24-May-2009
Speeches, Environment, Emissions Trading Scheme
Victorian Liberal Party State Council, Melbourne.
Significantly reducing the global level of CO2 in the atmosphere is an issue of great consequence.
And it is unchartered waters.
What we do, the consequences, who is with us, how well thought through any scheme may be and what we need to do to get it right is all important.
To this end, the Rudd Government’s emissions trading scheme fails badly in taking proper account of Australia finding itself effectively going alone. As a consequence the design remains deeply flawed, risking tens of thousands of jobs, killing major investments and doing little or nothing to reduce CO2 emissions.
The Government’s emissions trading scheme has been designed for a world where every country has such a scheme, where every country has a price on carbon, a level playing field.
If we had such a world, we would not be having this debate. If the world was moving as one the contentious issues surrounding the Government’s scheme would largely disappear.
If our competitors were also imposing a price on carbon our own industries would remain strong, competitive and innovative as Australia and our competitors transformed to a lower carbon world.
In this regard, everyone acknowledges that only co-ordinated global action will deliver meaningful reductions of CO2 in the atmosphere. With Australia producing just over one percent of the world’s emissions, there is no unilateral Australian solution, only a global solution.
So a global response must happen or else Australia will have embarked on a futile exercise as far as the world environment is concerned, and embarked on a highly damaging exercise as far as our economy is concerned.
Misleading the Public
It is why the Government’s claim that for a $1 a day their scheme will save the Great Barrier Reef is so wrong and disingenuous. This is the totally false impression given to the community by the Government’s very misleading presentation of the Treasury modelling.
If this was the real cost why wouldn’t you put up your hand in support? It is why there is no real debate. It is why it has received so little coverage in so many newspapers.
The public hasn’t the foggiest idea what an emissions trading scheme is and hasn’t really engaged because they see no personal cost to them. They have been duped.
Yet, without the rest of the world engaging in some form of carbon reduction scheme Australia’s actions will have absolutely no impact on the Great Barrier Reef, or on the environment generally. In fact, global emissions could actually increase as investments leave Australia and go to developing countries where less efficient factories pump out much more CO2 than in Australia.
And, without our major competitors engaging in some form of scheme the cost to Australians will be much greater.
This cost will be measured in the premature closure of many coal mines, cement works, coal powered generators and fuel refineries and the loss of major investment in new smelters, metal refineries, LNG gas projects, cement works, exploration and much more.
There will be a significant added direct and indirect tax on agricultural and manufacturing businesses competing against foreign products where no such tax applies.
This will see tens of thousands of jobs at risk, the permanent and serious shrinkage of major regional centres and the loss of major investments, yet little or no impact on CO2 emissions.
One $4 billion investment to extend an aluminium smelter in the Hunter Valley will be shelved. This project alone will see the loss of 15,000 construction jobs and 3000 permanent jobs.
It is why Australia must not find itself effectively going alone.
Showing Leadership
We can and we should influence and assist the world to respond, but we can’t get too far ahead of our major competitors.
It was the former Government that helped set up AP6 (Group of six Asia Pacific countries) to help develop and transfer low emitting technology to developing countries. It is still the only international agreement which involved China and India and the United States – the big emitters.
For purely political reasons the Rudd Government stymied this six country program. Yet without such leadership we won’t ever see the coal fired power stations which are being completed one in every nine days in China retro-fitted with low CO2 technology. And if not, then nothing we do anywhere is going to materially reduce the concentrations of CO2 in the atmosphere for generations.
And AP6 was doing very substantial work. With the United States and others we were putting serious money into new technology, taking technology to Greenfield developments in these countries. We are good at innovation relating to energy and resources. We have done it for 150 years. It’s one reason we have the great quality of life that we enjoy today.
Furthermore, Australia is also one of only five countries in the world that will meet its 2010 Kyoto target for emissions reductions. This result and leadership was delivered by the former Howard Government.
So, as a wealthy, developed nation we can and we have shown leadership and we should continue to assist international efforts in many ways.
