CEDA

Business debates the government's green paper on emissions trading

It's time to move on from the rhetorical case for changes in Australia's energy consumption and to sharpen the focus on practical policy outcomes. By Tony Parkinson.

"...let's get over debating whether we have it or not, and let's make it work efficiently."

Des King, CEO, Caltex

The Australian Government has allowed itself a window of less than 18 months to lock in, and legislate, one of the largest and most challenging structural reforms in a generation. As the Secretary of the Department of Climate Change, Martin Parkinson, acknowledged at a CEDA presentation on August 7, introducing a carbon emissions trading scheme in Australia by the deadline of 2010 would involve complex and contentious policy choices.

"Serious reforms are always confronting," Dr Parkinson told a gathering of more than 700 corporate executives in Sydney, "because they typically involve changes to the settled way of doing things, redistribute risk and force a reassessment of economic value."

Since the release last year of a landmark research report, Climate Change: Getting It Right, CEDA has become an important force driving a more informed public discussion about the long-term challenges Australia faces if it is to substantially reduce greenhouse gas emissions while promoting economic growth. CEDA's aim is to inject more realism and rigour into the debate.

To further this aim, the CEDA event in Sydney brought together Dr Parkinson and a panel of prominent energy industry figures to discuss the policy markers laid down in July in the Rudd Government's climate change Green Paper.

As the Government's leading adviser on climate change, Dr Parkinson gave an extensive briefing on the principles and objectives guiding government thinking. In response, the panel provided detailed feedback on what they see as the implications of emissions trading for doing business in Australia.

At the interface between government and corporate Australia, the debate is no longer about the science of global warming. Dr Parkinson heard business was anxious for policymakers to move on from building the rhetorical case for changes in energy consumption in Australia, and to sharpen the focus instead on the practical policy outcomes for when the rubber hits the road.

They were eager to discuss whether and to what extent the Federal Government’s proposed trading scheme, the Carbon Pollution Reduction Scheme, would impose additional costs on the energy sector, the impact it might have on investor confidence, and the implications for the competitiveness of energy exporters in key markets of the Asia-Pacific.
  
The next milestone for the Government will be the release by year's end of its medium-term targets for Australia’s carbon dioxide emissions. This is expected to identify the trajectory of emission caps at least five years out, and perhaps as far as 2020, providing a pointer to the likely carbon price.

Casting forward to these critical calculations, key questions raised in the CEDA debate included:

The case for change

Dr Parkinson opened the discussions with an outline of the policy framework set out in the Carbon Pollution Reduction Scheme (CPRS). The government's objectives were to reduce Australia's greenhouse gas emissions, encourage industry and society to adapt to unavoidable climate change, and to help shape a global solution.

"This three-pillar framework accepts that climate change is occurring and that we need to both manage the transition to a low carbon future and adapt to a changing world," Dr Parkinson said. "Calm, measured and well planned responses today will allow Australia to ride the wave of change - denying the existence of climate change will simply store up costs for future generations."

Emphasising a need to act urgently, Dr Parkinson offered a reprise of some of the Garnaut Report's findings on environmental risks to Australia: "Climate change is likely to negatively affect most Australians, particularly as a result of increasing severity and frequency of extreme weather events. The impacts of unmitigated climate change on Australia could include significant risk within a few decades to coastal buildings from storm events and sea-level rise…"

Recent preliminary analysis by GeoScience indicated Australia had assets worth $33 trillion located within 200 metres of the present-day high water mark. Investigations were underway on how much of that building stock, and infrastructure, may be prone to future sea inundation. While acknowledging some scepticism about the reliability of long-range climate change projections, Dr Parkinson said it would be irresponsible to ignore the risk. "While the weight of scientific evidence makes a compelling case that climate change is a fact, the precautionary principle suggests that even someone who was agnostic on the issue should rationally wish to take action now. For the agnostic, action today can be thought of as being analogous to taking out insurance or hedging one’s position," he told the audience.

