Coalition
Senators’ Dissenting Report
1) Introduction
Coalition
Senators subscribe to the position articulated by Rupert Murdoch that when it
comes to carbon dioxide emissions, no matter what your personal views, “the
planet deserves the benefit of the doubt.”[1]
It is in
the planet’s and Australia’s interests to reduce the world’s, and Australia’s,
carbon dioxide emissions.
However,
it is in no-one’s interests for Australia to implement a flawed and
bureaucratic emissions trading scheme which fails to make a measurable impact
on reducing global atmospheric concentrations of carbon dioxide, while at the
same time costing Australian jobs and industrial output to other parts of the
world.
The
so-called Carbon Pollution Reduction Scheme manifestly fails to achieve the
joint aims of reducing emissions while protecting jobs.
The
Government has rushed this flawed, bureaucratic and poorly detailed legislation
before the Committee and is set to try and rush it through the Parliament,
asking the Parliament to take them on trust, the bulk of the detail of the
scheme, including shielding for emissions intensive, trade exposed industries,
which will be delivered through regulation.
Labor
want us to move ahead of the world, yet provide only six pages of legislation
to try and cushion our emissions intensive, trade exposed industries; they have
failed to model the legislation before this Committee.
Also the
Government has failed to take account of the effects of the global recession,
both in regard to the added risk on jobs imposing the CPRS places at this time,
and the effect it has had on global emissions, which have slowed as a result
and bought the world “breathing space.”
Finally,
due to the unnecessary rush, there has been a lack of proper consideration of
alternative carbon pollution reduction schemes, such as carbon taxes, baseline
and credit schemes, hybrid schemes such as the McKibbin-Wilcoxen Hybrid Model,
or indeed alternative carbon pollution reduction measures such as bio-char.
2) Rushed inquiry
The
Government’s timetable for the introduction of the Carbon Pollution Reduction
Scheme is extraordinarily rushed, especially for a piece of legislation which
represents the largest structural reform to the Australian economy in decades.
The
development of this legislation has been rushed by the Government and is set to
be rushed into the Parliament without proper consideration.
The
exposure draft of the Carbon Pollution Reduction Scheme legislation was
released on the 10th March 2009, and referred to the Economics
Committee for Inquiry on the 11th March 2009. Public hearings
commenced just a week later, on the 18th March 2009, giving
interested persons just one week – five working days – to consider the
legislation.
Coalition
Senators consider that this is a grossly insufficient period of time to allow
interested and affected persons to properly consider the legislation and to
provide considered evidence and views to the Committee.
It was
therefore no surprise to Coalition Senators that a number of witnesses
expressed grave concerns about the very tight timetable that the Government has
allowed for this inquiry, a timetable which saw the absurd situation of
witnesses giving evidence before they had had time to prepare written
submissions.
For
example, Ms Belinda Robinson from the Australian Petroleum Production and
Exploration Association told the Committee:
...APPEA is concerned about the very tight
timetable allowed for submissions – nine working days – and hearings, most,
including this one, held before submissions are due on a package of legislation
and commentary that runs for over 700 pages.[2]
And Mrs
Aileen Murrell from the Chamber of Minerals and Energy of Western Australia,
noted:
This period of
consultation, whilst greatly appreciated, is inadequate given the complexity of
the proposed scheme and its potential ramifications on the Australian economy.
The CME comments to the Senate committee inquiry will therefore be limited to
general comments on the Carbon Pollution Reduction Scheme draft bill.[3]
Even
Professor Ross Garnaut, the author of the Garnaut Report commissioned by
the Government, told the inquiry that he had not had sufficient time to
consider the legislation:
...I have not, because of my many day
jobs, had the opportunity to carefully go through the legislation, so I am not
present myself as an expert on the legislation. I was told to come nevertheless.[4]
When
even someone with as close an interest in the Carbon Pollution Reduction Scheme
has not had the opportunity to examine the legislation, it is clear that the
allowed timeframe is insufficient.
As a
result, this inquiry at times descended into farce, often with hours of hearings
going by with no direct examination of the contents of the legislation itself.
On top
of this extraordinary rush, it quickly emerged during hearings that the
exposure draft legislation for the Carbon Pollution Reduction Scheme is
extraordinarily light on for genuine detail.
For
example, perhaps the most controversial and significant element of the Bill,
that relating to the Emissions Intensive Trade Exposed industries, comprises
just six pages of legislation. Six!
Instead,
the majority and substantive nature of the legislation will be enacted through
regulation, should the Bill pass.
Indeed,
the word “regulations” appears no less than 222 times in the substantive bill –
that is, an average of over once for every two pages of legislation.
As Mrs
Murrell told the Committee:
It should also be noted
that key sections of the draft legislation, such as part 8 relating to the
Emissions-Intensive Trade-Exposed Assistance Program, contained little detail,
leaving a substantial amount to be set out in the regulations not planned for
release until June 2009.[5]
Further,
we are told in the Commentary to the exposure draft that
Other elements of the White Paper
package which need to be implemented through legislation are expected to be
introduced with the bills referred to above, although they are not being
publicly exposed at the same time. This includes legislation to implement the
household assistance package and a maritime levy on emissions from shipping
services provided by vessels engaged in international voyages carrying domestic
cargo and domestic passengers.[6]
Furthermore,
Coalition Senators have been denied a clearer understanding of the
aforementioned regulations as questions on notice put to the Department of
Climate Change during the enquiry were not answered before the report was due.
Given
that the household assistance package, along with the EITE provisions, is a key
element of the CPRS, Coalition Senators are concerned that the Senate is being
asked to deliberate on legislation which takes some $11.5 billion out of the
economy in its first year of operation, and which will dramatically increase
electricity and gas prices for all Australians, and yet take on trust, the Government’s
statement that it will subsequently introduce legislation which offsets some of
these costs to the community.
Coalition
Senators are extremely concerned that the Senate is being asked to essentially
vote through a “blank cheque” for the Government which will enable them to
detail the operation of the CPRS without the opportunity for fine-tuning and
adjustment in the Parliament as is appropriate.
