reluctance to commit substantial funds and the steadfast refusal to engage in any real long-term forward pricing structures by a majority of Liable Entities may largely stem from the Coalition's highly publicised and drawn out campaign (principally via Tony Abbott) that it intends to erase the CPM if elected to government on 14 September. According to media reports, an election of Tony Abbott to replace Julia Gillard is looking likely, with the front page of The Australian proclaiming on 4 February 2013:

The Newspoll conducted for The Australian on 4 February 2013, puts the Coalition in a clear election-winning position. So what is the likely fate of the CPM under a Tony Abbott Liberal-National Coalition government: will his often quoted "pledge in blood" to rescind the CPM actually transpire?

Securing a majority in the Senate

From a Constitutional perspective, there is no legal impediment preventing Tony Abbott from repealing the Clean Energy Act 2011 (Cth). To do so however, he must:

• gain a majority in the House of Representatives
• secure a majority number of seats in the Senate (where the balance of power is currently held by the Greens).

Securing a majority of seats in the Senate may well be quite difficult. At the upcoming federal election on 14 September, only half the total number of state based senators will have their seats up for re-election. With 16 incumbent senators, the Coalition would need to secure 23 seats in September, a net gain of three from when these seats were last contested in 2007, to make up the 39 required for a majority. While not impossible, securing such an outright Senate majority remains unlikely ¹ – in a Research Note, Bloomberg New Energy Finance has assigned an overall probability of 20% to this outcome.²

Calling a double dissolution

If Abbott wins a majority in the House of Representatives but not in the Senate this September, then he could still seek to pass repealing legislation by way of a double dissolution. Under this scenario, Abbott would need to be confident that the Coalition would be returned to government and have a better-than-even chance of then securing a Senate majority.

There have only been six double dissolutions in Australia's history – 1914, 1951, 1974, 1975, 1983 and 1987. Only once (in 1951) did the government subsequently secure a majority in the Senate and pass its proposed legislation. As Bloomberg New Energy Finance has noted:

It is important to note that a double dissolution could also work in Abbott's favour: since all 12 Senate seats are contested in each state he could achieve six seats (50%) in each state with only 46.2% of the (primary) vote and a seventh with 53.8%. Provided the Coalition had a high enough primary vote, it might be well-placed to win a majority. However, in the same way a low primary vote could favour the minor parties and, in particular, the Greens, a single quota required to elect an individual Senator would be reduced from 14.3% to just 7.7%.⁴

In terms of timing, assuming it was the government's first agenda item, working through the double dissolution process would probably take 8 – 14 months from the original election date, and the outcome is not certain at any point during that process. On that scenario, by the time the parliament finally voted, the CPM would have been in place for nearly two years.⁵

Some commentators have suggested that a Liberal government would call a double dissolution whilst the Greens still retain the balance of power in the Senate. Having only just been returned to government after being in opposition since 2007, this would be an extraordinarily aggressive and confident move, particularly in 2014 when the CPM will have already been in operation for two years and the ongoing cost impact on people's day-to-day lives is expected to remain minimal.⁶

Taking all of the above issues into account, Bloomberg New Energy Finance has assigned a probability of 30% to Tony Abbott risking a double dissolution.

Foregoing CPM revenues

Despite its stated intention to repeal the CPM, the Coalition has stated that it will keep the personal income tax cuts that are to be delivered to households to assist them in managing increased costs as the CPM is passed on through the broader economy. These have included:

• tax cuts for low and middle income families, involving tripling the tax-free threshold from $6,000 to $18,000 in 2012/13 and adjusting the first two marginal tax rates, and a further increase in the tax-free threshold from $18,200 to $19,400 in 2015/16
• increasing payments to families, pensioners, veterans and self-funded retirees and assistance to aged-care residents.

