19-July-2011
Speeches, Emissions Trading Scheme
Tuesday, 19 July, 2011
Direct Action: an efficient, ‘no regrets’ approach
to reducing CO2 emissions
Carbon Price Forum
Sydney Harbour Marriott – 9.15am
In the absence of a global emissions trading scheme, imposing a carbon tax on Australia is an act of economic self-harm and totally futile from an environmental perspective.
For four years prior to 2011, both our opponents and our own colleagues quite rightly argued that a global scheme was a necessary pre-condition for successful and efficient abatement through an emissions trading scheme – that going it alone would be stupid and highly damaging.
This was emphatically asserted by Peter Shergold, John Howard, Malcolm Turnbull, Ross Garnaut, Penny Wong and Kevin Rudd.
So what changed? The need for the Prime Minister to do a deal with the Greens to save her political skin is what changed.
Recently, key Republican climate change Congressman Jim Sensenbrenner – who led the U.S. congressional delegation to Kyoto – described what the Gillard Government is doing as “unilateral economic disarmament”.
He said the prospects of either a cap and trade system or carbon tax were “dead in the U.S.”.
Key Democrats agree: President Obama will not be campaigning on either in the lead-up to next year’s election.
After the failure of the Copenhagen conference the world is further away from a global agreement than it’s ever been.
While the Gillard government likes to highlight the European emissions trading system as a reason why we need to undermine our great strengths, there is a high degree of pessimism in Europe about the prospects of a global scheme.
In fact the U.K Parliament’s Energy and Climate Change Committee recently launched a new inquiry into the E.U. Emissions Trading System.
The committee says in the absence of binding emissions reduction commitments under the U.N. framework the scheme “is looking increasingly isolated”.
It goes on to say: “The lack of an international framework for emissions reductions and carbon trading poses some serious difficulties for the future viability of the E.U. ETS.”
Regardless, the European scheme, which has been the subject of rorts, is a mere pilot compared to the carbon tax proposed here.
The Gillard-Brown scheme will raise more in revenue in its first four months than the
European trading system has raised in total over the last five years – even the electricity generators contribute virtually nothing.
To better understand why going it alone on a carbon tax will harm the Australian economy think about it for a second solely in an Australian context.
What would happen if a big new carbon tax was levelled against businesses only in NSW and no other state?
In no time at all, to remain competitive, you would start to see NSW businesses and jobs relocate to Victoria, Queensland and other states, where no tax applied, to the great detriment of the NSW economy. The emissions that relocating businesses generate would go with them.
Back to the proposed carbon tax and the same will happen, but on a global basis. Australian businesses, jobs and emissions will relocate overseas, where no tax applies.
If you were to put a price on carbon the Gillard-Brown scheme is about the most inefficient and complex way you could go about it.
It will not be one scheme, but 500 schemes (now that the other so-called 500 big polluters that Labor has raged against for 12 months no longer matter).
There will be bureaucrats crawling all over each of the companies that will be taxed. Different activity definitions apply, different levels of assistance apply.
The enormous level of tax churn under the government’s scheme not only underscores its inefficiency but suggests that first and foremost this is a vehicle for wealth redistribution.
Herein lies the fundamental difference between the carbon tax and the Coalition’s far more efficient Direct Action policy.
The carbon tax approach requires many tens-of-billions-of-dollars compensation because of huge increases in electricity prices; the Direct Action approach requires no compensation because it does not drive up electricity costs.
Frontier Economics exposed this fact with analysis it did based on Treasury’s 2008 modelling of a carbon price.
Looking at electricity generators alone it found that the actual cost of technology to reduce CO2 emissions from 2012 to 2020 was $6.6 billion – in other words, the cost of abatements was $6.6 billion.
During that period the government would reap $37.5 billion in tax from generators, and consumers would pay an additional $45 billion for electricity.
This shows that the government’s tax take is almost six times the actual abatement cost, and the increased cost of electricity is nearly eight times the actual abatement cost.
As Frontier’s Danny Price prophetically said earlier this year the excess tax will be churned via the political process which will bring its own distortions.
It is a giant money-go-round, but the money will end up in the hands of politically well-chosen beneficiaries.
He said the political control of so much tax revenue explains why the Greens have been such enthusiastic supporters of the carbon tax.
“They will be in the box seat in deciding how these funds will be distributed,” Price said.
He was spot on. The $10 billion Clean Energy Finance Corporation or ‘Bob Brown Bank’ is effectively a slush fund that will be used to support pet projects of the Greens and those that the private sector consider too risky to finance.
The lessons of the failed Tricontinental bank, and the failed S.A. State Bank and W.A. Inc. are so easily forgotten.