Industry perspectives

The panel assembled by CEDA included business leaders from the energy sectors most likely to face the greatest adjustment pressures under the CPRS. Chaired by Allens Arthur Robinson partner and specialist in climate change law, Grant Anderson, the discussion panel also included the chief executive of World Wildlife Fund Australia, Greg Bourne.

There was strong support from the panel for Dr Parkinson's argument on the case for pragmatic, prudent risk management - accompanied by a lengthy list of caveats and concerns about the design and impact of the CPRS.

Mitchell Hooke, chief executive of the Minerals Council of Australia, said,"I don't know anybody who seriously contests the concept of global warming and, even if they do, you then look at the precautionary principle, which says you don't need the science to whack you in the face before you do something about it.  But there are some fundamental principles we need to be adhering to…you certainly want comparable adjustment across the globe, and you want alignment of the market mechanism with a rollout of new technologies."

Caltex CEO Des King agreed. "Does it really matter whether the scientists are right? Climate change has really been the Trojan Horse for more energy efficiency…that what this scheme is really about. So let's get over debating whether we have it or not, and let's make it work efficiently."

Greg Bourne added, "There are big changes going on in the world climate. If all can get our act together in Copenhagen, all hell breaks out in the built economy, and we have…a new Industrial Revolution. If the world doesn't get its act together, all hell breaks out in the natural environment."

Belinda Robinson, CEO of the Australian Petroleum Production and Exploration Association, also accepted that arguments about the science were over. But she expressed confusion and dismay over the treatment under the CPRS of cleaner fossil fuels such as natural gas. This suggested a "disconnect between what the science is telling us and how we respond to it.”

According to Carlo Botto, head of portfolio management at TruEnergy, a "graceful transition" was the key, and investors were watching closely. "It's critically important not only that the scheme is a good one, but the confidence in the government managing that scheme is also there by investors."

Responses from the panel and audience indicated corporate Australia was less interested in debating the grand theory of climate change than in teasing out the key design and implementation challenges for the CPRS.

The bottom-line: would it place some Australian industries at a competitive disadvantage?

Design features

Dr Parkinson said the CPRS would be the centrepiece of the strategy to manage Australia's transition to a low-carbon economy, under which a carbon price would be the key instrument. Currently, in Australia, coal-fired power stations produce energy at a cost of about $45 per megawatt hour, gas at $55 an hour, wind at $100 an hour and solar at $170 an hour. Pricing carbon would shake up the relativities.

"The creation of a robust carbon market will provide information on the carbon price now and into the future…a powerful incentive for consumers and business to switch to lower-carbon products and production techniques, change investment patterns, and encourage greater efforts in new and innovative areas of research and development," Dr Parkinson said. "Using a market-based policy instrument to introduce this price will make it easier for business to plan for the future."
 
Dr Parkinson said the critical signal for investors, as they weighed up the relative merits of lower-emission technologies, would be the forward price.

"It must be a system that has its heart a price signal that is sending a message not just about the cost you will pay for carbon today but the cost you will pay in the future. It is that forward price that will actually influence behaviour. If the price for carbon today was $5 (per tonne), but the forward price over the life of my assets - which might be 20, 30, 40 or 50 years - might be $100, I will not be making investment decisions on that $5. I will look at the forward price."

Dr Parkinson said Treasury modelling, looking at the costs under different trajectories to cut emissions, would be released by October. There would then be an opportunity for public consultations before the government settled on medium-term targets. Dr Parkinson hinted at a modest start for the carbon price. "I don't think anybody is talking $120 a tonne for CO2 equivalent." 

He then laid out for the CEDA audience the principles of the scheme: broad coverage with as few exceptions as possible; effective linkage with international markets; and recognition that, in the absence of a global agreement, there would be the risk of emissions-intensive, trade-exposed, activities moving offshore with no appreciable gain for the global environment.