Those measures, worth some $4.7 billion in 2014/15, would need to be reversed if the CPM were repealed. Quite obviously this would be most unpopular with important elements of the electorate if the Coalition were to attempt to recoup such costs by alternative means (such as the federal budget).

What about compensation for carbon units under the Constitution?

The former Parliamentary Secretary for Climate Change and Energy Efficiency, Mark Dreyfus QC, has stated unequivocally that carbon units are "personal property" which if removed (by way of repealing legislation) would require the federal government of the day to pay compensation. Predictably, the Shadow Minister for Climate Action, Greg Hunt, has rejected this stance, and instead referenced carbon units as constituting proprietary interests created by statute and which therefore are not protected by s 51(xxxi) of the Constitution.

Ultimately, the question will centre on whether the extinguishment or cancellation of carbon units resulting from the repeal of the Clean Energy Act 2011 (Cth) would amount to an "acquisition" of that property by the Commonwealth (under section 51(xxxi) of the Constitution). Whatever happens, a repeal of the CPM unaccompanied by compensation would very likely be the subject of a constitutional challenge which would quite possibly end up in the High Court.

Likely outcome

This analysis considers one scenario which is possible given current opinion polling. It should be borne in mind that fortunes can swing dramatically in politics, and there is a very large number of factors that could intervene before either the election on 14 September or indeed a double dissolution election in two years' time.

Based on recent and current voter sentiment, it appears to be likely that the Coalition will win in September, but not achieve the 23 seats required for a Senate majority. Bloomberg's analysis suggests that a double dissolution is similarly unlikely - the probability arising from this set of circumstances has been assessed as "slightly more than a one-in-five chance of repeal".⁷ This is consistent with evidence from wholesale electricity markets which appear to be pricing in around an 80% certainty of an AUD 23/tCO2e carbon price in 2012/13.⁸

Bloomberg's analysis suggests that the most probable outcome is that a new Coalition government would leave the CPM in place. How can such a conclusion be reconciled against Abbott's relentless rhetoric to immediately instigate repeal proceedings upon assumption of the prime ministership? The conclusion must surely be that the Coalition's outright rejection of the CPM has been primarily associated with securing government: once actually in power, the Coalition's 'Direct Action' policy will inevitably be subjected to greater scrutiny and many difficult questions will be raised as to the adequacy of this platform to deliver real and measurable emission reductions over the long term.

Based on the forgoing analysis and the likely presence of some sort of carbon pricing existing well into the future, the commercial property sector should initiate (or continue) a review of their commercial property leasing agreements and in particular how they might be affected by increased carbon-related costs. Landlords should review their leases (including net leases, where the tenant pays the rent plus a proportion of the outgoings, and gross leases, where the rent typically includes all of these outgoings) now, to determine liability for any increase in costs and whether such costs can be passed on to tenants.

Footnotes

¹No incoming government has had a Senate majority in its own right in its first term since the current Senate electoral rules came into force in 1949, although the Howard Government (1996 – 2007) had effective control in its first term through a deal with the independents.

²Bloomberg New Energy Finance. Australia – Carbon Markets Research Note: 'Will Australia's carbon price last?' (7 December 2011).

³Ibid.

⁴When both houses of parliament are dissolved, the threshold for election as a senator is almost halved: 1/13th (7.7%) of the votes in a state instead of the usual 1/7th (14.3%).

⁵Deutsche Bank – Markets Research. 'Australian carbon policy: if the Coalition wins, how long would it take to repeal the carbon price?' (7 May 2012).

⁶This conclusion is based on Treasury's Modelling which concluded that the CPM would increase CPI by only 0.7% (Treasury Modelling 2011 'Strong Growth, low pollution').

⁷Bloomberg New Energy Finance. Australia – Carbon Markets Research Note: 'Will Australia's carbon price last?' (7 December 2011).

⁸Note however that trading volumes in the electricity forward market are low from early 2014, suggesting that the wholesale electricity market remains uncertain about whether the CPM will be in place at that time.

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