Repealing a carbon price will come with some complications, and not just for a government.

This article has been updated – see below

Labor and the Greens’ adoption of a fixed price commencement for the carbon pricing scheme will significantly improve the chances of Tony Abbott being able to repeal the scheme in the event he wins the 2013 election.

As Abbott argued eloquently in putting the case for a carbon tax in 2009: “… a new tax would be the intelligent sceptic’s way to deal with minimising emissions because it would be much easier than a property right to reduce or to abolish should the justification for it change”.

That observation is most relevant for his claim that he would repeal the carbon pricing scheme well into its second year of operation if he wins an election due in August 2013.

In the event the Liberals win and have retained Abbott and his promise to repeal the scheme, legislation could be drawn up quickly to effect the repeal; in the event Labor and the Greens retain control of the Senate and are unwilling to support the repeal bill, a double dissolution would be needed to enable the Liberals to give effect to their commitment. This would be hard to do by the end of 2013, given the three months that must pass between the rejection of the bill to satisfy double dissolution requirements. In any event, returning to the polls within a couple of months of winning an election is unlikely to appeal to anyone.

A joint sitting to repeal the scheme would therefore be more likely be in early-mid 2014, assuming the Liberals won a second, double dissolution election.

If a floating permit price and permit trading were in place by then, the repeal of the scheme would be more problematic and expensive. As Abbott noted, firms would have a property right vested in their tradeable permits, which the government would then have to acquire on just terms. Polluters and traders who had bought permits for future years in the expectation that permit prices would rise would have to be compensated for their suddenly worthless permits.

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But in the initial phase of the scheme, which will still be operating until June 30, 2015, fixed price permits cannot be traded — they are “surrendered” on purchase by the polluter. It functions like a tax, and therefore can be stopped like a tax.

The problem for repeal, however, comes oddly from the lavish generosity of the scheme to big polluters.

While purchased fixed price permits can’t be traded — they work just like a tax — free fixed price permits can be traded. They have to be sold back to government for their fixed price by the “true up” date of February 1 after the end of the relevant financial year. But until then, EITE industries, who receive 94.5% or 66% free permits (or 50%, for LNG), will be able to trade their permits. So, anyone receiving a free permit in the 2013-14 financial year can trade that permit until January 2015, unless the government decides to acquire it beforehand (for “just terms”).

The first step, before repeal, will therefore be for the government to stop issuing free permits to big polluters, because every one of those permits that is subsequently traded will cost the government money in February 2015. But under the scheme, free permits are to be allocated “early in each compliance period”. By the time of the 2013 election, the 2013-14 permits will have already been allocated. It should be possible for the new government, in repealing the scheme, to simply declare the permits worthless, while ending the obligation firms have to sell them back. Firms with freely allocated permits therefore won’t be out of pocket. But any permit that have been traded to another entity have a different status, and it may not be possible to extinguish those permits without compensation.

Should the new government wait before holding a double dissolution election and the scheme isn’t repealed until later in 2014, another years’ worth of free permits will be allocated, with the cost falling on the government in February 2016. Of course, should the scheme not be repealed until after July 1, 2015, every single permit issued thereafter is tradeable.

There are other consequences to repeal, perhaps more esoteric. Repeal of the scheme would be a strong signal to the international community that Australia wants no role in any international action to combat climate change. Running interference in climate negotiations, and trying to extract the best deal from them, as the Howard government did, is one thing. Actively sabotaging an operational domestic abatement scheme is quite different, and the international community is unlikely to regard the Coalition’s risible “direct action” policy as any sort of replacement. The possibility of retaliatory action, particularly from Europe, towards Australian exports will have to be considered.

The other consequence is blunter. Should a carbon pricing scheme be legislated and implemented, and then be repealed, it will be a clear signal that parliamentary politics simply cannot cope with the policy challenge of climate change. Those who take the need to curb emissions seriously — particularly younger people, who will pay the price of climate change — will be forced to consider other alternatives. The most logical one is taking “direct action” of their own, to shut down our most emissions-intensive industries — think the dirtiest power stations — and stop emissions-intensive exports such as coal.

Given the repeal of a functional carbon pricing scheme, they will have a strong moral justification, as well as policy rationale, for doing so.

UPDATE: Thanks to Antony Green for pointing out that the earliest a double dissolution election could be held would be, most likely, 2015, given the requirement for a sitting of the senators elected in the August 2013 election, which would occur on 1 July 2014 (see Antony’s blog here for reasons why). Given the requirement for a three-month delay between “rejections” of the repeal bill, a double dissolution election before 2015 would therefore be difficult. This would put repeal at a joint sitting perilously close to the commencement of the flexible price period of the scheme, at which point compensation costs would soar, and maximises whatever problems arise from compensation requirements under the fixed price period of the scheme.

Shane Wright of The West Australian has also covered repeal impacts in more detail.