Chapter 3 General issues about the bills
Economic impacts of the legislation
The Treasury modelling
3.1
The most reputable and thorough research on the effects of the
legislation and pricing emissions on the Australian economy has been conducted
by the Treasury. In July 2011, the Government released the Strong Growth,
Low Pollution report. The Treasury modelled two scenarios: one assuming the
world adopts a 450 parts per million stabilisation target and a second assuming
the world adopts a 550 parts per million stabilisation target. The latter was
adopted as the ‘core’ policy scenario and includes the following assumptions:
n Australia’s emission
reduction target is to reduce emissions 5 per cent below 2000 levels by 2020
and 80 per cent below 2000 levels by 2050;
n an initial carbon
price of $20 per tonne of carbon dioxide equivalent, (CO2-e) rising
by 5 per cent annually, plus inflation (resulting in a 2050 price of $131 per
tonne);
n assistance for
emissions-intensive trade exposed industries commences at 94.5 per cent or 66
per cent, depending on the industry, reducing by 1.3 per cent annually;
n an effective carbon
price is applied to businesses using liquid fuels from 2012-13 (excluding light
vehicles, agriculture, forestry and fishing) and to heavy on-road vehicles from
2014-15 (this last measure was not agreed by the MPCCC and is not included in
the bills, although it is currently Government policy);
n a worldwide
greenhouse gas concentration level equivalent to 550 parts per million as the
target for 2100, which is consistent with the low end of 2020 emission
reduction pledges made in Copenhagen in 2009 and Cancun in 2010;
n most other countries
commencing climate action by 2020 and all doing so by 2031;
n a global carbon price
emerging by 2016.[1]
3.2
The Treasury modelled the effects of these policies on the Australian
economy to 2050. Overall, the Treasury found that there would be major
reductions to growth in carbon emissions at the cost of a marginal reduction in
economic growth. Average income growth in Australia is expected to slow by 0.1
per cent annually. Domestic emissions are expected to reduce from current
levels of 578 Mt of CO2-e to 545 Mt in 2050, or under 200 Mt in 2050
if abatement sourced overseas is included as well. This compares against
projected domestic emissions of 1,008 Mt if there is no carbon pricing.[2]
3.3
The second scenario assumed that the 2100 global target for greenhouse
gas concentration levels would be 450 parts per million. This gives a 50 per
cent chance of holding the increase in global temperature to less than 2 degrees
celsius. The 550 parts per million target gives a 50 per cent chance of holding
the increase in global temperature to less than 3 degrees celsius. The
economic outcomes under this more ambitious scenario are very similar to the
core scenario. GDP will grow at the same rate as the core scenario. Gross
National Income (GDP adjusted for international dividends and interest
payments) will be 0.6 per cent lower in 2050 than it would be compared with the
core scenario.[3] This appears to be due to
greater international trade in emissions permits.
3.4
The Treasury also modelled the effects of delaying global action on
climate change. Delays increase the costs of achieving a particular outcome
because delays allow emissions to increase over time. Greater reductions are
required to then achieve the same result. The Treasury stated that delaying
global action by three years adds 20 per cent to the first year of global
mitigation cost. A further three year delay adds a further 30 per cent to the
first year mitigation cost. In evidence, the Treasury explained how delays
would have an economic cost on Australia within the international context:
There are two potential scenarios here. If the rest of the
world takes action and Australia does not take action there is the potential
for retaliatory action by other nations. Logic would suggest that, if other
countries are going to impose action on Australia rather than Australians
imposing it on themselves, it may well be more expensive. Particularly if any
action in the future might relate around trade, it could get into the messy
world of international trade obligations and international linkages. Australia
relies heavily on trade and analysis in the past has found that anything that
taxes trade in isolation from the rest of the economy turns out to be very
expensive in terms of potential economic growth. In the scenario where the
world was to move and Australia was not to move, if there was retaliatory
action, it is likely to be more expensive than if Australia imposes an
efficient market mechanism internally on itself.
