30-April-2009
Portfolio Media Releases, Emissions Trading Scheme
In the midst of the worst financial crisis in 80 years a major report into the Rudd Government’s proposed Emissions Trading Scheme confirms that the scheme is rushed, ill-considered and a source of massive risk and uncertainty over the next 20 years.
The independent report by the Centre for International Economics (CIE) was commissioned by the Federal Opposition in December following representations by major companies and green groups who both felt that the Government’s scheme was badly flawed – costing tens of thousands of jobs without doing anything significant about CO2 emissions.
The report confirms that the Government is rushing ahead with a scheme that will tax Australia’s largest exporters and employers, damaging their competitiveness and putting jobs at risk, without any analysis of these immediate costs, without any analysis of alternative approaches, without considering the impact of the global financial crisis or without considering the actions or inactions of major competing countries.
The Rudd Government has no idea of how many jobs its scheme will destroy, how it affects different industries or regions, or even whether it is the most cost-effective option for Australia to reduce CO2 emissions.
This is highly reckless, with the Government flying blind on both the risk to tens of thousands of jobs and the prospect of achieving anything meaningful on emission reductions.
If passed in its current form, the biggest deliberate structural change in our history would be more a product of blind faith and pigheadedness than rigorous analysis. The Government can’t tell us anything about its near-term risks and costs.
Constructive alternatives to the Government’s flawed scheme are necessary. As well as reviewing the carbon pricing mechanism, energy efficiencies in the commercial building sector, carbon capture in soil and other means, and the efforts of individuals, must be part of an effective scheme.
The CIE report clearly establishes that the design of the Government’s proposed emissions trading scheme needs to be reconsidered and compared empirically with alternatives, along with appropriate sensitivity analyses. For the Government to have ignored the impact of the global financial crisis beggars belief.
The costs over the next 20 years of lost competitiveness and lost jobs must be established, along with the likely impact, or not, on CO2 emissions.
The report’s exposure of this Government’s failure to assess the cost and effectiveness of their scheme over the critical 20 – 30 year transition period is a highly damning finding.
The report recommends that such critical analysis be done before finalising a scheme, and that such analysis be undertaken by an independent and transparent organisation such as the Productivity Commission.
Over recent months company after company have publicly indicated the cost of this scheme in terms of lost jobs:
• Bluescope and OneSteel say “hundreds of jobs would be lost” across the country and the 12,000 jobs that the Port Kembla steel works supports “would be under threat.”
• The Queensland Resources Council predicts up to 8,000 jobs could go
• Rio Tinto has stated that "put simply, the CPRS as proposed will cost jobs - now and in the future".
• Xstrata predicts that between 5,000 to 10,000 jobs nationally may be lost.
• Alcoa has raised concerns about 1,800 jobs at risk in Geelong and Portland.
• Exxon predicts that 350 jobs could be lost at their Altona refinery
• Norsk Hydro and Hydro Alumina Kurri Kurri see the ETS “jeopardising the future of the Australian aluminium smelting industry” and that cancelling their expansion plans under an ETS “means a loss of 3,000 permanent jobs and 15,000 construction jobs”
• Clean energy projects such as ZeroGen and Envirogen say that up to 1,000 jobs will go begging if future investment is cancelled because of the ETS
• Ford Australia believes the ETS will drive jobs overseas
• And research commissioned by the NSW Government into the regional impacts of the Government’s scheme found that regional centres across Australia, such as Gippsland, Geelong, central-west Queensland, the Hunter Valley, central Western Australia, the Kimberley region and Whyalla / Port Pirie, would shrink by over 20 per cent under the Government’s scheme.
As well, Professor Ross Garnaut, the Australian Conservation Foundation, Greenpeace, Tim Costello and many others have publicly asserted that the scheme is not going to provide certainty for business nor will it do anything of any consequence for the environment, and the Government should pull back and redesign this scheme.
“The Coalition will finalise its policy response once we've seen the results of the current Senate inquiries and following analysis of this report. However, it is clear that the Government’s current plans will cost tens of thousands of jobs, kill investment and achieve little, if any, reduction in CO2 emissions. The Government must propose a viable alternative,” said the Opposition’s spokesperson on Emissions Trading Design, the Hon. Andrew Robb AO MP.
“This is a comprehensive and important piece of research and I would like to thank the Centre for International Economics and David Pearce for their insightful and thoughtful analysis and also thank all of those who made submissions.”
KEY FINDINGS OF THE CIE REPORT
The CIE report found that this critical Government scheme is a source of major risk and uncertainty by failing the key policy tests, namely:
• The level of environmental benefit it achieves for the cost
• Its ability to deal with uncertainty and
• Whether it explicitly accounts for international developments (page 9).
