Kevin Rudd received a standing ovation when he announced to the world that Australia would ratify the Kyoto Protocol at the Bali Climate Conference in 2007. Then, there was widespread community interest in climate change and a decisive international agreement looked within reach.

Now, with the first commitment period of the protocol drawing to a close, Australia is equivocating about its continued participation in the agreement. How, in just five years, did Labor go from being Kyoto enthusiasts to Kyoto agnostics?

The conventional wisdom among progressives has generally been that the protocol isn’t perfect but it provides a building block for a comprehensive international agreement; a stepping stone for something better down the track. Some continue to believe that Australia’s participation in the protocol is important, and want the government to sign up for the second commitment period when its rules are finalised, probably in Qatar later this year.

The counter argument is that the protocol is a dying beast and will be replaced by a more comprehensive agreement being negotiated through what is known as the Ad Hoc Working Group on the Durban Platform for Enhanced Action (everything has an acronym in climate circles and the one for this process is the ADP). By tying Australia to a fading regime, participation in the second commitment period could weaken its capacity to shape the future international agreement.

Domestic political factors add to the case against the protocol. Most industry groups want Australia to withdraw and, if the Gillard government signalled a desire to participate in the second commitment period, it would be expose to yet more “carbon fuelled” attack from the opposition.

In addition to the strategic and political issues, there are several technical matters of considerable importance that are being mulled over by the government. The first is the large surplus that Australia would be entitled to carry over into the second commitment period if it stays with Kyoto.

Australia’s emission target in the first commitment period was to keep emissions to 108% of 1990 levels over the period 2008-2012. Due to a pronounced drop in deforestation, reforestation driven largely by the tax advantages associated with managed investment schemes, and a slow-down in the growth of energy emissions, Australia is on track to come under its target by about 110 million tonnes (Mt) of carbon dioxide equivalent (CO2e). If it signs up to the second commitment period, it will be able to carry the 110 Mt CO2e forward, making it easier to meet its targets and reducing the economic impact on the Australian economy.

There is a chance Australia might try to hold onto the surplus even if it turns its back on the protocol, on the grounds the emissions outcome was policy-induced. Some ministers have already publicly claimed that the flattening in Australia’s emissions is due to policy measures. At best, this is a half-truth.

The major reason for the surplus is the reduction in deforestation, and most of this is due to falling farm produce prices, rising farm input prices, climatic factors and declining availability of uncleared productive land. Notwithstanding this fact, it won’t necessarily stop the current or a future government trying to carry the surplus into an alternative regime. The benefit of staying in Kyoto is that it will make this move less contentious.

The other factor that complicates the calculus over the second commitment period is the rules concerning forest management (emissions and removals associated with the management and harvesting of public and private native forests, and plantations established before 1990). Australia did not account for forest management in the first commitment period, partly due to fears about emissions from bushfires. A new set of accounting rules has now been agreed that largely shield Australia from the effects of bushfires and open up opportunities for cheap offset credits.

Even without taking any additional policy action, Australia is likely to receive a significant windfall in forest management credits from the new accounting framework. This is a product of the contraction being experienced in the native forestry sector. Increasing competition from plantations, the high Australian dollar and a shortage of native logs in some areas have contributed to a sharp fall in native forest harvesting — log removals from native forests are currently more than 30% below the 2002-2009 average.  If harvesting remains at current levels, Australia will receive in the order of 12 Mt CO2e per annum of forest management credits over the period to 2020. This equates to about 14% of Australia’s cumulative abatement task over the period 2013-2020 with a 5% target.

Regardless of whether Australia participates in the second commitment period, it is likely to apply the new accounting rules. However, if it stays with the protocol, there is a catch; Australia’s credits from forest management will be capped at 14.6 Mt CO2e per annum.

This is a conundrum for environmentalists. Sticking with Kyoto means adopting rules that strip away much the incentive for improved forest management. If Australia abandons Kyoto, there is the potential to jettison the cap on forest management credits, thereby preserving the incentive for management improvements and potentially lowering Australia’s abatement costs.

Which way the government will go on the protocol is still unclear. The only thing that is certain is that Prime Minister Gillard won’t get the free kick her predecessor got in 2007.