The second issue is if that was not to happen—if the world
takes action and Australia does not take action and then Australia eventually
takes action off its own bat. It is potentially quite expensive to adjust at
that point because, if someone has a dollar of investment and they are looking
at investing in a country that has already moved along the path to reducing
their emissions versus a dollar of investment in a country that has a high
emission intensity industrial structure, it could well be that the investment
moves away from Australia quite sharply, and that could be quite a sharp
transition to a lower emission future. Sharp transitions involve higher economic
cost.[4]
3.5
Climateworks Australia confirmed that delays will have significant
economic costs to Australia, which include costs by us locking in more
high-emission infrastructure and equipment that put us further away from our
goals:
... if we delayed until 2015 commencing these actions to
reduce emissions, we would increase the cost of achieving the minimum five per
cent target by $5 billion in Australia. We also quantified that we have already
increased the cost by $1 billion by delaying from 2010 to 2011. The reason for
that is that a lot of the opportunities you will see that we have modelled are
opportunities to save money through energy efficiency, and so each year that we
do not undertake that year's share of that activity we allow buildings to be built
or refurbished or vehicles to be purchased at lower than ideal emission
standards. Those emissions are locked in and therefore the financial savings
are lost to us. Equally, it gets more extensive to catch up later in the
decade, as we must then draw upon more expensive opportunities.[5]
3.6
The Treasury report includes sensitivity analysis of the modelling. The Treasury
found that the findings were robust to varying the assumptions.
3.7
On Wednesday, 21 September 2011, the Treasury released updated modelling
to take into account the detail included in the bills and other policy
announcements. The first major finding in the update is that the slightly
higher carbon price of $23 a tonne will reduce domestic emissions by an
additional 5 Mt of CO2-e in the first three years of the scheme. The
second is that the policy announcement in relation to heavy road vehicles from
1 July 2014 reduces emissions by 20 Mt of CO2-e by 2050
and reduces the overall cost of meeting Australia’s emission targets by
spreading abatement action more evenly across the economy.
3.8
The other macroeconomic findings in relation to the Australian economy
remained largely the same as in the July report.[6]
3.9
It might be surprising that putting a price on carbon would generate
such significant savings in greenhouse emissions at such a small cost to
economic growth. The reason is that the free market adapts around the carbon
price. As the Treasury stated in evidence:
What happens when people take action typically is that they
shift the emissions intensity of their output and do not change the level of
their GDP. We find in history that the level of GDP has grown quite strongly in
countries while their emission intensity has fallen through time. That is the
intention of the overall package to put a price on carbon. You get continued
growth and emissions falling or emissions staying the same and emissions
intensity falling.[7]
3.10
To complement this macro-economic explanation, Westpac gave a
micro-economic perspective. They stated that, once businesses has certainty
about a regulatory approach or a market, they can start managing the risks and
adapting:
It goes back to the point that
we keep making—that is, that when you have certainty around the framework and
you have certainty around what you can expect, you are able to manage that risk
in a highly effective manner. Australian business is actually very used to
managing these sorts of market based variables and doing it very well.[8]
3.11
Although it is tempting to focus on the costs of reducing greenhouse
emissions, such an analysis does not cover the whole picture. Importantly, it
does not consider the large costs of not taking action on climate change, such
as the adaptive costs to the Australian economy of addressing the impacts of
rising sea levels and the changing suitability of land for agriculture. Viewed
in this light, the decrease in economic growth of 0.1 per cent annually is
a modest price to prevent large scale environmental changes.
Criticisms of the Treasury modelling
3.12
During the inquiry, the committee did not receive any alternative comprehensive
modelling that was at variance with the Treasury’s work. Therefore, the
committee concludes that there is no evidence of significant errors in the
Treasury’s analysis and that its findings are generally sound. Some participants
also took this view. For example, Westpac stated, ‘While we think this is a
fair assessment overall, this does not mean there may not be significant
adjustments within and/or between industries’.[9]
3.13
The committee did receive criticisms of the modelling. One concern
related to the Treasury’s assumptions about progress in developing
international emissions markets. This was raised by the National Lime
Association and the Institute of Public Affairs.[10]
The Treasury’s response was what they have done is to ‘use the Cancun pledges
and operationalise them in our modelling’,[11] rather than make
predictions about international agreement-making. The committee agrees that
taking a formal statement by a country’s government is a suitable way of
developing assumptions.
