22-July-2009
Articles, Environment, Emissions Trading Scheme
In this interview with Powering On, Andrew Robb MP reveals the low-cost opportunities the Government has overlooked in the proposed design of its CPRS. He discusses the importance of taking a global approach to reducing our carbon emissions and identifies Australia’s future carbon challenges.
1) Shadow Minister, there is much confusion around the issue of carbon in the energy industry. How does the Coalition believe the CPRS in its current form will impact large energy users?
The introduction of the Rudd Government’s CPRS as it currently stands will have a detrimental impact on Australia’s energy sector. The proposed CPRS only provides an adjustment period or gateway, for five years compared to 18 years in the United States and 15 years in the European Union (EU). It’s important to note that Australia is heavily reliant on coal for its electricity, making up 84 per cent of all electricity output compared to 49 per cent in the United States and 31 per cent in the EU.
When investors are approached to fund a 40 year energy or resource project, if they see a balance sheet with a large number of free permits that are reviewable in five years and they are solely at the whim of the government of the day, they become concerned about sovereign risk.
It is also estimated that the Rudd Government’s CPRS will wipe $10 billion off the asset value of Australia’s coal-fired generators while only offering less than $3.5 billion in compensation, leaving a black hole of $6.5 billion which is already creating major finance and refinancing difficulties for the sector. For Australia’s privately owned power stations there is more than $8.5 billion of debt due for renewal over the next two years.
This will be further compounded by the cash flow issue associated with the sector having to purchase up-front in excess of $10 billion of permits each year.
As Brad Page, Chief Executive of the Energy Supply Association of Australia (ESAA) recently stated, “trying to find large-scale additional working capital while also suffering substantial asset value loss is not likely to succeed”.
2) What effects will the CPRS have on current operational emissions trading schemes and abatement programmes?
The introduction of the Rudd Government’s CPRS will see the end of the NSW Government’s Greenhouse Gas Reduction Scheme (GGAS), which commenced in 2003. At present, the Rudd Government has offered no grandfathering or transitional arrangements for those companies to move from participating in GGAS to the CPRS. All emission certificates or offset credits generated through investments in emission abatement activities under the scheme will become redundant once the CPRS becomes operational. A number of companies, which were in many cases early movers in the sector and which have done significant work in this area will be negatively affected. Furthermore, the lack of transitional arrangements will jeopardise significant long term investments in the green energy sector.
The Rudd Government has also decided to discontinue the Greenhouse Friendly TM carbon neutral scheme on 30 June, 2010, which has undue adverse consequences for those companies with certified products under the scheme. These companies have invested heavily in the scheme and in promoting the Greenhouse Friendly TM Logo to industry and consumers. To discontinue a scheme that has considerable market awareness and a logo that offers the market with credible proof of carbon neutral status is a step backwards.
3) What do you think will be the major issues up for discussion at this year’s international United Nations Climate Change Conference?
Without doubt the major obstacle facing all members of the United Nations Climate Change Conference (UNCCC) later this year is ensuring that developed and developing countries are part of the global solution to the global problem which is climate change. The challenge is immense though, considering that only recently India made clear that there was no way they would take any legally binding emission reduction target to the conference.
India’s Minister for Environment and Forests Jairam Ramesh said on 30 June that; “by doing so we will be jeopardising our energy consumption target, transportation expansion and most importantly our agricultural and power production which is needed for poverty elimination".
Given this cold reality, not just for India but other developing countries such as Russia, negotiations will be difficult. But developments in the United States may prompt progress.
4) Are the outcomes from Copenhagen expected to affect the design of the Government’s proposed CPRS?
As a country producing only 1.4 per cent of the world's emissions, everyone, including the Government, agrees that there is no Australian solution to climate change; there is only a global solution. What happens at Copenhagen and with the Waxman-Markey Bill in the United States, a country which makes up one third of all emissions worldwide, will inevitably shape the way in which the world responds to the challenge of a carbon constrained future.
A recent study by the Netherlands Environmental Assessment Agency reported that China is now the world’s largest CO2 emitter, having passed the United States in 2008. It also found that China made up 45 per cent of the world’s total increase in emissions in the same year.
It’s important to remember that a tonne of CO2 released in Shanghai has the same environmental effect as if it was released in Sydney. As such, Australia’s response must be aligned with that of the rest of the world so we don’t simply export tens of thousands of jobs offshore and kill major investments.
