Will Gillard Have The Guts To Ask Obama The Question?

President Obama's visit raises a single basic challenge for Julia Gillard.

Unless the Prime Minister expressly and openly confirms whether the US will have a full national Carbon Tax or Cap and Trade scheme by 2016, she will have failed a bedrock test of leadership.

Labor was quick to accuse Tony Abbott of being a coward for being overseas during the Senate Carbon Tax vote, even though they cut short the debate to bring forward the vote knowing that he was on a trip including a visit to Afghanistan. But Prime Minister Gillard will be the real coward if she fails to directly seek a global carbon trading commitment from President Obama.

This test is important for a simple reason: the Government modelling for the Carbon Tax assumes that the United States will be part of a global trading scheme by 2016. It also assumes that China and India, not to mention Japan, Canada and Korea, will be part of such a scheme.

None of these assumptions is credible but all go to the absolute heart of the Government's Carbon Tax viability. In short, if the United States does not have a Carbon Tax or Cap and Trade scheme, neither will Canada. Indeed Canada just voted overwhelmingly to reject a Carbon Tax and its Foreign Minister, John Baird, declared whilst in Australia that Canada would never have such a scheme.

And if Canada says no, so will Japan and Korea and you can guarantee that there will be no such scheme in China or India either. Japan has already indefinitely deferred the introduction of an ETS and has joined Canada in flatly rejecting an extension of the Kyoto Protocol. Korea has also deferred plans for an ETS.

All of this matters because the Government's modelling depends on the fiction that there is a fully functional global trading scheme in carbon credits with deep international participation by 2016. There is no Plan B. There is no alternative modelling of a world based on the reality of the G20 nations thumbing their nose at the Prime Minister's Carbon Tax.

The very reason the Government has not modelled the real world of no global agreement is that it is devastating for the Carbon Tax. Indeed, the Centre for International Economics last week modelled a world of patchy global action. The key finding was that electricity would increase by 30% on top of everything else, or three times the Government's assessment. In addition, the impact on our total national economy would be more than five times the prediction of the Government.

The CIE calculated that if there is only patchy rather than co-ordinated global action the carbon price will rise to $36.10 in 2010 dollars when the flexible price commences in 2016 and increases to $43 by 2020, compared to Treasury’s figure of $29.40. It’s a matter of supply and demand because a smaller market won’t be able to meet demand for foreign carbon credits and that will drive up the price. The result is almost triple the Government’s projected rise between 2012 and 2020 and is itself assuming more global action than is likely.

So if the United States is not in and there is no global agreement, as the Government now concedes, then the modelling collapses. Electricity prices, which are set to jump inexorably under the Carbon Tax, will in fact skyrocket. And if electricity sky rockets then dodgy compensation becomes woefully inadequate both for firms and in particular for families and pensioners.

The net result is that an awful lot of money is being collected; $105bn between now and 2021 just on the tax, but emissions go up and we then have to spend a second round of funds on foreign carbon credits. It is then, for the twin reasons of the inefficiency of the system and the impact on electricity prices, that the Prime Minister came away from APEC without a single other country pledging to replicate the ALP's Carbon Tax.

Indeed, when it comes to electricity prices, perhaps the most honest assessment of what a Carbon Tax is intended to do came from President Obama himself. In January 2008 he told the San Francisco chronicle that under:

"a Cap-and-Trade system, electricity rates would necessarily skyrocket. Coal-powered plants, you know, natural gas, you name it, whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money. They will pass that money on to consumers."

So this week, the Prime Minister has a chance to set the record straight. Either the US will have a Carbon Tax as the Government modelling assumes - or it will not. If the latter is the case then the Government will simply have to acknowledge that prices will be higher, compensation will be inadequate and the economic impact will be greater than assumed in modelling based on a fictional world.

That's why real courage would involve the Prime Minister asking publicly whether the US will have a Carbon Tax or Cap and Trade scheme by 2016. But don't hold your breath.

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