3.14
The Treasury noted that countries can reduce their emissions in various
ways and that this need not be initiated through a nationally coordinated
scheme:
In order to get a net purchase, it does require the firms
within the United States to be able to purchase abatement from overseas. They
could still do that. This is a hypothetical scenario about what different
frameworks people could put in place in terms of different climate change
mitigation policies, but there are certainly different mechanisms whereby the
United States could have a part regulation regime and a part allowance of
purchase of abatement from overseas. It depends a little bit on the framework
the United States puts in place. For example, the Californian state is looking
at the possibility of an emissions trading scheme. There are other trading
schemes of different forms in place at the moment in the United States. It
could well be those mechanisms that end up in place, with the purchase of
abatement from overseas, or it could be through regulatory approaches where the
Environmental Protection Agency allows generators, for example, to meet certain
emission intensity targets by purchasing abatements from overseas.[12]
3.15
This was corroborated by the green energy sector. The Clean Energy
Council stated in evidence that, ‘There is now a long-term shadow price on
carbon in Australia’.[13] Pacific Hydro noted:
We are trading carbon credits out of our Chilean projects. We
have invested about $1.7 billion on the back of international carbon trading.
In many respects the market is off and running. Europe is trading in carbon. It
does not matter what happens in the next round of Kyoto, they will continue to
do that. China is starting to move down that path and so are many jurisdictions
in the US. In the absence of an international agreement, there are a whole
series of regional agreements which are powering ahead and driving this
international action. There is a global price in carbon without a global
agreement.[14]
3.16
In other words, emissions markets are developing from the ground up,
rather than from the top down. It is preferable for Australia to become part of
this process now because this will give us greater opportunities to influence
the development of the market and obtain arrangements that are to our benefit
or, at least, not to our detriment.
The view from the financial markets
3.17
Companies that are listed on the Australian Securities Exchange (ASX)
must comply with various listing rules. Chapter 3 of the rules covers
continuous disclosure, with rule 3.1 stating:
Once an entity is or becomes aware of any information
concerning it that a reasonable person would expect to have a material effect
on the price or value of the entity’s securities, the entity must immediately
tell ASX that information.[15]
3.18
Although this rule is general in application and is not designed to
cover climate change policy, any entity that had formed a view that climate
change policy would adversely affect its financial performance would be
required to report this to the ASX. Therefore, disclosures to the ASX give a
useful indication of what businesses believe are affecting their profitability.
These announcements would generally be at least as reliable as statements their
peak bodies might make in political debate because companies risk de-listing
for non-compliance with listing rules. The consequences for a business
organisation for making a misleading statement in political debate are much
less direct and certain.
3.19
The committee asked the Investor Group on Climate Change what
disclosures were being made to the ASX in relation to climate change policies:
My understanding of the market obligation is that, when a
company knows something to be true or knows that there will be an impact, there
is an obligation to disclose to the market. So the question is: does the
company have enough information to know something and, therefore, make a
statement? Our observation is that many companies have made disclosures to the
ASX. We study all the listed companies but we studied 14, I think, through
Deutsche Bank very recently. They were highly emissions intensive companies and
we found that all of those companies identified modest financial impacts from
the scheme, generally below one per cent of earnings.[16]
3.20
In other words, the companies that face the largest incentive under the
bills to change their operations and reduce emissions are predicting a
reduction in earnings of below 1 per cent in what appears to be the short to
medium term.
3.21
This compares with some statements made by industry. For example, in
June the Australian Coal Association stated that 4,000 potential jobs would be
at risk within the first three years of an emissions trading scheme. It stated
that such a scheme would cost the industry $18 billion in the first nine years.[17]
3.22
The two sets of comments are a long distance apart. The committee takes
the view that statements to the ASX by emissions intensive industries about
future profitability are much more likely to reflect their financial position.
Comments made by their industry representatives are much more likely to reflect
their political position and are better interpreted as a request for further
industry assistance. This matter is discussed below.
Specific economic issues
Growth in the clean technology industries
3.23
The Government’s clean energy future package takes two approaches to
encouraging a cleaner Australian economy. To assist in the initial stages, the
package includes several industry programs to help Australian industry make the
shift towards clean technology. In total, they comprise over $14 billion in
funding. The components include:
n the Clean Energy
Finance Corporation, which will invest in renewable energy technologies and
more broadly in clean energy such as low-emission cogeneration technology. The
Corporation will have an investment pool of $10 billion of public funds and it
will operate independently of the Government.
n the Australian
Renewable Energy Agency, which will more efficiently administer current
Government grants for renewable energy. It will independently administer $3.2
billion in current Government grants for renewable energy. Its funding amount
will be increased through dividends paid by the Clean Energy Finance
Corporation.
n the clean technology
investment program, which will provide grants to large scale businesses to
support energy efficient capital equipment and low-pollution technologies on
the basis that industry will provide three dollars for every dollar from the
Government. The program will provide a total of $800 million.
n the clean technology,
food and foundries investment program, which will serve a similar role and work
in a similar way to the clean technology investment program. This sub-program
will be limited to the food processing, metal forging and foundry industries.