The Critical Transition
But putting a multi-billion dollar new tax on our businesses many years before our competitors do likewise would get us too far ahead of the world.
It is why the critical debate we are having is all about how we transition to a lower carbon world, not whether we transition.
It is about how we calibrate that transition to be broadly in step with the willingness of our major competitors to do something similar in terms of putting a tax on carbon.
It is how we deal with the next 10, 15, 20 years or more of transition that is critical.
If the transition is mishandled, if we go it alone, if we get too far ahead of the world, we will see the great strength of our economy wantonly undermined and damaged for no good environmental outcome.
Global Action or Inaction
The Government likes to infer that much action on emissions trading schemes is taking place elsewhere around the world, and we’d better get with it. Yet, as Shadow Foreign Affairs Minister last year, I travelled extensively and dealt with leading politicians in our region and beyond. I found it difficult to get a discussion on climate change, much less any meaningful discussion on an emissions trading scheme.
There is clearly greater awareness in North America where I have spent time looking at US State schemes and the Canadian scheme, but even there the global financial crisis has seen community interest wane substantially in the face of major economic challenges. The Canadian scheme has been put on ice waiting to see what the US does.
So, unless there is significant leadership from the US we are all wasting our time on this issue. In this regard, the outcome of Copenhagen is fundamental, as is the design of President Obama’s scheme which is being negotiated throughout this year.
Even the much vaunted European model doesn’t bear up well under close inspection. It is not much more than a pilot scheme – they require business to purchase from the government (at auction) 4% of permits. The Rudd Government will be requiring 70% of permits to be purchased (The Obama plan is looking at 15% of permits to be purchased).
There is very little in place in terms of a price on carbon elsewhere around the world.
Under the Government’s proposed scheme design we would be making a very major leap in comparison with the rest of the world.
The Coalition’s very great concern is that the Rudd Government has deliberately largely ignored the impact of their scheme on our competitiveness and jobs in the first 20 years of transition, if our major competitors don’t reciprocate.
The design of the Rudd Government scheme assumes that our major competitors will move to put in place a major new tax on carbon across their economies, including their export and import competing industries, in the early years. The Government assumed the US would begin an equivalent scheme by 2010, China by 2015 and finally India by 2020. None of this is remotely possible.
What if China, India, Indonesia, the Middle Eastern countries, the South American countries and many other competing developing countries don’t apply a tax on carbon for 15, 20 or more years.
On a Wing and a Prayer
This is more than likely, yet the Government has provided no analysis whatsoever of the impact of their scheme on Australian businesses, Australian jobs, on the Australian economy or the impact on global emissions if our competitors drag their feet.
Why wasn’t the Treasury required to test such scenarios? It has been seven months since the Treasury modelling was released, and still no such analysis. Not a whiff of it.
There has been ample opportunity, in the face of the global financial meltdown, when every other projection and every other statistic has been recalibrated to see what effect it has had on fiscal policy and monetary policy, yet there has been no work done, no analysis done, no repeat of the modelling with a change of just a few assumptions to measure the robustness of the proposed model.
All they had to do was change some assumptions and run the model again. They have refused.
A major independent analysis conducted by the Centre for International Economics concluded that the Government and the community could have little or no knowledge of the costs and effectiveness of the Government’s proposed emissions trading scheme over the 20 to 30 year transition period because:
• There is no analysis of different scenarios concerning delayed start dates by major competing countries during that 20 to 30 year transition period;
• There is no analysis of the impact of the global financial crisis; and
• There is no empirical analysis of alternative approaches to achieving a reduction in CO2 emissions.
It beggars belief that the Government has not privately commissioned such analysis. If not, why not? If so, then release it.
If passed in its current form, the biggest deliberate structural change in our history would be more a product of blind faith and pig-headedness than rigorous analysis. The Government can’t and won’t tell business and the community anything about the near-term risks and costs of their scheme.
