Chapter 3
Timing
3.1 The Committee heard a variety of views about whether the CPRS should be
introduced soon or delayed; and whether the legislation itself should be
delayed or just the starting date.
3.2 Those urging prompt action stressed the urgency of dealing with climate
change, the need for Australia to present a clear position at the Copenhagen
conference in December, the benefits to business of providing them with greater
certainty and possible 'early mover' advantages.
3.3 Those urging delay argued that the scheme needed further development,
that Australia should not be 'acting alone' or 'moving ahead' of other
countries, that industry was not ready, that the global financial crisis made
this the wrong time to introduce the scheme, or just saw action on climate
change as unnecessary and repeated delay a way of avoiding it.
3.4 This chapter addresses each of these arguments in turn.
Urgency of dealing with climate change
3.5 The science of climate change, summarised in Chapter 2, showed the
importance of stabilising greenhouse gas concentrations. Reaching a given
target of cumulative emissions by 2020 or 2050 becomes harder, and requires
steeper cuts in annual emissions, the later the process gets underway. Chart 3.1
illustrates: the solid line is (roughly) the path of emissions under the
conditional offer in the CPRS (measured as a percentage of 1990 emissions) and
the dashed line shows a path to achieve the same cumulative emissions if action
is delayed three years.
Chart 3.1: the
consequence of delay on emissions reduction
Source:
Secretariat.
3.6 Australia was applauded at Bali for its conversion to being a forceful
advocate of action to address climate change. Building on this role at the
Copenhagen conference in December 2009 will require Australia to have a clear plan
for dealing with its own emissions. This approach will be more credible if it
is embedded in legislation passed by the parliament:
..climate change problem is probably the perfect example of a
collective action problem where the actions of a single state cannot possibly
protect citizens from the effect of worst consequences of climate change...
(this) puts a real premium on the credibility that you bring to the negotiating
table, so what you are doing with your own legislation is of profound
importance to the future outcome of the global agreement and people are paying
attention to your efforts.[1]
3.7 It is important for Australia to be able to play this role at Copenhagen
as the more countries that can be encouraged to adopt an emissions trading or
similar scheme, the more effective will be the impact on greenhouse gas
concentrations.
Providing greater certainty for business
3.8 There is strong evidence that failure to pass the legislation would have
an adverse effect on certainty for business in making their capital expenditure
decisions:
We totally agree that the certainty is required. We totally
agree that the passage of the legislation would give that certainty.[2]
Without regulatory certainty there will be delays in
investment, and security of energy supply could be compromised in the medium
term.[3]
...Prime Minister Howard’s task group report noted the real
costs of deferred investment, for example, where they said:"... waiting
until a truly global response emerges before imposing an emissions cap will
place costs on Australia by increasing business uncertainty and delaying or
losing investment. Already there is evidence that investment in key emissions-intensive
industries and energy infrastructure is being deferred."[4]
3.9 Mr Paul Curnow, a partner in the global climate change practice of the
international law firm of Baker and McKenzie commented:
Even some of our clients who do not fully agree with the
government’s scheme policy or design are now starting to realise that they
still need some policy certainty in order to move ahead with key investment and
operating decisions...delay
in the longer run is just going to lead to higher costs for a lot of
businesses.[5]
3.10 Renewable energy firms would be particularly adversely affected by
delay.
