[Ed. Note: In preparation for the Copenhagen summit, the KLD Blog will present some perspectives on global climate policy. The following analysis of Australia's rejection of an emissions-credit trading scheme comes from RiskMetrics analyst Mark Barraclough. Mark is based in Sydney and researches Australian firms, with a focus on the energy and extractives sectors.

As the US and other developed-world democracies debate their own "cap and trade" schemes, the case of Australia's Carbon Pollution Reduction Scheme (CPRS) may prove instructive.]

Any chance of Australia taking a legislated emissions trading scheme to Copenhagen evaporated on Dec. 1 as the nation's opposition Liberal party voted down the Rudd government's Carbon Pollution Reduction Scheme (CPRS) for the second time. Earlier in the week, opposition leader Malcolm Turnbull was unceremoniously ousted for supporting an amended emissions trading scheme bill, and Tony Abbott emerged as the new Liberal leader.

The outspoken Mr. Abbott has previously described climate change as "crap" and stands firmly in the camp that Australia should do nothing until major emitters such as the U.S. and China have established their own schemes.

The Political Route Not Taken

As this is the second time the CPRS bill has been rejected in the Senate, the Rudd government had the option to dissolve both the House of Representatives and the entire Senate in what is known as a double dissolution. In essence, Kevin Rudd could break the stalemate and call the world's first election fought entirely over climate change.

With a significant group of Liberal parliamentarians publicly skeptical that climate change is occurring as a result of human activity, and given that the Labor government is already well ahead in opinion polls, a double dissolution election could deliver Labor the balance of power in the Senate. Even were it not to succeed in doing so, the government would still be able to call a joint sitting of both houses of parliament to break the deadlock and push through its CPRS bill.

However, the government's acting Prime Minister, Julia Gillard, has announced that the government is intending to reintroduce the same amended CPRS bill on the first sitting day in late February next year. Mr. Abbott has promptly responded that his party will vote it down again.

The Politics Behind the Impasse

Why didn't the Australian government take advantage of this opportunity? The answer lies in the effect a double dissolution could have on the timing of Senate elections. A double dissolution before July 2010 would put future Senate elections out of sync with the House of Representatives. Such an outcome could shorten the Rudd government's second term in office to two years, due to the way a sitting government will generally choose to put the Senate election cycle back in sync with the House, to avoid exposure to a protest vote via the Senate elections.

Essentially, it makes more political sense for the government to hold off and trigger a double dissolution in the second half of 2010 because this will keep Senate elections in step with the House.

There is also the possibility that an election now could potentially see the Greens win seats from Labor. The government has just negotiated an amended CPRS bill which includes substantial subsidies for coal-fired power generators and other big polluters. A portion of those people who voted for Labor over its climate change policy at the last election could switch to the Greens out of disappointment over this compromise with business interests.

Greens leader Bob Brown has said that the government should "have been negotiating with the Greens for a scheme based on cuts of 25 to 40 percent below 1990 levels by 2020."

The problem for the government has been that any scheme that appeases the Greens would be vigorously opposed by business leaders representing energy-intensive industries, with whom the government has taken nearly two years to reach a fragile agreement.

Implications for Business

Mining companies, which for the most part were not destined to receive significant subsidies under the proposed scheme, may find some relief in this delay. For its part, the peak mining industry association (the Minerals Council of Australia) urged a fundamental re-think of climate change policy this week. But the current policy proposal has found support in the aluminium and petroleum exploration and production industry associations, which see it as the best deal on industry assistance they are likely to achieve.

If the legislation is not passed in the new year, owners of Australian brown coal-fired power generators such as International Power PLC and CLP Holdings are likely to wish they had the proposal's AUD 7.3 billion in electricity sector adjustment subsidies (over 10 years), as debts are up for refinancing.

With carbon regulation still a threat over the medium term, natural gas producers and utilities focused on natural gas power generation may stand to benefit in the policy vacuum. As coal power plants age and no new coal power capacity is added, lower emission natural gas offers the least risk and lowest capex solution. Australian participants in the space include Origin Energy, AGL Limited, Santos, and Arrow Energy.

While these companies may benefit from continued uncertainty over carbon regulation, the effects of the political failure this week are likely to be felt over the longer term, should Australian business lag other nations in developing a lower-carbon economy.

[For more on this topic, see the Climate Change Resource Center.]