"But a good scheme also has to recognise that the more support provided to emissions-intensive trade exposed firms, the greater is the share of the costs that are shifted onto the rest of the economy - to non-assisted trade exposed firms, to non-trade exposed businesses and to households," Dr Parkinson said. "There is no easy way of resolving this tension."

Winners and losers

It is this element of the CPRS goes to the nub of business concerns. The Government has said it will allocate up to 30 per cent of emissions permits free to those industries with international competitors not exposed to a carbon price. Since the release of the Green Paper in July, Australian companies have had to determine whether their emissions will be covered by the CPRS, and, if so, whether they are eligible for free permits or special assistance. Alternatively, which companies will have to buy permits, at what price, and to what extent can the costs be passed onto customers?

The CEDA discussion in Sydney went to the circumstances facing the energy sector, in particular, with business raising a series of concerns about how these industries might be adversely affected. The discussion also explored the broader impact of the CPRS for the economy as a whole, and the global context in which Australia was readying itself for major policy changes.

Des King said Caltex would be the nation's single biggest buyer of emission permits under the CPRS, spending in the order of $1.4 billion a year, or 10 per cent of all permits on the market. "It's a huge amount for one player but if the system is designed efficiently, we can do that," he said.

"We all know the sensitivity of consumers to petrol prices so we need to make sure that…consumers can feel assured that the carbon costs they pay in their fuel permits bought by us and passed through is delivered cent for cent," he said.

However, another aspect of Caltex's business was oil refining. "We own two refineries, and the emissions for each would be two million tonnes a year," he said. "Refining wasn’t included in the category to get relief in the early years."

Citing Mobil's warning that it may have to shut the Altona refinery, Mr King said 25 per cent of Australia's oil needs were already refined overseas, predominantly in Singapore, and that could jump to 50 per cent very quickly if refineries here were asked to pay a higher carbon cost than their competitors.

"All that does is make us more dependent on imports, which is the security of supply issue," he said. "We know there is relief for energy-intensive industries exposed to offshore competition. We look forward to working with government to make sure there are measures in there to take account of that."

Likewise, Belinda Robinson argued the Green Paper penalised exporters of LNG. Ms Robinson said Australia was well-endowed with natural gas, a fuel which should play a greater role in the domestic energy mix. But under the CPRS, LNG exporters would be "totally exposed to the price of carbon" while  competitors, mainly in the Asia-Pacific, were not. The industry has warned this could put at risk up to $60 billion of investment, with investors tempted to turn instead to Qatar, Indonesia, Malaysia, Algeria, Nigeria and Trinidad, each with large reserves of natural gas and unburdened by the cost of emission trading.

Ms Robinson described this as "one of the fundamental flaws" in the Green Paper. "It doesn’t take account of this industry's ability to make a significant clean contribution. It taxes exports and gives imports a free ride. If we cannot make the economics of LNG production in Australia stack up, the Asia-Pacific region is denied the ability to reduce its greenhouse gas emissions to the tune of 120 million tones of CO2 equivalent a year and Australia is denied $10billion worth of tax revenue annually…everyone is worse off."

A future for coal?

Carlo Botto said pricing carbon would also have a disproportionate and adverse effect on coal-fired electricity generation, which is currently responsible for 85 per cent of Australia's power supply. He said the power generators could account for as much as 50 per cent of the CPRS.

He said the Green Paper did not provide the detail necessary for a comprehensive assessment of the financial impact but there would be serious shock to the coal sector. "The balance-sheet impact is very significant," he said. "The market design prevents us from passing those costs effectively on to the consumer. Electricity prices will go up but the nature of the market means that there will be an enormous margin squeeze on generation."

Transitional assistance would be critical. "There's many tens of billions of dollars invested in the current generation stock," Mr Botto said. "To transition that 85 per cent coal-fired generation into low or no emissions stock in a relatively short period of time will require massive amounts of investment in the medium to long term. It's quite important to make sure there is investor confidence to put dollars into this market when the scheme itself is effectively an artificial schbeme developed by government. It doesn’t actually trade in real commodities...it's determined by government to deliver a policy outcome."