The one thing that kills investor confidence, and we are
seeing this at the moment in the global financial crisis, is uncertainty...We
will always look to invest where the resource is aligned with the best economic
incentives available. So we would be obliged to move to wherever those factors align
themselves and, certainly, Western Europe has some very attractive regimes at
the moment.[6]
Hydro Tasmania supports a scheme design that ensures the full
cost of carbon is reflected in all investment decisions as soon as practically
possible, providing investment certainty.[7]
...I would have to question why you would want to further delay
it. It is not just the geothermal industry that needs that certainty, it is
anybody operating in the clean energy sector.[8]
3.11 The Committee also heard from financial institutions that this
uncertainty was a deterrent to investment in companies with significant
greenhouse gas emissions:
We would argue that the uncertainty that is created by not
proceeding from our experience and our perspective would be worse because it
will stifle the flow of capital...without legislation passing, the level of
uncertainty would simply add such a degree to the risk profile of any
investment that sits within that carbon scheme impact that we simply would not
allocate capital because we cannot understand the metrics around the impacts of
that scheme.[9]
AFMA supports the existing timetable for the start of the
CPRS on 1 July 2010. It is very important that certainty be provided as soon as
possible to other existing markets that are currently being affected by the
proposed Scheme. In particular, the market for term electricity contracts (for
both electricity supply and electricity derivatives) is hindered by an
inability to properly factor in a carbon price. Likewise, the extension of term
finance facilities has the added difficulty of not knowing with any precision
how and when a carbon price may affect credit terms.[10]
IGCC supports the introduction of the CPRS,...and emphasises
its view that placing this legislation with a start date of 2010 is essential
for the Australian economy and in particular for investors. For investors to
invest, we need to know the rules.[11]
3.12 Concerns were expressed that delay could be destabilising:
Delaying action also runs the risk of locking us into longer
term carbon pollution and inefficiency. This can expose the Australian economy
and in particular vulnerable communities to the impact of higher energy prices
when the economies rebound. Artificially pumping up high carbon and inefficient
industries and ignoring portfolio climate risks will create a ‘subclime’ bubble
that is sure to burst...[12]
Rule certainty versus scheme
commencement
3.13 The Australian Industry Group argued that investment certainty could be
provided by passing the CPRS legislation this year, even if commencement of the
scheme were delayed.
But the certainty would apply whether the start date was 2010
or 2012 because people would then be certain about the start date. So the
certainty will be achieved when the legislation is passed regardless of the
start date.[13]
3.14 A counterargument was that businesses had already made significant
investments on the assumption of a 2010 start date. Those companies that have
done most to prepare for the introduction of a carbon price will have the most
to lose from a delay in scheme commencement.
...there is an underestimation, I believe, of the amount of
investment that has already gone into this. There are thousands of people
working in companies around the country and have been for quite some time
preparing for it. To delay it would be to have all those people sitting idle...
Most of the work and preparation that has been done has been geared towards the
start date of the scheme... there is also potentially a lack of understanding
about how much the price of carbon has already been factored into investment
decisions made. So if you delay the start date of the scheme by one or two
years, those investment decisions will be undermined—the foundations will be
removed.[14]
Possible 'early mover' advantages
3.15 Delaying action here risks Australian industry making further
investments that will prove inappropriate in a carbon-constrained world. There
were also suggestions that delay would mean missing the benefits could accrue
to 'early movers':
...if we delay then we will also miss some of the economic
opportunity that this change will actually create.[15]
3.16 This view was supported by some of the econometric modelling, which
suggests there are benefits in commencing the transition to a low carbon
economy sooner rather than later:
In the scenarios modelled, economic costs in 2050 for early
movers are around 15 per cent lower than when everyone acts together, while
costs for late movers are around 20 per cent higher.[16]
...the Treasury modelling finds that early action is in Australia’s interests if we expect emissions constraints to expand gradually across the
world over time, and this gradual expansion was a key conclusion of the
previous government’s task group.[17]
Need for further analysis
3.17 Some submitters supported timely action on climate change in principle,
but argued that introduction of the CPRS should be delayed to allow for more
analysis of different aspects of scheme design, and further economic modelling.
What worries me in the case of the CPRS is that I am not
totally convinced that there is enough information or a strong enough
information base to understand some of the particular design decisions that
have been made.[18]
3.18 Origin Energy expressed scepticism about such views
We are concerned to ensure the debate about choice of scheme
design does not get used as a reason to defer tough decision that will need to
be made eventually. The current government has invested significant time and
resources into developing a sophisticated, comprehensive and detailed scheme
design, which is reflected in draft legislation. Similar effort – and similar
time – would be required in relation to any alternative scheme design.[19]
3.19 The claim that there has been insufficient discussion is hard to sustain
given that the design of an emissions trading scheme has been debated in
Australia for at least twelve years. (See Chapter 1 for a chronology). Indeed,
one witness referred to being 'inquiried out'.[20]
Regulations
A related argument was that there were still details to be
specified in regulations, and that these should either be included in the
legislation or that consideration of the legislation should await the preparation
of these regulations. Others thought the legislation could be introduced but
the starting date needed to allow sufficient time for developing the
regulations:
We have no problem with the 2010 deadline as long as it
allows time for the regulations to be developed properly.[21]