While the report took no issue with the Government’s projections beyond 2040, the report concluded that the Government and the community could have little or no knowledge of the costs and effectiveness of the proposed CPRS scheme over the 20 – 30 year transition period because:
• “there is no analysis to show the tradeoffs between different choices within a broad ETS policy;
• there is no analysis to show the tradeoffs between an ETS and other viable alternatives;
• there is no analysis of the short term (20 – 30 year) transitional costs;
• there is no analysis to test whether the framework outlined in the White Paper is in fact the lowest cost;
• there is no analysis of the risks involved in the short term (as there was essentially very little sensitivity analysis undertaken) (page 12);
• The Treasury modelling has not in fact simulated the details of the CPRS as proposed in the White Paper (page 10); and
• …Understanding of the transitional costs and effects …is very limited…(yet) transitional issues create all the problems in the implementation of the policy: from the demands of ‘interest groups’ to the fragilities of investment in the global financial crisis” (page 11)
Following the review, the CIE concluded:
• the proposition that the CPRS generates abatement at lowest possible cost has not yet been demonstrated;
• there is no clear understanding of the transitional costs of the CPRS and there is a risk that, if these are not properly understood, unexpected transitional costs may derail the policy;
• the non-trade neutrality of the CPRS poses a major challenge for a number of important industries — this non-neutrality brings no environmental benefit;
• the scheme potentially threatens the balance sheets in a number of key industries;
• importantly, it is not clear that the proposed CPRS will produce higher net benefits than will other available alternatives;
• at the very least, more consideration should be given to complementary energy efficiency measures;
• many of the major aspects of the CPRS have not been modelled and, therefore, neither have the tradeoffs inherent in particular design choices (page 74); and
• a comprehensive RIS (regulatory impact statement) of the CPRS is, therefore, highly appropriate. Indeed, as one of the largest regulatory policies in recent decades, a RIS is highly appropriate…the RIS needs to be able to answer the kinds of questions currently being considered, for example, by the NZ Parliament Select Committee currently reviewing the New Zealand Scheme” (box 6.1, page 77).
Exposing this Government’s failure to assess the cost and effectiveness of their scheme over the critical 20 – 30 year transition period is a highly damning finding.
The report recommends that such critical analysis be done before finalising a scheme, and that such analysis be undertaken by an independent and transparent organisation such as the Productivity Commission.
To this end the report concluded that “While this may involve some ‘delay’ in implementing the policy, ultimately the only sensible starting time is when the policy is ready in the full sense of the word. This is a policy that at its core must remain stable for many years to come if it is ever to bear fruit” (page 12).
The report also concluded that complementary measures such as energy efficiency and carbon capture in soil and other means must be considered because “the price mechanism alone may not be enough to cost-effectively manage the transition to a low carbon economy”(page 10).
Other findings include:
• The CPRS will not be the lowest cost means of GHG abatement unless the fullest potential of low cost or cost neutral energy efficiency measures in the buildings sector are realised (page 15).
• It may be the case that, at least in the short to medium term, industries that currently ‘pollute’ are best placed to find the resources and the technology to reduce emissions…An alternate view (implicit in the CPRS as it is currently structured) is that the resources are best mobilised and allocated through government processes. (This is at least in part an empirical question that could be addressed in ongoing analysis) (page 21).
This reduction in balance sheet values is likely to make investment very difficult, particularly as funding can often revolve around balance sheet asset values.
It is important to consider whether this reduction in balance sheet values achieves any particular objective in terms of achieving mitigation at minimum cost (page 29).
• … it is important that any policy also incorporates the possibility of directly absorbing emissions from the atmosphere…According to the scientist Freeman Dyson:
“To stop the carbon in the atmosphere from increasing, we only need to grow the biomass in the soil by a hundredth of an inch per year”.
Whether the full potential that Dyson considers can ever be realised is unclear — however, a mitigation scheme that does not allow for this possibility is clearly incomplete (page 30).
• (Under CPRS) All industries will be affected regardless of whether they have a direct permit obligation…Most industries purchase energy as an input (page 34).
• Households will be affected through a number of mechanisms, the most obvious one being increases in the price of energy and energy related goods and services. Households are also employees and owners of business (either as small business operators, or through indirect means such as shares in superannuation funds). Households will thus be affected through the fortunes of industry (page 35).
• There is a policy risk that, if the short term costs are not understood or planned for in advance, they may derail the entire policy program through short term pressures for removal of the policy (page 75).
Media Contact: Stuart Eaton, 0433 298 620
CIE Review of the CPRS – Summary (PDF 430kb)
CIE Review of the CPRS – Full copy (PDF 852kb)