There is no requirement to finalise Australia’s ETS legislation before going to Copenhagen. In fact, in May the Executive Secretary of the UN Organising Committee for Copenhagen Yvo de Boer revealed that the UN does not expect countries to have legislation in place before Copenhagen.
As the Coalition has provided the Government with bipartisan support for the carbon abatement targets for the Copenhagen Conference, there is absolutely no reason to seek to ram this flawed scheme through the Parliament.
5) In what ways would the Coalition’s proposed voluntary carbon market affect large energy users?
The Coalition has proposed a voluntary carbon market from 1 January, 2010, based on the Chicago Climate Exchange. This would allow industry, individuals and organisations to purchase emission permits and credits voluntarily, ultimately bankable against a future Government scheme or international scheme.
At present, there are many Australian energy companies that already purchase carbon credits within a voluntary market. A voluntary carbon market such as the one proposed by the Coalition would be a mechanism for Australia’s energy sector to hedge against future permits liabilities. It would also provide an income stream for those creating the offsets.
These voluntary measures would enable immediate action on achieving Australia’s 2020 targets. Once a full scheme is in place, it would help to deliver larger abatement outcomes than the Government’s proposed CPRS.
It would also allow for opt-in offsets from the agricultural sector which is part of the Waxman-Markey Bill in the United States. Large energy users could purchase emission offsets from the agricultural sector created by bio-sequestration and different farming practices, for example.
6) The Coalition recently commissioned Frontier Economics to look at different emissions trading models. What is your opinion of emissions intensity target schemes in the context of the cap and trade scheme as proposed by the Rudd Government?
The reason behind why the Coalition, along with Independent Senator Nick Xenophon, commissioned Frontier Economics to carry out additional investigations into the Rudd Government’s CPRS is due to the Government’s failure to provide adequate modelling of alternative schemes. The Rudd Government is attempting to rush their deeply flawed scheme through Parliament, yet they have not modelled the impact of the global financial crisis, 20-30 year transitional costs or what will happen if our major export-competitor nations don’t put a domestic price on carbon.
A cap and trade scheme which is based around an emissions intensity approach is one such model which Frontier Economics will carry out work on. It involves participants being allowed to emit CO2 according to a (usually historical and industry-specific) baseline level of emissions which can be reduced over time to reduce total emissions of the economy. It is a carrot-and-stick approach which penalises companies producing above the baseline and allows companies to sell credits when producing below the baseline.
It has potential to offer a smoother transition for our trade-exposed industries as more countries progressively put a domestic price on carbon. Other benefits include less churning of funds than occurs in a cap and trade system, preservation of company balance sheets and less impact on the back pocket of Australian households. An intensity model can also converge into the CPRS model over time as the baseline approaches zero.
It’s critical to explore such variations of a cap and trade scheme to make sure that we as a country transition into a carbon constrained economy at the lowest possible economic cost.
7) What do you believe is the next emissions challenge facing Australia now and following the introduction of an Australian emissions trading scheme?
An emissions trading scheme is just one tool by which to mitigate Australia’s carbon emissions. In the Coalition’s view, the Rudd Government has overlooked significant low cost opportunities and complementary measures which are available today.
The Coalition’s proposed Government–authorised voluntary carbon market will introduce complementary measures directed at capturing carbon in soil, harnessing energy efficient technologies, investing in bio-sequestration, and recognising the efforts of individuals and businesses in reducing emissions. These measures will deliver very significant cuts in net emissions and minimise the current risks posed by the CPRS of losing tens of thousands of jobs and damaging the fabric of many major regional centres.
All these possibilities have largely been ignored in the Government’s scheme, ignored in the Government’s rush to be seen to be, “punishing” the big emitters.
All these complementary measures, in concert with a major focus on promoting renewables and deforestation, which the Rudd Government has played catch up on, provide an opportunity to minimise the risk of putting too much onus on an emissions trading scheme. Meanwhile, the intended action or inaction of the rest of the world is still not clear.
As former British Prime Minister and climate change advocate Tony Blair recently stated, 70 per cent of the world’s reduction needed by 2020 can be achieved by investing in three areas: increasing efficiency, reducing deforestation and the use of low-carbon energy solutions.