It is of
concern to Coalition Senators that both rushed timeframes, and putting the
detail in the regulations rather than the legislation, is becoming a pattern
under this Government, with Coalition Senators on this committee having
expressed similar concerns about another piece of legislation also considered
recently by this Committee in November 2008, the Corporations
Amendment (Short Selling) Bill 2008.
As the
saying goes ‘the devil is in the detail’ and Coalition Senators believe that
model regulations should be provided to the Committee for assessment.
3) The CPRS Scheme
The CPRS
model of the emissions trading scheme is the Government’s response to the
Garnaut Report’s prediction that unless carbon emissions are significantly
reduced there will be a 4% increase in global temperatures.
According
to the supporting documentation of the exposure draft, the objectives of the
scheme are:
-
To meet Australia’s obligations
under the Kyoto protocol by reducing carbon emissions;
-
To support the development of an
effective global response to climate change; and
-
To reduce Australia’s carbon
emissions to 60% below 2000 levels by 2050 and between 5% and 15% below 2000
levels by 2020.
The
question Coalition Senators have sought to answer is whether these are
reasonable objectives for a small country like Australia which produces only
1.4% of global carbon emissions or whether a more modest scheme, which
concentrates on local reduction of carbon emissions, would be more appropriate
and less costly to the Australian economy.
According
to the Institute of Public Affairs (IPA):
“Over the past decade,
Australia’s economy has been buoyed up by being the quarry to the world’s
fastest growing economies. But notwithstanding our natural wealth, and economic
reforms, we have struggled to grow at one third of the rate of less well placed
countries like India and China. Moreover, the accumulation of regulatory
imposts and threats, of which those on energy have increased most, is now
contributing to recessionary warnings.
Australia has more to
lose than almost any other country from the costs imposed by CO2 emission
restraints. Cheap coal based electricity has been the bedrock on which much of
our industrial development rests. Smelting industries in particular gravitated
to Australia in the wake of the 1970s oil price hikes but low cost electricity
has assisted the competitiveness of all our tradable goods industries. While we
might speculate on the long term costs of global warming on Australia, the
short term costs of increasing the price of electricity supplies are self
evident.
With only one per cent
of world GDP, we are neither prominent among world nations nor particularly
influential within world councils. And while Australia has many well qualified
scientists few of these are considered to be world authorities on climate
change. Accordingly, it is pure hubris for Australia to attempt to take the
lead in abatement activity.”[7]
4) Assessment of the CPRS Model
The
proposed Emissions Trading Scheme (ETS) is a so called ‘Cap and Trade’ model
under which industry will be required to obtain permits, know as Australian
Emissions Units (AEUs), from the Australian Climate Change Regulatory Authority.
While
the ETS will apply to a variety of greenhouse gases listed in the Kyoto
Protocol, including methane, nitrous oxide, sulphur hexafluoride,
hydrofluorocarbons and perfluorocarbons, these gases account for roughly 24% of
greenhouse emissions and CO2 the remaining 75%.
Notably,
the Rudd / Wong CPRS proposal will not apply to all Australian Industry. In
fact, only about 1000 firms, considered to be the largest emitters in the
country, will be required to initially comply with the scheme. It has been
noted that the exclusion of petrol, for up to 3 years, reduces the coverage of
the ETS by another 14%. In addition, agriculture will be excluded for 10 years
and de-forestation will not be included to avoid ‘practical difficulties’.
According
to the background paper, the Government has not decided whether the Joint
Petroleum Development Area and the Greater Sunrise Oil and Gas Field will be
included in the Scheme. It is clear that the Scheme will have only restricted
application in the Australian Economy and there is certainly little provision
for individual Australians to have any recognition of contributions they may
make to the reduction of emissions, for example, by installing solar powered
hot water systems on their roofs or by having their homes designed according to
principles of energy conservation.
Emissions
credits (AEUs) will be treated as financial products and consequently will be
regulated by ASIC. In due course, the ASX will introduce a futures market for emissions
credits prior to the issue of permits, so it is said, to assist industry in
managing risk.
The
Government envisages linkages with similar trading schemes when established and
in fact envisages Australia becoming a regional hub for carbon trading. With countries
such as China, Japan, South Korea, and Indonesia, considered unlikely to
establish ETSs in the near future, the concept of Australia becoming a carbon
trading hub appears to be optimistic.
One of
the features of the CPRS is that emitters will be able to purchase credits from
other countries based on overseas mitigation programs such as forest
plantations in Indonesia. Such credits will mean that Australian companies
purchasing such credits will be able to produce a commensurate amount of carbon
emissions above Australia’s cap. Coalition Senators find it hard to understand
how such arrangements can be seen as consistent with the reduction of world
carbon emissions which is one of the 3 objectives of the CPRS.
5) Alternative
approaches
Australia
is a small country accounting for around 1% of global GDP and producing only
1.4% of world emissions. Coalition Senators believe that it is important to not
lose sight of the fact that we live in a competitive world and while Australia
does have some competitive advantages in attracting investment, such as
political stability, a sound banking sector, reliable law and low sovereignty
risk, these are only relative benefits. It would be unwise for Australia to
significantly increase unilaterally the operating costs of industry in
comparison to our competitors.
As
stated in the Age, Mr Don Voelte, CEO of Woodside Petroleum, warned that:
“the
proposed emissions trading scheme would cost LNG projects between 15% and 30%
of after-tax profit.”[8]
The Institute of
Public Affairs has also expressed the view that it is unwise for Australia to
overlook what a small player it is in the commercial affairs of the world and
to imagine that adopting an ETS which imposes higher costs on industry will not
put Australia at a competitive disadvantage.
Coalition Senators
are of the view that any Australian ETS should be primarily concerned about
encouraging reductions in carbon emissions in Australia without imposing undue
increases in costs to Australian industry and consumers which would
respectively cause economic disadvantage and loss of jobs to industry and
increase the cost of consumer goods and living costs for Australian citizens.
Accordingly, Coalition Senators believe that alternatives to the proposed CPRS
should be considered.