The deliberate failure of the Government to require such analysis has meant that individual companies and organisations have been forced to commission such research.
In so many cases this research has shown that many years of going it alone will severely weaken key industry sectors in our economy.
Preserving a strong economy
We must never forget that as a community, as a country we best tackle climate change from a position of economic strength.
At a personal or family level, if someone wants to do something concerning climate change by installing solar panels on their home or putting in a water tank, then they are much better placed if they have a job and/or money in the bank.
In the same way at a national level we are best placed to finance the necessary research, innovation and adjustment if people are in work, if the balance sheets of businesses are strong and competitive and if the Government has strong taxation revenue.
It is why we must get the design of the scheme right. It is why it is too important to play politics with this issue.
The big issue is how long will our companies be facing a major tax impost, either directly or indirectly, which our competitors will not be facing?
Is the design of this scheme robust enough to deal with scenarios which haven’t been modelled, where our competitors take 10, 15, 20 years or more to adopt a price of carbon?
The work leaked from the NSW Government analysed the impact of the Government’s scheme at a regional level and found that all of the major regional centres – the Hunter, Gladstone, Central West Queensland, Illawarra, the Kimberley, Whyalla, Port Pirie, Geelong, Gippsland and some parts of Tasmania would shrink by 20 per cent or more. Why has the Government withheld this information?
Yet we know if the world had a price of carbon today our energy, resources and manufacturing sectors wouldn’t shrink because the further development of energy and resources would occur in those countries that are most efficient, and we’re in that league. It is why we’ve been so successful.
Political Expediency
My concern from the outset is that much of the Government’s response has been dripping with politics at the expense of measured and properly considered policy developments.
Many of the problems stem from the fact that Kevin Rudd nominated an artificial 2010 start date just to score a political point against John Howard, to nominate an earlier start date.
As well, Kevin Rudd raised huge expectations and promised a scheme delivering deep cuts in emissions while not putting our export and import competing companies at a competitive disadvantage.
His scheme fails miserably on both counts principally because our competitors are not doing likewise.
Without the rest of the world engaging, Mr Rudd’s promise of deep cuts with no disadvantage to export and import competing companies is an impossible equation unless you do other things, such as complementary measures and major investment in renewables.
I dispute the contention of Senator Wong that we can’t have incentive based and regulatory based activities alongside a market based system.
In fact, if you look at the latest proposed US legislation, it explicitly excludes agriculture from the cap but explicitly includes agriculture in the opportunities to develop offsets; to create a revenue stream for farmers.
This is a clear indication that the US is heading towards the development of a market based scheme, in concert with voluntary, regulatory and incentive based measures. Such possibilities have been totally ignored in the frantic rush to see legislation before the Parliament.
For two years Mr Rudd has said the start date must be 2010 – it could not wait one day further. After months of asserting that the global financial crisis increased the case for an early 2010 start date, the Prime Minister recently announced a delay of the start date by 12 months because of the global financial crisis. Confusion reigns.
Like so many areas of Government policy Mr Rudd is making it up as he goes along. On the start date Mr Rudd is beginning to be mugged by reality.
The back flip on the start date was accompanied by the announcement of other changes. These changes were presented as substantive changes. Yet the changes were not substantive. It was tinkering. They did not address in any sense the fundamental flaws that we have identified in the scheme.
Using the delay
The twelve month delay does present an opportunity to see what the world decides at Copenhagen in December, and to do the work that should have been done to get the scheme right.
Despite being forced to delay the start of the scheme by twelve months, because it’s flaws provide a source of much uncertainty, Mr Rudd is now insisting this deeply flawed scheme be rushed though the Parliament on the pretext of ‘certainty’.
I have been contacted by many companies who have said they don’t want the certainty of not being able to compete. They want a scheme which preserves their international competitive position.
This is a view which is known to be commonly held within the Labor caucus, many of whom no doubt breathed a huge sigh of relief that the start date had been bumped out beyond the next election.
But simply delaying the start date doesn’t fix the design flaws.