Mitchell Hooke said the Minerals Council wanted government to recognise the scale and complexity of the challenges for the energy sector, given Australia had already cut emissions intensity by more than 40 per cent since 1990. "It is not about carving out my sector, or any other sector, for special assistance. Australia has an emissions-intensive economy. It ought to be about how we can go through a measured transition to a low-carbon economy."

He said it was imperative to align the design and timing of a carbon trading scheme with two other crucial dynamics: first, the state of negotiations globally on a post-Kyoto protocol, and the rollout of emissions trading  elsewhere; secondly, to allow sufficient time and latitude for industry to develop then deploy new, cleaner technologies. "Get any of those three out of synch, and you have an argument for compensation," he said.

Mr Hooke cited clean coal as an example of the technology gap. "Let's not kid ourselves: we will not have a global solution to climate change management without a clean coal solution. The world is going to double the production and consumption of coal until 2030. The Middle East is building coal fired power stations, China is building a gigawatt of coal-fired power every nine days."

Although acknowledging Dr Parkinson's view that expectations of a higher carbon price down the track would serve as a motivation to spurring new technology, Mr Hooke said price signals alone would not be enough. "There has to be partnership between industry and government. There is simply not a company, even some of my big guys, with enough depth in their pockets to fund the kind of stuff we are doing in clean coal."

Dr Parkinson agreed clean coal would be essential to any global solution. "I don’t know how many times I hear this argument that it's immoral for us to be involved in coal. There are over 50 countries in the world that have commercially-exploitable coal deposits. Coal technology is cheap, easy, readily available, and people are going to use it for energy security reasons no matter what we as Australians do. So we have a vested interest in finding a clean coal solution. It's critical in getting the right outcome internationally."

'Special pleading'

Responding to the broader business critique, Dr Parkinson defended the integrity of the Green Paper's approach. "The Government recognises industries will wish to focus the debate on the potential for lost investment opportunities in their industry to argue for additional support. But government has to balance this against similar claims from other sectors - the more support provided for any one industry the greater the impact on investment and employment in other, non-assisted, industries."

The debate over industry claims for exemptions or relief served as the trigger for robust exchanges at the CEDA event.

In answer to a query from Mitchell Hooke on why the government did not consider imposing a carbon price on consumption rather than production, Dr Parkinson said this was tantamount to a call for a return to the old tariff protection debates. "The last thing we wanted to do was to create an incentive for a bunch of Australian business people to keep wandering up to Canberra with their hands out. We've been through that. Anybody who remembers anything about Australia's trade history will know that for most of the post-war period we had a situation where it was better for businesses to come to Canberra and lobby to increase protection than it was to get on and run their businesses in a world-class, efficient manner…been there, done that, I sure as hell don't want to go back again."

Greg Bourne said Australia had to keep the focus firmly on the drive to achieve greater energy efficiency, stop deforestation, and promote renewable and zero-emission technologies. The policy should not be crowded out by industry lobbying for exemptions. "To me, it's not about one sector or another. It's about all sectors. We need all sectors to be unbelievably innovative to meet the challenge. Stress is good. Necessity is the mother of invention. The softer we are on any one sector, the less inventive they will become."

A former oil industry executive, Mr Bourne said many of the emission- intensive trade-exposed industries had "lobbied long and hard" for no change in policy. "The fact that the lobbying has not worked is frustrating for them but the burden must not be transferred to the rest of the economy," he said.

Des King called for a pragmatic approach. "Let's get over debating whether we are going to have a scheme. We are going to have it (so) let's make it work in a way that gets Australia a seat at the table internationally, to debate  the right thing to do, which is to increase the cost of carbon to make us more energy efficient. But let's bring in the scheme in a way that’s gentle enough so we can iron out the wrinkles and not disadvantage our economy."