Coalition Senators
believe that three alternative schemes should be evaluated with those being:
-
A Carbon Tax;
-
McKibbin-Wilcoxen Hybrid Model;
and
-
Emissions trading developed using
the baseline and credit method, otherwise known as the Canadian Scheme.
5a) Carbon
Tax
A Carbon
Tax is a tax based on carbon emissions where emitters are charged / taxed a
fixed amount per unit of carbon emitted. The price certainty which a Carbon Tax
would provide is regarded as a significant advantage compared to the
uncertainty which would prevail under the proposed auction of credits as
outlined in the CPRS.
An
argument used against the use of a Carbon Tax is that it would need to be
periodically re-set, however Coalition Senators believe that this is an
overstated problem and that the Carbon Tax for any forthcoming year could be
included as an item in the May Budget along with most other taxes and any
adjustments made to those taxes.
Senator
EGGLESTON— Nobody disagrees that a global system
is a great ideal, but many people think it will be a long time before it is
implemented because the kind of countries we are dealing with, like Indonesia,
India and Malaysia, are not going to have emissions trading schemes in the
foreseeable future. So, whilst it is an ideal, it is not necessarily a very
practical basis upon which to work. Some people have suggested that, in fact, a
carbon tax would be a better approach and say that a carbon tax is preferable
to a carbon trading system because it is more efficient, effective, simple,
flexible, transparent and, more importantly, has the added benefit of providing
revenue which could be used to cut other taxes, including domestic taxes. A
revenue neutral carbon tax may have little or no economic cost to us in
Australia. Economic cost is a big issue because it may translate into loss of
jobs and have an adverse effect on our economy.[9]
Coalition
Senators concur with the view expressed in the Garnuat Report that “a carbon
tax would be better than a heavily compromised emissions trading scheme”.[10]
Most
importantly however, Coalition Senators believe a Carbon Tax should be
considered because it would specifically focus on addressing the need for
reduction of emissions in Australia rather than overseas.
Whilst
the CPRS holds grandiose overtones which promote the scheme as an example for
the world to follow, Coalitions Senators cannot ignore that the CPRS represents
a complicated emissions trading scheme which risks higher costs to our economy
and disadvantages to our people.
Coalition
Senators repeat the view expressed in the Garnuat Report that a Carbon Tax
would be preferable to a heavily compromised emissions trading scheme which the
CPRS, with all its uncertainties and presumptions, will almost undoubtedly
prove to be.
5b) McKibbin-Wilcoxen
Hybrid Model
Professor
McKibbin gave compelling evidence to the CPRS Inquiry in Canberra. It was noted
that he is an advisor to the US Government on climate change and co-director of
the energy and climate economics project at the Brookings Institute in
Washington. Under the McKibbin-Wilcoxen hybrid model, as explained by Professor
McKibbin, large emitters would be allocated long term permits which would be
tradeable, within Australia (and not internationally), for carbon credits as
under the current CPRS model. As well the government would issue short term
annual permits at a fixed price. McKibbin believes that this model would reduce
the volatility and unpredictability of carbon prices associated with emissions
trading and the CPRS in particular.
Professor
McKibbin provided the Committee with a copy of an address he gave entitled “Lessons
for climate policy from monetary history” and Coalition Senators include in
this report the summary given in that address as the points made are extremely
relevant to consideration of this issue:
“To sum up: climate
change policy is a serious issue. Dealing with climate change uncertainty is
what matters. Any effective policy will be a major change to the Australian
economy. A new market has to be created. It is not a short-term carbon market.
It is not a new tax. It is a long-term market in trading climate uncertainty,
which is needed at the national and global level.
The second point is
that there is still a great deal of uncertainty about where the world is
heading, so if a Garnaut-type approach is taken, where you commit to a precise
target or a range of targets on the off-chance that you would be able to trade
your way out of it by buying cheap permits offshore, and the permit market does
not develop offshore, what do you do? You may have locked yourself into an
international agreement with no safety valve. Relying on the development of a
global trading system without a safety valve domestically is a very risky
policy.
The final point I want
to make is that we need to get away from the idea that we know exactly where we
want to go and that there are no trade-offs in getting there. That’s called
religion. We have to deal with the trade-off between the environmental benefit
of taking action, and the economic costs of getting there. If this is not
acknowledged, international agreement will not occur, because it is over cost
issues where the international negotiations are failing. Developing countries
have bigger problems to deal with, from their own viewpoint, than climate
change, but they are willing to be part of the international process if it is
designed the right way.
Monetary history has a
lot to teach policymakers about how to design effective climate policy at the
national level within a cooperative global agreement. It is time to move in the
direction of building a transparent, credible, national or regionally focussed
policy framework, with flexibility to adjust in a clear way over time towards a
global concentrations goal. The almost religious focus on targets and
timetables regardless of costs is the biggest hurdle to overcome in the climate
change policy debate. There are better ways to generate carbon prices than what
is currently proposed. One such better approach has been the focus of this
presentation.”[11]
Coalition
Senators are of the view that the stabilization of prices that the McKibbin-Wilcoxen Hybrid Model promises
means that further evaluation of the McKibbin-Wilcoxen
Hybrid
Model is certainly justified. In addition, the McKibbin-Wilcoxen Hybrid Model, by not
permitting international trading of credits, would have the desired effect of
an Australian scheme focusing on the domestic price of carbon rather than
Australia being drawn into the issues of unpredictability and uncertainties
which will inevitably surround international carbon trading models.
5c) The
Canadian Model – Baseline and Credit
The
presentation by Frontier Economics in Melbourne made the point that since Australia
is a small, open economy it is necessary to ensure that any scheme introduced
to reduce carbon emissions needs to be economically efficient.
Frontier
Economics pointed out that this is particularly the case if Australia is drawn
into setting up any scheme ahead of competing nations.
Mr
Price, Managing Director of Frontier Economics, made a strong case for
consideration to be given to a “carrot and stick” approach, which he stated as
having “the key benefit [] that the absolute price effect through the
economy is much smaller for exactly the same emissions reduction and exactly
the same resource cost. So it has the same economic efficiency characteristics
but the price effect is much smaller.”[12]
The
point was also made that the baseline and credit approach which he proposed
would avoid what he described as the “need to churn billions and billions of
dollars of revenue”[13]
as would be the inevitable outcome, as he stated, of the CPRS system proposed
under the Rudd / Wong plan.