3.20 These aspects are discussed in more detail in Chapter 13.
Australia 'going it alone'
3.21 It is sometimes suggested that Australia would be acting alone if it
introduced an ETS starting in 2010:
Do we want to do that [mitigate climate risk] alone and put
our businesses at risk if others are not?[22]
3.22 However, the evidence shows that Australia is not leading on climate
change.[23]
Twenty seven European countries have had an emissions trading scheme in place
since 2005. Twenty-three US states and four Canadian provinces currently
participate in regional trading schemes.
Australia
is not taking the lead. Australia is following the actions of others and it is
certainly not acting alone because the European Union is several years ahead,
other governments have put in place national legislation that is broadly
equivalent, and you see in the US, finally now in Canada, Japan and indeed in
many of the developing countries, China included, significant efforts to reduce
greenhouse gas emissions through a variety of methods.[24]
It is
seriously misleading to pretend that Australia is somehow ahead of the rest of
the developed countries[25]
3.23 Australia is part of a group of fast following developed countries,
including Canada, New Zealand, the United States and Japan that are currently
developing and implementing emissions trading schemes to meet emissions
targets. The Canadian Government is working to introduce a national scheme, and
US President Obama has confirmed that he will introduce a cap-and-trade scheme.
Japan has trialled a voluntary scheme and is discussing the introduction of a
full-scale domestic scheme. New Zealand’s government will review the design of
its emissions trading scheme by late 2009, but has affirmed its commitment to
the introduction of emissions trading.
3.24 The Scandinavian countries have long had carbon taxes and South Africa
has announced that it will peak its emissions between 2020 and 2025, stabilise
them for a decade, and then reduce them towards 2050. In China they have
mitigation policies which include promoting greater energy efficiency and
reducing emissions in the energy sector. China has a target of reducing energy
consumption per unit of GDP by 20 per cent on 2005 levels by 2010, and a
renewable energy target of up to 10 per cent by 2010. Other policies include
promoting greater energy efficiency in China's top 1000 enterprises, reducing
energy use through more stringent National Building codes for residential and
commercial buildings and establishing energy efficiency appliance standards.
China will also impose fuel economy standards for motor vehicles higher than
those of many other countries including the US.
3.25 Impact of the global financial crisis
3.26 Some witnesses cited the global financial crisis as a reason to delay
either the passage of the CPRS legislation or the starting date for the scheme:
The other reason [for delaying the starting date] is the
impact of the global financial crisis on businesses—businesses cash flow and
businesses ability to access credit. These are putting obstacles in the way of
businesses preparing for a 2010 start date.[26]
[the CPRS] it should be implemented fully when economic times
return to normal.[27]
3.27 However, other witnesses saw at least as many advantages as
disadvantages in starting during a period when the economy is likely to be
emerging from recession:
Is it a good or a bad time in a recession to introduce
mitigation measures? It is a very good time to introduce support for new
low-emissions technologies because the opportunity cost of labour and capital
is low... my judgment would be that, by the time an ETS was introduced in the
middle of next year, we would be beyond a recession; we would be in an
expansionary phase. We do not know that for sure, but if this were the case
then that is actually a good time for structural change.[28]
As to whether it is a good time or bad, I do not think that
an economic slowdown or a recession is in itself a good reason to postpone
those kinds of forward looking policies, in particularly because of the point
about the investment. If you hold back the scheme you will also be holding back
investment in the newer lower carbon technologies and industries.[29]
It is a good time to make long-term investments. Asset prices
are low. Interest rates are low. The capital costs of the clean energy
infrastructure, which we must invest in around the world, are lower than they
have been for some time.[30]
... as we come out of the recession, we are going to have a lot
of new investment in the energy sector, and that provides a golden opportunity
for the government to introduce policies to ensure that a very large portion of
that new investment goes into low- and zero-emission forms of energy
generation.[31]
Industry readiness
3.28 The committee heard a range of views about industry readiness. The
Australian Industry Group suggested:
There are considerable administrative difficulties imposed by
the proposed 1 July 2010 start date that are becoming increasingly apparent.[32]
3.29 However these concerns about preparedness may be overstated. The
Australian Industry Group presented evidence that some firms that may not feel
ready for the Scheme may not even be required to participate:
Interestingly, we are currently doing a survey of our members
and a very large proportion of them—much larger than we would expect—have an
expectation that they will have a direct liability. We think a lot of
businesses think they will have a direct liability when they will not.[33]
3.30 As mandatory obligations will only apply to around 1,000 businesses the
majority of registered businesses, who have concerns regarding readiness, will
not face regulatory obligations as a result of the scheme. The companies that
are covered will mostly have specialists within the organisation who have been
building expertise on various aspects of emissions trading over some years.