The ban on the ‘Bob Brown Bank’ from investing in Carbon Capture and Storage at the insistence of the Greens, despite its abatement potential as backed by Treasury, confirms this is dripping in politics.
I’d like to foreshadow that a Coalition Government would block such a fund. We would not support government guaranteed borrowings or equity injections from borrowed money to finance what is effectively a slush fund. This is bad policy; dangerous policy.
By contrast the Coalition’s Direct Action policy will cost $3.2 billion over four years and it will be transparently funded from savings within the budget. This sounds like a small amount compared with the $9 billion a year tax take under Labor’s carbon tax. However, as explained earlier, the actual cost of abatement is only one sixth of the Government’s tax take.
Virtually all this Direct Action money will be spent on purchasing least cost abatement through competitive tender.
Competitive tendering is a market based system, but one which doesn’t come with tens-of-billions-of-dollars of new tax and tens-of-billions-of-dollars of higher electricity charges.
Unlike the government’s scheme there will not be six new bureaucracies costing $382 million under our plan.
Direct Action is a ‘no regrets’ policy.
If there is still no global agreement by 2020 Australia will have remained competitive while reducing emissions by five per cent; avoided tens-of-billions-of-tax, yet still be in a good position to assess the way forward from there.
Direct incentives to invest in lower energy and emissions technology in our business sector, greater carbon levels in our soils and tree planting in appropriate areas will see major productivity gains regardless of action taken by the rest of the world.
For example, on some farming land, soil carbon has dropped from five per cent to one per cent and even less.
If you increase soil carbon by one per cent, that will add 15 tonnes of carbon per hectare into the soil.
There are 3.77 tonnes of CO2 per one tonne of carbon, so if you increase soil carbon by one per cent that equates to taking 50 tonnes of CO2 out of the atmosphere.
If soil carbon is increased by three per cent over the 450 million hectares of agricultural land in Australia, that equates to 65 billion tonnes of CO2 into the soil.
Australia produces about 560 million tonnes of CO2 per year, so by increasing soil carbon by three per cent, that would equate with 100 per cent of our emissions for more than 100 years.
Increased soil carbon enhances microbial activity and water retention and has a marked impact on productivity.
Rehabilitating millions of hectares of existing agricultural soil would seriously contribute to food security issues of the 21st century.
This demonstrates the great potential of soil carbon. Our Direct Action policy allows for up to 85 million tonnes of soil carbon by 2020, a figure more conservative than CSIRO estimates.
This ‘no regrets’ policy can be easily adapted to reflect changes globally and will not result in price rises of virtually everything across the economy, as would occur under a carbon tax.
On the other hand, going it alone with a carbon tax and then an emissions trading system is highly irresponsible.
This politically inspired ‘going it alone’ policy approach guarantees that Australia will be far worse off than if a global agreement applied.
In fact, under a global scheme, closures of inefficient power generation and value-adding resource plants, such as zinc and aluminium smelters, would occur elsewhere in the world first.
Australia, under a truly global scheme, with great expertise, experience and efficiency in energy and resources, could well see an increase in emissions per head, as global investment moved to Australia – one of the world’s most efficient and lowest emission areas of production.
For example, producing a tonne of zinc in Australia leads to 2.6 tonnes of CO2 being emitted, whereas a tonne of zinc produced in China sees 6.8 tonnes of CO2 being emitted.
Also, under the government’s scheme we have learnt that in order to achieve the 160 million tonnes per year reduction by 2020, almost 100 million tonnes will come from the purchase of overseas permits.
This would come at an annual cost of around $3.5 billion. This effectively means that $3.5 billion of Australia’s carbon tax is spent annually on abatement in other countries.
A further 20 million tonnes of abatement would be achieved through the retirement of 2,000 megawatts of brown coal fired power generation.
Despite all the fevered claims that Direct Action won’t work, the single biggest abatement measure in the Government’s scheme happens to be a Direct Action proposal – namely, the closure of Hazelwood power station.
The Government’s carbon tax itself will only deliver around 40 million tonnes of abatement in Australia, or just 25 per cent of the overall abatement.
To put this all into some perspective Professor Ross Garnaut projects that China’s emissions will increase by around a staggering 7,000 million tonnes per annum by 2020.
So while Julia Gillard says the carbon tax will take the equivalent of 45 million cars off the road, China’s increases alone will put the equivalent of more than 1.7 billion cars back on it.
And some of that increase in China’s emissions will come from former Australian industries that have migrated to China because our unilateral carbon tax will have made steel, zinc, aluminium, cement or other industries uncompetitive.
This figure demonstrates why in the absence of meaningful global action an increasing number of Australians are asking, just what is the point of the carbon tax, when ‘no regrets’ alternative approaches exist.