Another
point of concern which the Canadian model addresses is the negative impact the
proposed CPRS will have on complementary programs and voluntary actions. As
explained by Mr Price:
“the way the CPRS works
is that if complementary measures are put in place by other state governments,
or if voluntary actions are undertaken by consumers, all that does is leave
additional emissions that are allowed to be produced by industry. It undermines
the incentive for voluntary action and undermines the effectiveness of
complementary measures that governments put in place at the federal, state and
local levels because the way these schemes work is that it is a target that is
consistent through time, irrespective of the economic conditions. It provides
investors with a great deal of certainty. It maintains the task for producers
and consumers to continue to reduce emissions through time. It does not give
them a let-up if the economy goes back a little bit. It still keeps the
pressure on reducing emissions through time and it does not undermine the
incentive for voluntary action or complementary schemes.”[14]
Coalition
Senators are of the view that voluntary action and complementary schemes should
not be rendered ineffectual in the overall plan to reduce carbon emissions. Many
people, whose votes were influenced by the Labor Government’s promised action on
carbon emissions, would be greatly discouraged if the proposed CPRS
disempowered them, allowing for emitters to benefit from their voluntary
actions rather than the environment.
Frontier
Economics also made the point that the CPRS scheme inadvertently benefits
higher emitters and removes the incentive for those higher emitters to reduce
their emissions:
“the CPRS creates some perverse impacts
in that it tends to reward higher emitters in the compensation arrangement than
lower emitters and in fact discourages high emitters from reducing their
emissions.”[15]
Coalition Senators are concerned about
this possibility and took note of Mr Price’s comments regarding the need for a
stable price for carbon:
“Because the emissions
task is constant through time under the scheme we are promoting, carbon prices
will be far more stable through time. We spend a lot of time with investors in
the energy sector in particular and the one thing they like is stable commodity
prices or prices against which they can decide their investments. The last
speaker I heard talked about the European emissions price rising and collapsing
rapidly according to what happened in the regulatory arrangements. You will see
the same thing with the CPRS through the course of re-establishing the
so-called gateways. Prices will rise and collapse as you come close to those
gateways. It will create lot of price instability. Price instability makes it
very difficult for investors to make long-lived infrastructure investments.
This type of arrangement provides much more stable prices.”[16]
Mr
Price concluded by making the point that a Canadian style cap and credit scheme
would probably produce a relatively lower cost of electricity and thus a
lessened impact through the general macro-economy. Mr Price stated that he
believed the cost savings if this approach was applied just to electricity
would be “...in the order of $300 billion to $400 billion cheaper than the
CPRS.”[17]
The
baseline and credit or intensity scheme model, which Frontier Economics
promoted at the hearings, was said to be “...a scheme design which is more
dominant around the world and more prominent in Australia in terms of
operations.” It was further claimed by Frontier Economics that “it
received virtually no attention in the course of any analysis that Professor
Garnaut undertook.”[18]
Coalition
Senators are of the view that intensity schemes should be given further
consideration as a possible model for an Australian ETS in view of the clear
economic benefits such a scheme is said to offer.
6) Underlying
assumptions
The Rudd
/ Wong CPRS scheme depends for its success on three underlying assumptions.
These are firstly, that there will be an international market established for
carbon trading and that most countries in the world, including Australia’s
major trading partners, will introduce ETSs. The second assumption is that the
process of accounting for the volume of permits traded internationally will be
valid and can be relied upon as financial documents in good standing and
thirdly, that the MRET target of 20% of Australia’s power being provided by renewable
energy is achievable.
Regrettably
there is doubt about all of these assumptions being realized.
The establishment of an international
carbon market
The Rudd
/ Wong CPRS depends heavily on the establishment of an international carbon
market enabling countries with ETSs to trade in carbon in which Australia would
participate. In fact, the existence of an international market for carbon
credits is integral to reducing the cost burden of an ETS on Australia as
trading in international credits is expected to put downward pressure on the
price of permits by enabling the purchasers of permits to buy them where they
are cheapest.
For a
carbon market to have any meaning Australia’s major trading partners would have
to be involved, otherwise Australia would find that the added cost of an ETS
would put Australia at a competitive disadvantage.
Australia’s
major trading partners are now in East Asia, including China, Japan, Korea and
Singapore, while the USA, the UK, and Germany remain significant trading
partners as shown in the graphs below.
![Major export markets](/~/media/wopapub/senate/committee/economics_ctte/completed_inquiries/2008_10/cprs_09/report/d01_1_gif.ashx)
![Chart of major export markets](/~/media/wopapub/senate/committee/economics_ctte/completed_inquiries/2008_10/cprs_09/report/d01_3_gif.ashx)
![Major import sources](/~/media/wopapub/senate/committee/economics_ctte/completed_inquiries/2008_10/cprs_09/report/d01_2_gif.ashx)
[19]
Of the
above countries, the UK and Germany, as members of the European Union, are
participants in their ETS and New Zealand has established its own ETS.
The
patterns of world economic power and trade are changing as is demonstrated by
the growth of the Chinese economy and in considering future patterns, India
must also be recognised as being a growing economic power with which Australia
will become increasingly engaged in future years.
Alan
Moran, in an article entitled “Climate Change: China’s approach” referring to
the 2008 White Paper issued by the Chinese Government, said:
“In
a notable turn, the White Paper shifted the policy priority to adaptation. This
is a recognition that China (and therefore others in the developing world that
embark on a rapid growth path) will not initiate serious abatement measures
at least until Western levels of emissions are reached. And in this respect
the White Paper discusses cumulative levels of emissions which would justify
China out-emitting Western countries on the basis of the past levels of
emissions. A corollary is that the sort of CO2-e levels of emissions said to be
required to stabilise the warming effect will not be reached.”