Scheme flaws
There are four overarching areas of concern, outside of some industry specific issues, that the Coalition has with the legislation.
The first, and by far the greatest concern, is the threat that thousands of Australian companies will face a major tax, for years, that none of their competitors will face.
It is the threat that this scheme holds for the competitiveness of thousands of our companies if our major competitors do not adopt a similar price of carbon for 10, 15, 20 years or more.
Much damage could be done, especially to many major rural regional centres, because as it stands now, despite the recent tinkering, Australian companies, employing millions of Australians, will have to pay a significant new tax, either directly or indirectly, that none of their competitors will be paying.
If Australia finds itself going alone with a huge tax on energy and CO2 emissions, Australian jobs and emissions will go where energy is cheap. We would outsource jobs and industries to developing countries, and see global carbon emissions rise, not fall, as production transfers to less efficient industries in the countries of our major competitors.
For example, with LNG industries alone, the proposed scheme will perversely prevent up to 180 million tonnes of CO2 (one third of Australia’s emissions) being avoided each year because of gas projects that won’t go ahead. For every tonne of greenhouse gas associated with the production of LNG in Australia, between 4.5 and 9 tonnes are avoided in the Asia-Pacific region when this gas is substituted for coal in generating electricity. LNG is part of the global solution, not part of the problem yet the scheme significantly penalises LNG exports. It makes no sense.
Yet no assessment has been made by the Government of the loss of jobs and investment if our competitors don’t co-operate.
The Government has deliberately avoided this critical piece of work. It can be done, should be done, must be done before any scheme is voted on in the Parliament. And, it should be done by an independent agency, namely the Productivity Commission. It can be done within six months.
This further analysis should also review empirically how the proposed Government model measures up against other serious approaches that are available – the McKibbin model, a carbon tax, the Carmody Consumption tax or the Canadian version of a cap and trade scheme. None of his comparative analysis has been done to see which is the lowest cost approach, which is the most robust model in the uncertain times ahead.
Given that an emissions trading scheme is the biggest deliberate structural change in Australia’s history, it must be done correctly or else tens of thousands of jobs are at risk.
Serious competitiveness issues arise if our major competitors don’t come on board. If you look at the current scheme; 43% of the revenue comes from high energy using export and import competing industries, yet only 27% goes back in terms of free permits, even after recent tinkering which saw free permits rise from 25% to 27%.
Over five years this represents a tax on those industries of more than $12 billion that is not faced by our competitors.
On top of this there are tens of thousands of businesses that will face major tax imposts, without any compensation, that can’t be passed on because they compete in world markets.
Work presented at the recent Farm Institute Conference showed that the average dairy farm will face a new annual indirect tax impost of $8,000 to $10,000, with no capacity to offset this cost.
Similarly, the beef and sugar industries will each see a $60 million tax passed back in the price they receive for their cattle and sugar cane.
The grains industry, a very low emitter, will face annual indirect costs of $ ½ billion. This emissions tax would sit on top of tariffs faced by our grains industry of 3% in the USA, 16% in Canada, 45% in the EU and 70% in Japan.
Similarly, thousands of small to medium manufacturing plants will face similar indirect costs. At a time when their balance sheets are under enormous pressure, the capacity of these companies to invest in innovative technology to seek to offset increased energy costs, and other indirect costs passed back to them, will be highly compromised.
If our major competitors don’t impose a similar impost for well over a decade what will be the impact locally? How is the design of the Government’s scheme calibrated to deal with this likely eventuality?
The silence from the Government is deafening.
In the end it all translates into jobs. Over recent months company after company have publicly indicated the cost of this proposed scheme in terms of lost jobs:
• The Minerals Council has found over 66,000 jobs will be lost or foregone
• 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
• 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.”
• Norske 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.
How stupid would we look if in 10 or 15 or 20 years time our major competitors still have no scheme in place or have protected their trade exposed industries, and we have been imposing these costs, and more (because of the built-in annual reduction of free permits).