These industries are trade exposed and have higher energy costs than general
manufacturers. The program will provide $200 million over six years.
n the clean technology
innovation program, which will provide $200 million over five years for
grants to support business research and development in renewable energy, energy
efficiency and low-pollution technology. The Government will match private
sector investment dollar for dollar.
n the clean energy
skills program, which will provide $32 million to educational institutions and
industry develop the materials and expertise to help tradespersons and
professionals move towards energy efficient services and products.[18]
3.24
These programs will operate in an economy where greenhouse emissions
will become more expensive and the private sector will face greater financial
rewards for developing and commercialising clean technologies. As with any
other sector of the economy, clean technology has the potential to generate
direct and indirect jobs and grow over time. Pacific Hydro gave an example of
this in evidence:
Over 10 years ago Pacific Hydro built the first
non-government wind farm in Australia at Codrington. We sourced our towers then
from Keppel Prince Engineering, who predominantly at that stage serviced the
aluminium smelter. Eleven years down the track now there are 250 people
fabricating towers. Similar things have been replicated in South Australia and
elsewhere. Portland is a fantastic example where the wind industry is the
second largest employer in the region behind the aluminium smelter.[19]
3.25
Similarly, the Australian Manufacturing Workers Union (AMWU) also
recognised that clean technology has great potential in Australia:
Because of the science, we know we have to reduce emissions.
We know the need to reduce high-emissions activities is already creating global
demand for low-emissions technology. We see the potential of clean technology
jobs. We see the $6 trillion global clean technology industry, so we know the
future of Australia's manufacturing industry is tied to the extent to which we
invest in and are successful in clean energy generation and energy efficient
technology development. We have approached the challenge of carbon emissions reduction
with our eyes wide open so we can take advantage of the opportunities that the
move to low-carbon economies will bring for Australian industry and Australian
manufacturing in particular.[20]
3.26
However, the opportunity to secure some of the clean technology industry
depends on a number of factors. As the Treasury noted in its modelling,
countries that move late will obtain less investment and employment than early
movers.[21] The reasoning behind
this is clear. Countries that already have the knowledge and infrastructure for
an industry will be cheaper places to invest, all else being equal, than
countries without them. Vestas Australian Wind Technology confirmed this in
evidence:
Vestas has previously tried its hand at establishing
manufacturing of wind turbine components in Australia, but that venture did not
succeed because we simply did not have the scale here to make sure that those
jobs were sustainable and that market was large enough. Instead, in recent
years we have added a lot of manufacturing jobs in the US and a lot in China
and still plenty more in Europe as well. We go where our markets are and where
our markets are the biggest so we cut out transport costs. That is the thing that
Australia has missed out on in recent times—we have not got to that scale. You
can model this and you can model that and everyone turns up with their own set
of independent modelling, but you are never going to know until you actually
get to that scale. If you look at what other countries have done elsewhere,
beyond our shores, those that have gone for renewable energy, and have gone big
and gone early, are the ones that have the jobs now.[22]
3.27
As time progresses, the window of opportunity for firms to invest in
particular countries to enter the market will reduce in size and significant
opportunities will no longer exist when the market matures. In evidence, the
committee asked wind generators whether the window was still open in Australia:
I think it is still open, as long as the clean energy bill
goes forward in its strength and as long as we see relatively soon—probably in
the next three to four years—a policy of what is going to happen beyond the current
large-scale renewable target, because we are all sitting here. We know we are
building projects to 2020, which will not be 2020. It will be 2018 or something
like that when it is contracted out, and then the market is finished. All we
know is that we have legislation and a Clean Energy Finance Corporation, but we
do not know what either of them are going to do. So it is very difficult at the
moment. What you will see is people investing in the large-scale renewable
program for the next six years and, if there is nothing else in front of us at
that point in time, everybody will close down shop.[23]
3.28
The clean energy bills represent an important opportunity for Australia
to further develop its clean technology sector. Significant parts of the world
economy, including Europe, are moving towards clean technology and Australia,
if it moves now, will be able to maximise its portion of these markets. The
longer Australia delays adopting these technologies, the more likely it is to
become a net importer of them. Passage of the bills will give Australian firms
a greater financial reward for clean technology innovation and give more long
run opportunities to local manufacturing.