In a
similar review article on Japan, entitled “Japan and Global Warming Policies”,
written in November 2008, Alan Moran wrote:
“Other
sources confirmed that Japan is taking a de facto approach that involves no
action of a substantive nature. Japanese industry is very concerned to
combat measures that would add to its costs and retard growth. It also takes
the view that it is highly efficient already and points out that the Japanese
use less energy than others domestically due to the smallness of their houses,
a matter which called forth deprecating comment from the western media not long
ago. Even so, the policy approach followed is not consistent with the 3-4
tonnes per capita average global emission levels that would be required if CO2
levels are to be stabilised at the 550 ppm level.”
On the
likelihood of Japan introducing an ETS, Alan Moran wrote:
“Japan
will participate in all international matters and contribute to carbon savings
but is not considered at all likely to introduce a tax or ETS that involves any
disciplines on industry.”[20]
With
respect to the USA establishing an ETS, Tim Wilson claimed in his March 2009
paper already referred to above, that:
“the US has made it
clear that it will not participate in a post‐Kyoto
agreement without the involvement of developing countries. And despite
postulations by President Obama, the US will not be in a position to make
significant cuts to its emissions. Obama’s recently appointed Special Envoy on
Climate Change, Todd Stern, said that the 25 to 40 per cent emissions
reductions committed to in the Bali Road Map were “not possible” for the United
States. And his comments have been echoed by the head of the Intergovernmental
Panel on Climate Change, Rajendra Pachauri, who said recently that President
Obama would face a “revolution” if he committed to deep cuts in emissions.[21]
From this
it would seem that there are reasonable grounds for doubt that an international
ETS market involving many of Australia’s major trading partners will be
established in the foreseeable future.
Reliability of Carbon Permits as
Financial Instruments
In his
previously mentioned article, Tim Wilson also raised questions about whether
the volume of permits traded internationally will be valued appropriately and could
be relied upon as financial documents in good standing:
“Carbon markets operate
essentially the same as a normal financial market. The value of a financial
product is diminished the more are issued, or the credibility of the equity to
underwrite the financial product is uncertain. If a carbon permit is traded at
a certain price it is essential that “the value of the credit will be
maintained”. If the government issues too many permits, or cannot substantiate
the equivalent carbon emissions for the permit, it loses value. And with the
loss of value goes the credibility and certainty provided in the market, the
incentive to invest and the credibility for linking markets. Bowen lays out the
conditions for, an efficient and effective global emissions trading market as:
-
Having efficient
rules and administrative arrangements (including monitoring, enforcement and
penalties).
-
Including all major
suppliers of, and demand for, permits.
-
Ensuring that supply
and demand for permits delivers a price on carbon that is enough to encourage
abatement, yet not so high as to dramatically reduce growth.
-
Delivering certainty.
Similar conclusions
followed from an EU simulated exercise on emissions trading, and the
Government’s White paper.”[22]
Wilson
adds:
“Yet currently most of
the infrastructure necessary to provide certainty doesn’t exist in countries, including
developed countries. In Australia the Federal Government is still collecting
initial data of Australia’s emissions from the private sector. And Australia is
significantly more advanced than most other countries.
That would mean
establishing government infrastructure in all participating countries to be
able to monitor, account and enforce their emissions; and have credible permits
equivalent to their emissions sufficient that investors want to buy those
permits. As Peterson argues “permit trading can only be an efficient instrument
if emission and permit trade are monitored and accounted appropriately and if
compliance is enforced”.
But without such
regimes the certainty of each country’s emissions are questionable. The Kyoto Protocol
requires Annex 1 countries to have a “national system for the estimation of
anthropogenic emissions by sources and removals by sinks of all greenhouse
gases”. Considering the serious
economic transactions taken on the basis of national reporting of their
emissions and the subsequent volume and value of permits, estimations provide
limited certainty to investors.”[23]
This
conclusion, in turn, raises the question of whether Australia’s carbon
reduction program should be designed to be linked into an international
emissions trading scheme or whether it would be more practical and prudent for
an economically small nation like Australia, contributing just 1.4% of world
emissions, to develop a more simple program concentrating on reducing domestic
emissions, such as a Carbon Tax.
Renewable Energy
A key
underlying presumption of the CPRS is that renewable energy will provide an
increasing contribution to base load power needs and an MRET of 20% has been
set for 2020 which will require around 12 gigawatts of power to be generated from
renewable sources.
The view
has been expressed that the Renewable Energy Industry will be the principle
beneficiary of the CPRS were it to be introduced, in the sense that the
Renewable Energy Industry will be the recipient of large amounts of funding in
the hope of breakthroughs in the output and efficiency of renewable energy
mechanisms. However the reality is that Australia is not well endowed with
cheap renewable energy sources such as hydro-power. Unlike Norway and
Switzerland, Australia does not have large snow covered mountain ranges capable
of delivering large amounts of hydro-power.
Instead,
with our principle hydro-power sites in the Snowy Mountains and Tasmania plus
small units in locations such as Kununurra in the Ord Dam, hydro-power accounts
for only 5% of Australia’s power supply. The next most important source of
renewable energy is wind power with wind farms located chiefly in Southern
Victoria, Tasmania and the South and Mid-west coasts of Western Australia.
Wind
power is regrettably inconsistent in power deliver due to fluctuations in the
flow of wind and is never expected to provide much more than 10% of Australia’s
renewable energy and even then at a high cost.
Solar
power is obviously the most abundant source of renewable energy available in
Australia but although much research over many years has gone into developing
the technology so far, there is currently no possibility of solar cells
providing base load power for Australian power grids.
Other
possibilities are harnessing tide and wave movements to produce power, but so
far the technology for these forms of power have not progressed sufficiently to
be considered a viable source of base load energy. Similarly while research
into energy production from geothermal sources is being carried out, there is a
long way to go before geothermal energy can become a source of cheap base load
power.
Given
this the inclusion of a target of 20% of Australia’s power to be generated from
renewable sources seems unlikely to be achievable, at least within the time
frames under consideration and probably not for many years.
Again,
the Coalition Senators are disturbed that yet another of the key underlying
presumptions of the CPRS appears to be optimistic to say the least, if not
unrealistic in fact.