Such stupidity is already being exposed as the details of a future Obama emissions trading scheme takes shape.
Draft emissions trading legislation was sponsored by Democrat Congressmen Henry Waxman and Edwards Markey on March 30th, this year with the blessing of President Obama.
Less than a week ago, on May 18th, further amendments to this draft Bill were incorporated by Congressman Waxman, including very specific provisions relating to the treatment of US export and import competing industries in any future emissions trading scheme.
Specifically the draft Bill now provides for 100% protection for all US export and import energy intensive industries until 2025.
What is more the Obama draft Bill now says that a reduction in protection of these industries will only occur after 2025 where more than 70 percent of global output for that sector is produced or manufactured in countries that have scheme equivalent to that operating in the United States.
As well, for the US electricity generators, the Obama draft bill provides for a much higher proportion of transitional free permits, applying through until 2030. Whereas it is proposed that the Australian electricity sector receive far less, and phasing out by 2016.
The Australian generator industry, desperately competing for capital in US and world markets, will find it very difficult to attract critical finance.
One thing is certain, as this Obama draft takes further shape in the US it will only get more sympathetic to US export and import competing industries, not less.
This is a wake up call of monumental proportions for Mr Rudd and Senator Wong.
It emphatically confirms that the Rudd scheme will see Australia effectively “going it alone” in the significant taxing of our export and import competing industries for the first 12 years of a scheme, and potentially for many years beyond.
It confirms that from 2012 Australia’s energy intensive export and import competing industries will be paying billions of dollars of tax, and increasing each year, while the same industries in the United States will have 100% protection through until 2025, and potentially well beyond if other major competing countries have not come on board.
The competitive position of so many key Australian industries will be trashed as they pay our Government billions of dollars in taxes not being paid by our competitors, including US companies.
This is gross incompetence. It confirms the commonsense of the Coalition’s repeated requests to defer the finalisation of any scheme until we see what the US proposes to do and until we see the outcome at Copenhagen.
It is all about design; design features which give you the robustness and the capacity to manoeuvrer to play a part in all this but not get too far ahead of the rest of the world, not go it alone.
The second issue is the balance sheet issue. Some companies will see half or more of their average profitability over the last eight years taken up with the effective tax they are going to face. That is going to have a serious impact on the capacity of companies to fund the technology transition to a lower carbon footprint.
It is a “Catch 22” situation. Yet, it is my observation that existing large emitters are the companies best placed to lead Australia, and their industries, to a low CO2 environment, as long as their balance sheets remain strong enough to find the billions of dollars to finance the necessary technology and innovation to lead that transition.
Perversely, the requirement to purchase billions of dollars of permits – a tax not faced by competitors - will use up cash that could otherwise be used to fund abatement projects.
The other balance sheet issue is the existence of large numbers of free permits on a balance sheet.
When investors are approached to fund a 40 year energy or resource project and they see a balance sheet with a large number of free permits that are there solely at the whim of the government of the day, they become concerned about sovereign risk.
When these investors find out that the level of free permits faces a mandatory annual reduction and is reviewable in five years, on a forty year project, investors will think twice. Many will invest in countries where that sovereign risk doesn’t exist. Sovereign risk will stop much new investment in its tracks. Projects are already facing this financing dilemma, including a new gas fired power generation plant.
This relates to the third issue, the problem of churn or recycling of billions of dollars of taxpayer monies through the system at the Government’s discretion.
Each year the sale of permits will see the Federal Government reap a huge new tax revenue - $13 billion in year two, growing rapidly to $20 billion a year by 2020, or thereabouts. In 2012 this will be equivalent to an increase in GST to 12 ½ per cent.
For most Australian families, like GST, they will pay this increased tax directly in the form of 30 to 40 per cent higher power bills, and indirectly in increases in the price of most services and items purchased.
The Government intends to recycle some billions of these dollars to compensate low income earners for the 30 to 40 per cent increase in electricity costs.
