Rudd Cuts Spending to Allow Early Australian Carbon Trading

Australian Prime Minister Kevin Rudd will cut spending and limit tax concessions to fund a move to emissions trading a year ahead of schedule, should his Labor government win this year’s election.

The carbon price, which was to be fixed at A$25.40 ($23.16) a ton for 2014-15, will move on July 1, 2014, to a floating price of about A$6, costing the government around A$3.8 billion over four years, Rudd told reporters in Townsville today. At least A$770 million will be saved by ending an energy security fund program two years early and about A$1.8 billion will come from changes to tax incentives relating to employer-provided cars.

“Australia’s carbon price will be the same as in 31 other nations covering a population of more than 500 million people,” Rudd said in a statement today. “Businesses have been asking for the early transition and the changes will reduce their input costs and boost their competitiveness.”

Rudd had flagged changes to predecessor Julia Gillard’s clean-energy policy, which left Australia with the world’s highest carbon price and raised electricity charges, since ousting her last month. The move may be one of his last policy tweaks before calling an election, with polls showing he’s erased the gap with the opposition led by Tony Abbott, who has pledged to ditch the carbon price system if he wins.

“This clears the decks for Rudd on an issue that’s been damaging the party and is another step toward him calling an election,” said Nick Economou, a political analyst at Monash University in Melbourne. A ballot must be held by the end of November.

Tax Changes

Along with removing fringe benefits tax concessions for using company cars for personal use, the government plans to eliminate about 800 senior jobs from the public service to pay for the early transition to emissions trading. Legislation to enable the plan would be introduced to parliament by Labor should it win the election.

Shares in McMillan Shakespeare Ltd., which provides salary packaging and vehicle leasing administration services, fell 15 percent to A$15.36 by 10:44 a.m. in Sydney before a trading halt. “We believe the changes if implemented will have a material impact on the company’s business,” Chief Financial Officer Mark Blackburn said in a statement to Australia’s stock exchange.

Household Savings

The change will save Australian households an average of A$380 a year through lower electricity and other prices, Rudd said. Government assistance to industries exposed to intensive carbon emissions won’t change, he said.

The fixed price on emissions for about 300 of Australia’s largest polluters was planned by Gillard to reduce the country’s reliance on coal and to help meet the target for a 5 percent cut in greenhouse gas emissions from 2000 levels by 2020.

Abbott’s Liberal-National coalition also supports Australia’s 5 percent reduction target by 2020. It would commit as much as A$750 million to subsidize companies’ spending to achieve that goal.

“This is not a true market,” Abbott told reporters yesterday when asked about emissions trading. “Just ask yourself what an emissions trading scheme is all about. It’s a market, a so-called market, in the non-delivery of an invisible substance to no-one.”

Business Support

Moving toward early emissions trading would mitigate the impact of “high energy prices and lost competitiveness,” the Australian Industry Group, a business lobby representing about 60,000 companies, said July 15.

It would be a development “that most of the Australian market would support,” Hugh Grossman, executive director of carbon research company RepuTex in Melbourne, said today. “Australian carbon prices against the rest of the world have been a lot higher over the past couple of years.”

Gillard, who ousted Rudd in a party coup three years ago, struck a compromise in 2011 where she agreed to set a fixed rate for three years before starting market-based pricing in mid-2015. Carbon pricing began at A$23 a ton in July 2012 and rose this month to A$24.15.

EU Prices

European Union carbon futures for 2013 settled yesterday at

4.05 euros ($5.30), up 0.3 percent on the ICE Futures Europe exchange in London. European prices this year have traded as high as 6.66 euros on Jan. 7 and as low as 2.75 euros on April

17. Prices rose from this year’s lows as the European regulator won approval for a plan to reduce an oversupply of permits by delaying planned auctions.

Australian’s carbon price would probably trade below the EU level for the first two to three years, with parity unlikely until later this decade, RepuTex said separately in a statement, as local factors like electricity generation would help shape the Australian price.

Backing for Rudd during his first spell as Australia’s leader waned after he postponed the introduction of a carbon-trading plan to limit climate change, a phenomenon he’d described as the “greatest moral and economic challenge of our time.”

Popularity Lift

Since Rudd’s return, Labor has risen to its highest level on a two-party preferred basis in almost nine months, according to a Newspoll survey published July 9 in The Australian that showed it was tied with the coalition on 50 percent.

A Fairfax-Nielsen poll published in the Sydney Morning Herald newspaper yesterday also showed an even split in the two-party measure, designed to gauge which party is most likely to form government under Australia’s preferential voting system.

Labor’s primary vote surged 10 percentage points to 39 percent in the poll taken July 11-13, while the coalition fell three points to 44 percent from a month earlier. Rudd leads Abbott as preferred prime minister, 55 percent to 41 percent. The survey of 1,400 people had a margin of error of plus or minus 2.6 percentage points.

“If I was Rudd I’d call the election as soon as possible,” Economou said. “He looks to have wrong-footed Abbott and should seek to maximize the goodwill he’s generated.”

Before it's here, it's on the Bloomberg Terminal.