7) Treasury
Modelling
Coalition
Senators continue to be frustrated by the fact that the Government has been
unable to produce any economic modelling to justify its claims about the likely
effect of the CPRS upon jobs and upon the environment.
While
the Government continues to claim that it has done modelling, the reality of
the matter is that the Treasury modelling referred to does not specifically
model the CPRS legislation.
While
Treasury did model a number of scenarios, including a five% cut (the minimum
under this legislation) that modelling was based on a number of premises; those
being, a global agreement to reduce carbon dioxide emissions being in place by
2010, China signing up in 2015, and India in 2020.
However,
the CPRS legislates a minimum five percent cut irrespective of what happens in
the rest of the world – irrespective of whether global agreement is reached in
Copenhagen later this year, irrespective of whether China comes on board,
irrespective of whether India comes on board, irrespective even of whether the
US comes on board.
On top
of this, the Government concedes that the Treasury modelling cited in
explanation of the CPRS does not take into account the global economic crisis.
The
model used by the Treasury in doing their modelling – the general equilibrium
model – assumes that there will be a seamless adjustment in the labour market
between one area and fails to take account of the inevitable massive short and
medium term dislocation as a result of the employment changes the CPRS will
inevitably bring about.
As the
Acting Secretary of the Department of Climate Change, Mr Blair Comley, told the
Committee:
Mr Comley
- “If you have a full employment closure of a CGE model then essentially you
have assumed that the labour released in one area, if there is a change in the
relative growth rates of a sector, will be absorbed elsewhere.”[24]
Coalition
Senators understand the real world to be different to the CGE model used by
Treasury, and that while short to medium term job losses and social dislocation
can be explained and “absorbed” elsewhere in Treasury’s modelling, this will
not be the case in real world.
Concerns
about the accuracy of the Treasury modelling are not only held by Coalition
Senators and affected industry, but even by the social services sector.
As
Tony Westmore, of the Australian Council of Social Services, told the
Committee:
“We are very concerned
that the Treasury modelling may be wrong, that provisions that are in place may
be inadequate...”[25]
Coalition
Senators are therefore of the view that until the Government produces modelling
of its proposed legislation, which, amongst other things, takes into account
the current global recession, it is virtually impossible to make a considered
judgement of the effect of the CPRS upon the economy and upon jobs. Coalition
Senators note that despite an absence of Government modelling, various industry
groups have presented evidence illustrating the potential of the CPRS to have
significant impacts.
8) Effects
of a recession
There
has been much debate in the public arena, and indeed evidence to this inquiry,
regarding whether a recession is the right or wrong time to be moving ahead
with such a significant structural change to the economy.
Both
sides of these arguments were encapsulated by Professor Ross Garnaut, who
stated:
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.... So I think now is a very good time for a
big emphasis on public support for research, development and commercialisation
of the new technologies.[26]
However,
Professor Garnaut also noted:
On carbon pricing,
there is a reason to be somewhat cautious about putting an extra cost on some
firms while the recession continues because of financial fragility during
recession.[27]
Coalition
Senators agree with both of these statements. Now is a very good time to be
investing in new, low emissions technologies and research. But it is a very
risky time to be putting an extra cost impost on firms already under
significant financial pressure.
Further,
while distressed about the current state of the world and Australian economy,
which is being made worse by the Rudd Government’s actions, Coalition Senators
note that the recession does provide some breathing space in terms of time to
address carbon dioxide levels.
Indeed,
it is axiomatic that as industrial output falls, so too will emissions.
This
point is conceded by the Government themselves; noting that Australia’s level
of emissions fell in 1990 in conjunction with Paul Keating’s “recession we had
to have” and did not return to 1990 levels until 1997.
While
it is impossible to quantify exactly how much of this fall was due to the fall
in industrial output in the recession, as opposed to contributors such as
changes to land-clearing regimes, there is no doubt that the recession did slow
emissions output.
Senator
Abetz: Are you saying that the recession had any impact on the reduction?
Dr
Gruen: Undoubtedly the recession would have had some impact.[28]
This
view was supported by Professor Ross Garnaut, who while not advocating for a
delay in passing the legislation, did state:
Clearly,
the deep global recession is pulling emissions well below what they otherwise
would have been. Emissions may have actually fallen in the September quarter
and since...my best guess is that if the world was not doing anything about
mitigation this would put back the level of emissions of the world by two or
three years. That is equivalent to a pause in emissions for two or three
years.[29]
[emphasis added]
Unfortunately,
more elaborate consideration of this issue has been limited by the Department
of Climate Change’s failure to provide Coalition Senators with answers to their
questions in time to be included in this report.
Coalition
Senators are therefore strongly of the view that this evidence supports our
argument that it is better to take a bit of extra time, and to get the
emissions reduction mechanisms right, rather than rush a scheme into place
which is ill-considered, flawed, bureaucratic and which won’t achieve the
stated outcomes.
We
should use the “breathing space” provided by the current global circumstances
wisely.
9) CPRS
and the WA Electricity Market
Griffin
Energy, in their submission to the inquiry into the exposure draft of the CPRS,
made the point that the Western Australian Electricity Market, in which gas
power generation is dominant, suffers discrimination because the Treasury
modelling uses the same competitive spot market assumptions made for the
Eastern States Electricity Market in its assessment of the need for ESAS
assistance.
In fact
however the WA Electricity Market is very different to that of the Eastern
States Electricity Market in that WA has a high dependency for electricity
generation on gas from the North West Shelf being carried to the South West in
the Dampier to Bunbury pipeline, and this will continue to be the case even if
renewable replace coal.
Griffin
Energy point out that there is a historic price competition between gas and
black coal in the Western Electricity Market and state that WA’s long term
security of supply will likely be compromised by the current CPRS settings.
Griffin
points out that the so call National (i.e. Eastern States) Electricity Market
is based on a competitive spot market into which all generators supply
electricity whereas the Western Electricity Market is based on bilateral
contracts.
In the
selling model the price of electricity is locked in for the length of contracts
and there is no capacity in the Western Electricity Market to pass through to
consumers the increasing price of carbon which the generators will bear over 15
years. By contrast in the National Electricity Market Model, based on
competitive spot prices, the additional cost of carbon over 15 years will be
passed through via the market clearing price.