3.31 Some other witnesses suggested that industry were well prepared:
We have been in dialogue with companies for a long period of
time about their preparedness for emissions trading and for climate change as a
whole... I certainly get a sense that companies understand the scheme. Companies
generally tell us that they have a good understanding of the abatement cost
curves across their organisation. That signals to us that they are ready for
the scheme, they know how it is going to impact their business and they know
how they need to respond. So I think some of those calls for delay are perhaps
misguided.[34]
So we do not support the view that the scheme should be delayed
because of issues with data or data management. We think those things are
readily surmountable and have already been overcome by most of the companies
that are targeted under the scheme.[35]
Overall opinions
3.32 Taking these factors into account, many experts believed the stronger
case was established for moving forward rather than delaying:
...it is important to get it running for next year...There is a
lot of learning...And the sooner we get everything in place, the sooner the
learning begins.[36]
My personal recommendation is that you pass this scheme for
all of its faults... get our industry into the best shape we can early by making
it value energy and assisting it in whatever ways we can to make that
transition but do not delay, because delay is dangerous.[37]
... there is no justification for delay in setting the policies
in place.[38]
3.33 The Australian Council of Social Service, while not happy with every
detail of the scheme, also wanted to start moving:
...the longer we wait, the more expensive it is going to get.
Early action is better than delayed action. While we certainly see flaws in the
CPRS as it is proposed, and with the measures that sit alongside it, notably in
support of low-income households, we think that it is about making a start. Our
concern is that if we do not make a start in the short term, we will not be
making a start for a long time to come.[39]
3.34 There are divided views among environmental groups, although generally
even those who would like to see the bill amended do not want it delayed. The
Climate Institute said:
...failure to pass effective legislation this year and delay
further action on climate change would be economically irresponsible...[40]
3.35 This was also the view of the World Wildlife Fund who stated:
We would support a 2010 start date.[41]
3.36 An exception was the Australian Conservation Foundation who in their
evidence to the committee said:
...we do not support the introduction of the scheme as it
currently stands[42]
Committee comment
3.37 The Committee appreciates the urgency of addressing climate change and
the additional costs of delaying doing so. It does not accept that Australia is
acting in advance of other countries, but feels we should take responsible
action now to reduce Australia's carbon pollution and contribute to a global
agreement. This would leave Australia better placed to argue in Copenhagen for
other countries to take the bolder action that will be in the world's, and particularly
Australia's, interests. Being in a strong position to strongly argue for
international co-ordinated action is in the national interest and will
contribute to reducing the threat of damaging environmental, economic and
social implications within Australia.
3.38 There are arguments on both sides about when in an economic cycle is the
best time to introduce an ETS and, as always, it is difficult to predict
whereabouts in an economic cycle Australia will be two years hence. But the
Committee does not view this as a reason for delay.
3.39 The Committee notes that while the exposure draft has only been
available for a short period, it is essentially just a legislative expression
of the White Paper, which business has had for months, and this in turn
builds on discussions about emissions trading schemes have been continuing for
years. The evidence shows that the firms which will face obligations under the
scheme, mostly large companies, have had staff working on the matter for a
considerable period and are well prepared. The current timetable does not
require lodging of emissions reports until October 2011 (Table 1.1).
3.40 Reducing carbon pollution at least cost, providing business certainty
and the potential for green jobs are overwhelming reasons for putting the
legislative framework in place promptly.
Recommendation 1
3.41 The Committee recommends that the bills should be passed without delay.
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