Labor's lot on carbon

One of the hardest things about going from the Government benches to the Opposition is losing all the resources that go with them.

Labor has probably already worked that out but the first week of parliament will really bring that fact home. 

The Coalition will this week introduce legislation to repeal the carbon scheme and Labor has signalled its intention to try to amend it to introduce an emissions trading scheme.

Now that is easier said than done. The Government has all the resources of the Office of Parliamentary Counsel to work on its legislation; the word on the street is that the poor schmuck who drafted all the CPRS and Clean Energy Future bills was locked in the same dark room to draft the repealing legislation. 

With no such drafting resources it will be interesting to see how Labor goes about amending a Bill, which is pretty much one line; Schedule 1, Item reads - "Clean Energy Act 2011: The whole of the Act: Repeal the Act." 

The rest of the amendments are basically transitional arrangements for the phase out of the carbon scheme and consequential amendments to other pieces of legislation.

One option for Labor would be to cut and paste the amendments hurriedly drawn up before the caretaker period earlier this year. But that will face some procedural hurdles.

Despite these difficulties, it's a bit different from the course of events one ill-informed scribe was over-confidently predicting in his recent "Labor backflip" yarn. Word of advice: heed the lesson of the last three years- if you're going to rely on an unnamed Labor Right factional hack, make very sure you're not being used to fly a kite in caucus.

Not to be dissuaded the same scribe was ruminating this week that Abbott's achilles heel on his plan to repeal the carbon scheme was the weather. 

Well yes its true, public support for taking action to tackle climate change was highest during the Millennium drought. But as I argue here the recent bush fires in NSW don't mean there will be a resurgence of support. The argument that public support will return for putting a price on carbon when the weather turns foul conveniently overlooks that it didn't in 2009 after the Victorian bushfires nor did it in 2010 after the Queensland floods.

Nice idea. But I fear it's a bit of a pipe dream.

However, the prize for the most widely optimistic claims goes to the chair of the Australian Competition and Consumer Commission Rod Sims, who reckons that it will be a fairly easy task to strip carbon out of electricity prices.

"It's not a massively complicated process,'' Mr Sims said this week. ''Electricity prices went up fairly quickly on the way up and they will go down fairly immediately on the way down.''

That claim would have had a few energy market experts scratching their heads. Anyone who has taken any time looking at Australian energy markets knows one thing for sure and that is that they are "massively complicated".

And as is becoming increasingly clear, it is not a simple matter of going back to old energy prices come 1 July next year.

The biggest problem confronting energy companies is what happens if the carbon scheme is not repealed by 1 July next year. The Abbott Government has made clear even if the repeal bills are not passed until after 1 July they will take effect retrospectively.

But again, easier than it sounds. For a start, state energy regulators can't make pricing determinations for 2014-15 just on the basis of an "expectation" the carbon scheme will be repealed. As a result, they will  need to wait until after repeal to redo retail energy pricing and that will take at best 2-3 months.

During this time, the law is the law and generators will most likely still be passing through the cost of carbon to customers through the retailers. 

At the same time, customers will expect to be getting cheaper power and newspapers will be crying blue murder running story after story of pensioners doing it tough.

But it won't be a simple case of refunding retailers and customers 10 percent when the changes come through.

As explained by the Energy Supply Association of Australia, unlike the impact on goods and services of the introduction of the GST in 2001, there is no easy way to calculate what the carbon component is of energy prices.

"It is impossible to precisely quantify the extent to which the carbon price has increased wholesale energy prices, as they vary based on the changing mix of generation output. In a competitive market, price discovery is dynamic, and participants’ ability to recover carbon costs will vary. Renewable generators (wind, hydro) also benefit from those higher prices, even though their costs are not increased by a carbon price.

Further complicating this scenario is the inability to attribute to the carbon price a specific value at the time of trade."

Then there are all the forward contracts that have been entered into by retailers to hedge against the volatility of the wholesale market that have carbon factored in. Says ESAA:

"Forward contracts are based on expectations of wholesale spot prices over the period of the contract and can be bought and sold several years in advance.....

Where a carbon “pass-through” clause has been used in a bilateral contract, the arrangements differ. There is a standard form contract approved by the Australian Financial Markets Association (AFMA) that has a price ex-carbon and a formula for calculating a carbon component based on the prevailing price."

So it isn't as straight forward as Sims would have people believe. Nevertheless, the ACCC from 1 July will be running the fine tooth comb over energy prices to determine whether they are "unreasonably high"  using the new powers being conferred by the Abbott Government. These new powers go much further than the ACCC's powers when the carbon scheme was introduced, which merely addressed whether companies were making false or misleading claims about the price impact of carbon tax.

So that brings us back to Labor's lot. With the ACCC breathing down energy companies necks, you can bet they will start bringing pressure to bear on Labor to pass the repeal Bills before 1 July rather than roll the dice with Clive Palmer.