Griffin
states that the Western Electricity Market requires a separate ESAS formula
with an emissions intensity cut off limit of 0.75tCO2e.
Griffin
suggests that this can be achieved by amendments to part 9, division 2 with a separate
section 176A in the legislation which allocates WEM assistance to eligible
assets and that there should be a separate section 182A to deal with the annual
assistance factor applicable to the Western Electricity Market which will apply
a consistence design methodology to both the WEM and NEM based on the relative
proportions and intensities of each market.
Given
the fact that the Wester Electricity Market will be based increasingly on gas
and renewable energy while the Eastern Market will remain coal based, the
Coalition Senators request Treasury to recognise that different circumstances
apply in WA and implement Griffin’s suggestions.
10) CPRS
and its impact on agriculture
The
Government’s decision to avoid addressing Australian agriculture within the
context of a Carbon Pollution Reduction Scheme (CPRS) until 2015 is alarming.
Agriculture contributes 16% of Australia’s emissions and the Senate Committee’s
report on the proposed introduction of the scheme acknowledges that after
stationary energy, agriculture is a leading CO2e emitter. Yet the report and
proposed legislation has deferred any policy decisions for the agricultural
sector until at least 2013. Subsequently, there is insufficient policy debate
on the impact the CPRS will have upon agriculture and the regional economy.
This
section of the dissenting report aims to readdress the considerable
short-coming of the majority report by highlighting significant problems and
issues raised in a series of independent reports which conclude that a CPRS
will have a dire impact on the agricultural sector. This section of the
dissenting report also expresses its concern that, particularly within a rural
and regional context, the CPRS is a policy which is more akin to international
“grandstanding” than sound policy for the economic or social well-being of all
Australians. This report commends the work of the Australian Farm Institute,
the Centre for International Economics and the Australian Bureau of
Agricultural and Resource Economics, each having made a contribution to better
understanding the impact of a CPRS on agriculture.
This
report shares the concerns of the Australian Farm Institute that a CPRS and
associated carbon trading will cause a decline in agricultural output but fail
to produce any benefits in terms of global greenhouse emissions.[30] This
report agrees with the Australian Farm Institutes’ hypothesis that if a CPRS
and associated emission trading scheme were introduced, agricultural production
in Australia would be cut by $2.4 billion a year by 2020 and $10.9 billion a
year by 2030.
The CPRS
will negatively impact farm enterprises in two ways; firstly, the indirect
rises in costs associated with farm inputs, secondly, after 2015 farms are
financially liable for emissions attributed to their farming enterprise.
There is
no doubt that the CPRS will increase the price of fuel and electricity. In the
agriculture sector this will be a rise in a range of production costs.
Contracts for cropping, pasture chemicals and fertilisers will increase by 5%.[31] ABARE
also acknowledges an increase in production costs of 2.4 per cent across
industries. It argues those costs are relatively small because of the range of
assistance being offered by Government. ABARE highlight that there will be
fuel credits for the first three years of the scheme and assistance in the
price paid for fertilisers and chemicals.[32]
This report, however, views the government assistance as an artificial subsidy
funded by the taxpayer to support an overambitious greenhouse policy.
Speculatively, there is also a concern about how our major trading partners and
WTO may interpret this kind of assistance given a climate of greater trade
liberalisation and a reduction in agricultural subsidies. Another perspective
of the rise in costs and international trade is the impact it will have on
Australia’s competitiveness. Agricultural exporters in South America, Asia and
Eastern Europe will not be subject to the same rises in input costs.
This
report shares the view of the Australian Farm Institute that if farmers are
made to pay for emissions it has attributed after 2015 farm cash margins will
suffer. Modelling suggests that a broadacre farm can expect severely reduced
incomes in 2016.[33]
Even if farms are declared Emissions Intensive and Trade Exposed farmers can
expect a reduction of up to 25%.[34]
When
viewing the impact of the CPRS in terms of a cost/benefit analysis for the
agricultural industry it becomes clearly apparent that for the billions of
dollars lost in production and export we gain little in the global reduction of
carbon pollution. The Coalition is of the opinion that the introduction of the
CPRS is detrimental to competitiveness in agricultural trade, the
sustainability of farming and food security. From an agricultural perspective
and the perspective of those rural and regional areas based on the agricultural
economies the risk is too great for the small reward.
From an
agricultural perspective there are a number of other policy incentives which
could be incorporated to reduce carbon emissions in the sector. The funds spent
on compensating the agricultural industry could be best directed toward
increases in research and development which will improve farm productivity and
develop sound emissions mitigation technologies.
The
absence of any clear plan for the agriculture sector in developing the CPRS and
its legislation is of a great concern to the Coalition considering the impact
it will have upon producers. It demonstrates a city-centric perspective that
ignores the important role agriculture plays in Australia’s national economy.
Subsequently, from a rural and regional perspective, which bases itself upon a
robust agricultural economy, this legislation cannot be presented to
Parliament.
11) Emissions
Intensive, Trade Exposed (EITE) industries
Unless
there is meaningful global action, Coalition Senators are in absolutely no
doubt that should the CPRS be implemented as proposed, not only will Australian
jobs be exported to nations without emissions trading or a carbon tax, so to
will emissions.
Indeed,
this view has been acknowledged by the Minister herself.[35]
We
have already expressed our serious concerns about the lack of detail in the
legislation setting out support for emissions intensive trade exposed
industries (just six pages), and that the Senate is being asked to take on
trust what the Government will regulate in this space.
While
initially eligible EITE industries will get either 90% or 60% free permits,
Coalition Senators are also concerned that because of the 1.3% so-called
“carbon dividend” that over time the value of these permits will be eroded and
that Australian industry will suffer a death of a thousand cuts.