For his part, Mitch Hooke rejected the charge of pleading for tariff-like protection. "The bottom-line is that I really don't want to be playing in this space. I don't want another GST food fight…where the debate comes down to an arbitrary determination about who's in and who's out. I was actually quoting Geoff Carmody who said, 'do you want to have a complex situation with the prospect that it won’t work or do you want to actually work through something that’s a complex situation but might work'?"

He said Australia would not want to "tax our industries into the ground on the very fanciful notion that we can lead the world into a platform on global climate change management solutions." He said this was not an excuse for inaction but a call for a measured policy approach. "We can sit back here and have academic discussions about a carbon price, but if that carbon price gets ahead of the capacity to change behaviour with technology, then all you have in effect is a tax, a punitive tax, not something that is actually a market driver."

Mr Hooke said the Minerals Council's view was that, in the first instance, Australia should launch its carbon trading scheme with an auction of only 20 per cent of permits, the remainder to be free. This could then be ramped up over succeeding years after taking a realistic account of not only what can be achieved internationally but also the pace of technological developments, "because if we don't get the kind of breakthrough technologies we are all talking about across every available source of energy, then we just won't cut the mustard."

No 'get out of jail' cards

Dr Parkinson stressed the government remained eager to hear from business on how the design of the emission trading scheme might be improved. "We are acutely aware that the public and business will have access to better information in some areas than we have, and will be in a better position to assess how well many aspects of the proposed policy would work in practice. We are after feedback. This is not a stalking-horse. It is an options paper."

However, he stipulated that the objectives of the scheme were "set in stone". The Government had determined it was better to "manage the transition than to attempt to hold back the forces of change" and it would resist "the siren call of attempting to pick sectoral or technological 'winners'.

He also rejected the "above the cap" proposal in the 2007 Shergold report to the Howard Government, which advocated reducing the risk of driving investment offshore by lifting the total national emissions cap to accommodate new investment in, for example, state-of-the-art power generating plant. Conservationists criticised this as a 'get out of jail card".

Dr Parkinson said it could also undermine Australia's credibility on the issue internationally. "Once the government ratified Kyoto it put us into a different world," he said. "The idea in the Shergold report that we could keep going outside of our cap…that changes once you are in a binding international negotiation. The new government has said that it wants an international agreement that has binding targets on developed economies and binding commitments for action on developing economies as a step towards getting them to accept targets in the medium term. How are we going to convince China or India or Brazil to actually make that sort of commitment…if we have a binding commitment of our own which carries an escape clause that says we will walk away from it at the first opportunity?"

The global context

A recurring theme at the CEDA discussion was whether Australia was at risk of isolating its industries in international markets where emissions trading is the exception, not the rule. Dr Parkinson offered the government's reasoning on why it had decided to commit sooner rather than later.

"I think we would all agree that avoiding dangerous climate change is a global challenge that requires a multilateral solution," he said. "So why, then, should Australia be among the countries that takes early action to drive global abatement - why shouldn't we wait for others to do the heavy lifting?"

Dr Parkinson said Australia was unique among the developed economies in its vulnerability to the impact of climate change. It was in our national interest to pursue an effective global solution, and begin the necessary domestic reforms. "Australia has a strong interest in accelerating global action both to reduce the risks of adverse climate change impacts and to reduce the costs of our mitigation efforts. Our influence in international climate change negotiations is likely to be affected by what we do at home," he said.

"Importantly, the introduction of an effective market-based carbon
reduction policy in Australia provides the opportunity to demonstrate to other countries the success of policy approaches that would enhance Australia's economic welfare if they were adopted more widely."

"A sustainable global solution will require actions by all major emitters, developed and developing, and Australia is committed to an international framework in which advanced economies adopt binding economy-wide emissions reduction targets with efforts comparable to ours, and where major developing countries make binding commitments on mitigation actions."

Running ahead of the pack?

Dr Parkinson said it was wrong to portray Australia as getting out ahead of the pack. He said 27 countries in Europe - both in the European Union and non-EU countries such as Iceland and Norway - had already moved to emissions trading. A New Zealand emissions trading scheme commenced in January this year, and Japan was discussing the introduction of a full-scale domestic scheme in 2010 or 2011. Canada and 26 US states were also considering emissions trading schemes, and both Democrat and Republican presidential candidates had committed to 'cap and trade' schemes.