This will see millions of cheques continue to be mailed to Australian households each year. This Government is addicted to mailing out cheques. It’s not hard to see why.
A huge administration will be set up to churn billions of dollars back through the economy, with the Government picking winners as to who gets compensation and who doesn’t.
No new energy or resource project will get off the ground without companies coming on ‘bended knee’ to get a quota of free permits from the Government to make their investment competitive.
It will foster a Nanny State, mendicant attitude. Most investors won’t risk this balance sheet gamble.
There are alternatives. The design of the Canadian cap and trade scheme sees the same price of carbon established but leaves much of the money on the balance sheets of companies rather than a new source of tax revenue for the Government. Such design features need to receive serious consideration. They haven’t.
Finally, in our view the Government has not looked at significant low cost opportunities or complementary measures that are available. Too much is being expected of an emissions trading scheme in the absence of global action.
Complementary measures directed at capturing carbon in soil, reducing energy usage, especially in commercial buildings, other bio-sequestration and recognising the efforts of individuals and families in reducing emissions have the potential to quickly deliver very significant cuts in net emissions without putting at risk tens of thousands of jobs and 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 possibilities, in concert with a major focus on promoting renewables, provide an opportunity to minimise the risk of putting too much onus on an emissions trading scheme while the intended action or inaction of the rest of the world is still not clear.
The Government’s legislation has been trapped within the 20th century policies and rules of Kyoto, rather than expanding the range of processes to cover 21st century solutions such as the many forms of bio-sequestration or energy efficiency measures.
Only in this way can strong targets be delivered by processes that don’t threaten jobs, processes that not only abate greenhouse gases from the atmosphere but also produce clean energy, fuel, feed and fertilizer, rehabilitate soils, improve crop yields and deliver sustainable green jobs and industries.
Agriculture alone has huge potential, as does algae, to provide large scale sequestration.
Agriculture is a biological system that emits carbon and very effectively stores or sequesters carbon. To date, there is no acknowledgement by the Government of the sequestering opportunities. Yet it is very low hanging fruit.
Respected scientist, Freeman Dyson has said “to stop the carbon in the atmosphere from increasing, we need only to grow the bio mass in the soil and the carbon it contains by a hundredth of an inch per year”.
The technology and agricultural practice is known. There is huge scope with the right incentives to see tens of millions of tons of CO2 stored in soil, while rehabilitating large tracts of agricultural land in the process. In Australia alone, 4.8 billion tonnes of dirt moves across our continent every year through sheet and river erosion. Salinity is a creeping cancer.
A greater focus on complementary measures would enable a much quicker start in achieving the targets in CO2 reductions at least equal to the Government’s targets.
Conclusion
In Mr Rudd’s haste to “lead the world” on emissions trading he runs the great risk of unwittingly going it alone, and for little or no environmental gain.
The Government’s scheme, as designed, puts major industries, and the jobs that go with them, at great risk. Commercial realities have been ignored. President Obama’s plans have been ignored. The scheme is deeply flawed.
We have to better understand the prospect and implications of effectively going it alone in Australia with this scheme before we make any decisions about finalising a scheme.
If Australia gets this reform wrong, the impact could be hugely detrimental.
And, all at a time when we will need the energy and resources sector, and other businesses, to play a big part in getting on top of the mountain of debt accumulated so rapidly by the Rudd Government.
It is a time for prudence, careful policy making and commonsense. It is not the time to gamble with people’s livelihoods and their futures in the cause of political expediency.
The Government’s scheme is in no shape to be passed, and the vote must be deferred until after Copenhagen and when the Obama scheme is clearer. There is no Plan B if the rest of the world doesn’t follow suit.
The 12 month delay in the starting date provides a breathing space to see the intentions of the rest of the world at Copenhagen. It also allows the time to undertake an empirical assessment of the loss of jobs and investment, and the impact on global emissions, if our competitors don’t put a tax on their CO2 emissions for 10, 15, 20 years or more.
This is the biggest deliberate structural change to our economy ever. We must get it right.