As
the President of the ACTU, Ms Sharan Burrow told the Committee:
The
1.3 per cent reduction, which of course came down from four per cent in the
original paper, is something that as a blanket piece probably needs further
consideration. There will be some industries that will struggle to make that
1.3 per cent, but others, including some of the largest companies, will do it
much more easily.[36]
Coalition
Senators are also doubtful of claims put to the Committee that the likelihood
of so-called “carbon leakage” is overstated. While the Department of Climate
Change claims that there is “very little” evidence of carbon leakage in Europe
as a result of their emissions trading scheme, this is hardly surprising given
that virtually all emissions intensive, trade exposed industry is exempted from
the European scheme.
As
to the Treasury’s modelling which claims there is “little evidence of carbon
leakage”[37], this claim means nothing given
that the Treasury did not actually model the CPRS as it stands – that is,
Australian action irrespective of global action.
In
defending the charge that the CPRS in isolation will lead to businesses going
offshore, witnesses resorted to school-boy style debating tactics:
Mr Cameron
– “... I am unimpressed by the idea that businesses move from one jurisdiction to
another because a modest price of carbon is imposed by a government in the
public interest. I would very much like to see the farewell speech of the
business leader to his or her staff saying, ‘We’re leaving the country to set
up offshore because we cannot carry the obligations to reduce our emissions
within this jurisdiction. We are going to carry on polluting and thereby
creating risk to your fellow citizens. By the way, you’re losing your jobs
too.’ I just do not regard that as a plausible argument and I would very much
like to see the CEOs make that speech and then wave them goodbye at the
airport.”[38]
While
one may agree or disagree with Mr Cameron’s comments, as Senator Bushby pointed
out[39], this simplistic answer does not
address the fact that Australian-made goods will be disadvantaged against those
produced without the impost of a carbon price.
It
also fails to take account of the very real likelihood of business – rather
than closing an existing operation – simply deciding against further investment
in Australia and instead investing in countries without a carbon price.
It
is for these reasons that Coalition Senators again express their serious
concern about Australia imposing a carbon price on our industry, through the
CRPS, before the rest of the world has signed up to a similar scheme.
12) A
tax or not a tax?
Coalition
Senators are extremely concerned that, even at this stage, with the Exposure
Draft legislation being considered by this committee, the Government is unclear
as to whether the CPRS is a tax or not.
Reflecting
this uncertainty, the Government has even introduced three additional
“technical” bills “in case” at some time in the future the emissions units under
the CPRS are considered a tax.
Three
of the draft bills are technical bills, in case the charge for Australian
emissions units issued as the result of an auction or fixed charge is, at some
time in the future, considered to be taxation.[40]
When
asked directly, the head of Treasury’s macroeconomic group, Dr David Gruen,
simply said he did not know.
Senator
Abetz: “My question is this: is the CPRS a tax or is it not a tax”?
Dr
Gruen: “I simply do not know what the legal status of it is.
Even
proclaiming:
Dr
Gruen: “I am not sure we are the right people to ask”.[41]
It is
astounding that a senior Treasury official would not only not know the answer
to this question, but suggest that Treasury should not be expected to know.
Whether or not the CPRS is a tax has serious, complex and potentially costly
financial implications for affected parties, which one would expect Treasury to
have considered.
In
regard to whether or not the CPRS is a tax, Coalition Senators make note that
once again, their capacity to scrutinise the CPRS has been limited by the
Department of Climate Change not providing responses to written questions on
notice in time for inclusion in this report. These are basic questions and the
failure to answer them proves that the entire CPRS process is rushed and
flawed.
Notwithstanding
the Government’s confusion, Coalition Senators consider that given that the
CPRS looks like a tax, smells like a tax and talks like a tax, it is a tax.
13) Conclusion:
The need for global action
Everybody,
even Minister Wong, agrees that without meaningful global action to reduce
carbon emissions, any action taken by Australia in isolation (or relative
isolation) to reduce carbon emissions would have no impact on total global
emissions while costing Australian jobs.
Minister
Wong: “There
is no point in putting a cost on carbon pollution in Australia if it simply
results in jobs and emissions being exported to countries that do not yet face
a carbon price.
To
overlook the perverse environmental outcome that would result from emissions
simply being exported to other nations is environmentally irresponsible, and
disingenuous in the extreme.”[42]
Therefore,
central to the debate about whether Australia should introduce the CPRS at this
time is the issue of whether Australia is leading the world; and whether, if
so, Australia should be leading the world, irrespective of actions the rest of
the world may or may not take.
On the
one hand, the Government claims that Australia, in implementing the CPRS, is
acting in concert with the rest of the world:
Dr Parkinson:
“...I think it is seriously misleading to pretend that Australia is somehow
ahead of the rest of the developed countries.”[43]
However,
on the other hand, the Government admits that very few countries have actually
committed to real action. As noted by Dr Parkinson, Secretary for the
Department of Climate Change:
“Setting a cap on most of your national
emissions means that you have a guaranteed way of meeting your national
objectives. Without a cap, targets are only ever aspirational.”[44]
He
then went on to note:
“Few countries have announced specific
quantitative commitments to medium-term targets.”
[emphasis
added][45]
Coalition
Senators have noted that the reality is that only very few countries actually
have emissions trading schemes in place, namely, the European Union (where the
scheme has been roundly criticised for failing to deliver CO2 reduction
outcomes) and New Zealand.
It is
the view of Coalition Senators that it is foolhardy in the extreme to actually
legislate to commence an emissions trading scheme without knowing what may be
decided at this year’s critical Copenhagen Conference.
While it
may be the view of the Government that to do so would provide “leadership”,
there was no evidence presented to this inquiry that if Australia were to
legislate the CPRS as proposed it will somehow force key developing nations to
come on board.
It
compromises Australia’s negotiating position and puts at risks thousands of
Australian jobs by locking us into a scheme when it is possible that the rest
of the world may say, at this time of economic uncertainty, that action should
be delayed.
Accordingly,
Coalition Senators recommend that the exposure draft Carbon Pollution Reduction
Scheme not be presented to Parliament, and that the Government go back to the
drawing board before presenting a properly modelled and considered plan to the
Parliament which reflects the outcomes of this year’s Copenhagen climate change
meeting and the best interests of Australia.
Senator
Alan Eggleston
Deputy
Chair
Senator David Bushby
Senator Barnaby Joyce
Senator
the Hon. Eric Abetz
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