"It is in Australia's interest to shape the emerging carbon market. While we have to be realistic about our influence on the big decisions…a middle power can play a key role in designing the mechanics of the international system. You will only get a seat at this table if you are actively engaged in designing and successfully operating these mechanisms," Dr Parkinson said.

Industry representatives were more circumspect on the likelihood of progress in the post-Kyoto negotiations. There was also vigorous questioning of the wisdom of aligning Australia to the European carbon trading model.

Belinda Robinson argued Europe's circumstances were significantly different to those of Australia, and to draw too closely on that model carried risks. "In Europe, of course, they are not exposed to the same extent to countries that do not have an emission reduction obligation. They are primarily trading within the European bubble and they are not a resource-based economy."

Mitch Hooke also rejected the notion of adopting European benchmarks. "Our GDP growth has been twice that of the Europeans, and we've had five times the growth in population. GDP and population are two things that really contribute to growth in emissions. So we would really have to work twice as hard as Europe to get our Kyoto targets, and we will have to go two-and-a-half times as hard to get to 20 per cent reductions on a business-as-usual platform. If we really want to be in synch with the Europeans, they won’t be moving to full auctioning by 2020."

He said Australians had to be mindful of the energy needs of the developing world, in the midst of the greatest industrialisation since America in the 1890s and postwar Japan.

"They are going to be screaming for energy….So we can sit here talking about what we can do in Australia as part of the leadership equation. Great exercise. But don't let's get ahead of our own standing, and believe we can go around telling countries how to do global policy. I've been involved in every single negotiation on trade liberalisation since the World Trade Organisation was established. You've got to be a bit careful about celebrating your own importance in the scheme of things. So let's be a leader but let’s not pay such a price that we actually add to our woes."

Conclusion

In December 2007, CEDA acknowledged the difficult and complex task faced by policymakers in Australia and around the world in making deep cuts in carbon dioxide emissions without causing unsustainable damage to the global economy. Transforming energy consumption while avoiding severe economic impact will require careful and steady policy responses aimed at the long term. This is what we meant by Getting it Right.

In one sense, the current Australian climate change debate suffers from too much certainty. It suffers from analysts on every "side" of the issue who exaggerate the certainty of their case. Yet despite the growing acceptance
that climate change could pose serious risks to future generations, projections of climate change necessarily rely on assumptions about the future.

As in any exercise of prediction, there are uncertainties - in the science as well as the economics. We certainly cannot wait for perfect knowledge before taking action. But the prospect of climate change from greenhouse gas emissions calls for risk management strategies.

Knowledge is imperfect in many areas of human decision-making. Public policy has tools for making decisions in conditions of risk and uncertainty. These general rules apply equally to climate change issues.

Dealing with climate change, however, is complicated by a number of factors - the broad range of greenhouse gas emission sources, the strong link between energy usage and economic growth, and the long time scales over which climate change must be considered. Policies enacted today may not have noticeable effects on climate until 50 years or more into the future.

By global standards, Australia is a leading energy and resources economy. So the burden of responsibility on policymakers in this country is great if we aspire, as we should, to deliver the best policy response across all the world's major economies. In the words of The Economist magazine, "climate change is one of the hardest policy problems the world has ever faced".

The Australian Government has embarked on this policy challenge, with the release of its Green Paper and the promise of detailed policy development in the coming months. CEDA seeks to provide a serious forum for debate and deliberation on this crucial agenda. As this Sydney event demonstrates, there remains much work to be done and not much time in which to do it.

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CEDA assembled a panel of business and government leaders in Sydney on 7 August 2008 to discuss the green paper on emissions trading discussion .

Speakers included:

Printed from the CEDA Web site at http://ceda.com.au. Copyright 1999-2008 CEDA