GREEN PAPER ON CARBON EXPOSES HARD TIMES AHEAD
21 July 2008
GREENCHIP: Matthew Warren
COMMITTING to a national emissions trading scheme (ETS) is like jumping off a cliff. It's not the leap of faith that kills you, but the sudden deceleration at the bottom.
Kevin Rudd promised Australia a trading scheme by 2010 as the headline act in last year's climate change strategy during the lead-up to the election. The most difficult policy decision of a generation was framed by politics.
Like his promise of a 20 per cent mandatory renewable energy target by 2020, Rudd was determined to go one better than whatever John Howard could put on the table.
By the time his task group report came out a year ago, Howard had already decided to announce his climate epiphany by committing the nation to an ETS by 2011. Anticipating this, Rudd had already committed to a 2010 start date, typical of the clever politics that defined Rudd's victory. Only now are we starting to discover the potential downside.
None of the four Australian reports over the past two years on the possible design of an ETS has seriously discussed the suitability of such a scheme for one of the most trade-exposed, energy-intensive economies on earth.
For starters, no one has had the data. Bureaucrats are sceptical of the claims by electricity generators that some will be forced to close if the price of emissions gets too high. But not too sceptical. They're nervous enough that they're going to get their own modelling of the national electricity market done, just to make sure.
It has just been assumed that since the largely intra-trading, high-value-added, energy-constrained European economies were opting for emissions trading, this would also be the first best policy response for Australia.
The European Union spent five years just designing its scheme and it's in the middle of another seven years of phased transitions to iron out structural problems. They don't actually switch to unconditional trading of permits until 2020.
Their phase-in process transcends political terms and therefore political cycles. Perhaps we should interpret the scale and tempo of this approach as a measure of how seriously they take the issue.
Only now are we doing the same, supposedly less than two years from the first day of trading on July 1, 2010. Already the multi-billion-dollar screaming has begun in earnest. We might want to get used to it.
Australia's second-biggest export industry, liquefied natural gas (LNG), was the first to the barricades, led by Woodside Petroleum. It has been excluded from compensation under the proposed scheme design.
LNG is a huge growth sector for the Australian economy that could triple in a decade on the back of $60 billion of investment here. LNG could play a critical role in helping other economies make the transition to a low-emissions future.
Liquefying the gas for transport is an energy-intensive process. Without some protection from a price on emissions, it makes it harder for Australian suppliers to compete in a global market against competitors from Nigeria, Malaysia and Qatar.
Trading scheme designers know this, yet their decision to exclude LNG was deliberate. Compensating such a fast-growing industry could punch a huge hole in the revenue stream of the new scheme already hemorrhaging revenues to insulate industries such as aluminium, cement and some types of steel. And, of course, motorists have to be protected.
The green paper has starkly revealed how difficult it will be to sustain, let alone allow, growth in Australia's trade-exposed, energy-intensive industries, which account for 40 per cent of national emissions.
Woodside is only the tip of the iceberg. Oil refiners have joined in and you can expect some heat soon from paper, plastics, chemicals and metals processors. Things will get really ugly in October when emissions trajectories are finally proposed and all firms will be able to calculate what this will actually cost them, how much business they will lose and how many people they will have to lay off.
Their stories of entrepreneurship and smart business crushed by one sweeping regulatory reform will be told over and over again. It will be a bloody November.
The objective of successful greenhouse policy is to make the switch to a low-carbon economy as smoothly and painlessly as possible. A national ETS could be an important tool in that process of transition.
Hurting Australian firms by making them less competitive and surrendering business to offshore rivals unconstrained by a price on emissions does not cut global emissions. A confidential Morgan Stanley review of the green paper last week predicted a carbon price of between $50 and $100 a tonne would be needed to stimulate the $60 billion of new investment needed to drive the new, low-carbon economy.
Weakening industry's ability to invest in the technologies will undermine public support for sustained and decisive action. It could create a political climate conducive to backtracking and conservatism: a delay caused by unnecessary haste. As with any other economic reform, suffering and hardship are not measures of success _ but of failure.
Copyright 2008 News Ltd.
The Australian
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