Claims about jobs
3.29
In the debate over the effect of climate change policies on the
Australian economy, a number of claims have been made about job losses. For
example, the committee heard in evidence that the Minerals Council of Australia
claimed that 24,000 jobs would be lost from the mining sector over 10 years. On
the other hand, the Climate Change Institute has made projections that 34,000
clean technology jobs would be created from such policies, also over 10 years. The
net effect of these claims is close to zero.[24]
3.30
The Treasury has made macro-economic projections about jobs under
climate change policies compared with business as usual. In evidence, the Treasury
stated that jobs would grow by 1.6 million, with or without carbon pricing, by
2020.[25] The economy will adapt
over time with emissions intensive industries growing more slowly and clean
industries growing more quickly. The Treasury expects that Australia’s highly
skilled, educated and flexible labour force will be well placed to meet this
challenge.[26]
3.31
The committee asked Professor Bruce Chapman, an expert in labour
economics, to explain how the labour market works. Professor Chapman’s key
point is that the labour market experiences a high degree of turnover. People
are constantly entering employment, leaving employment, and changing jobs. This
idea is well accepted among labour economists. In a typical business day, 8,000
people start a new job and 7,900 leave a job.[27]
3.32
Against the background of a constantly evolving labour market, the
employment effect of climate change policies of 30,000 jobs over 10 years is a
low order issue. Professor Chapman stated:
My essential point—because I am not an expert on climate
change policy but I know a bit about labour markets—is that, if you want to
have a debate about carbon pricing, do not think about the jobs. The jobs issue
is trivial in aggregate.[28]
3.33
Although no adverse employment effects are expected at the macro level,
the Government has recognised that industry requires time to adjust to the new
arrangements. The effects of an economic shock are reduced if they are spread
over time and the economy can naturally adjust.[29]
3.34
To facilitate this adjustment, the government has announced a major
program to assist the economy in its transition to clean technologies. The jobs
and competitiveness program will allocate free carbon permits to the high
emission industries that are highly exposed to international competition.
Without this assistance, businesses in this category would face additional
costs while many of their competitors would not, thus placing them at a
disadvantage.
3.35
The most trade exposed and emissions intensive industries will receive
permits equivalent to 94.5 per cent of their emissions costs based on
historical data. Less trade exposed and emissions intensive industries will
receive permits equivalent to 66 per cent of their emissions costs, also based
on historical data. This assistance will be reduced by 1.3 per cent annually to
encourage businesses to develop clean technology. Using a historical baseline
gives companies a financial reward for reducing emissions. If their rate of
reducing emissions is sufficiently rapid, they will keep their emissions below
the number of free permits they are issued and will not pay for the emissions
they produce.
3.36
In some circumstances, industry assistance can be problematic if
businesses come to be too reliant on it. Ultimately, businesses should be
making profits, rather than asking for more assistance. The jobs and
competitiveness program manages this in two ways. Firstly, assistance will
gradually reduce by 1.3 per cent annually. The second mechanism is that the
Productivity Commission will regularly review the program, with the first
review occurring in 2014-15. If changes to the program are proposed and
accepted by the Government, businesses will still have some certainty because
changes to the program can only be made after a period of notice. The initial
rates of assistance are guaranteed for the first five years and three years notice
is required for any changes.[30]
3.37
Therefore, while the profile of Australian industry will change over
time, the Government has put in place very generous arrangements to make this
transition gradual and give businesses time to adjust. The committee expects
that, at the macro level, the changes in job numbers will be a low order issue.
At the firm level, businesses that make the best attempts to reduce their
emissions will receive financial rewards for doing so.
The coal industry
3.38
The coal industry will be affected by the legislation in a number of
ways. Firstly, industries that use coal as an input within Australia will have
to pay through some means for their emissions, so there will be reduced demand
for the product. At the start of the new arrangements, many pollution intensive
industries will receive assistance through the jobs and competitiveness
program, which will greatly reduce this effect. Industry assistance will slowly
phase out, which gives businesses time to develop clean technologies.
3.39
The main effect will be on a small number of ‘gassy’ mines that have
higher levels of methane emissions, also termed fugitive emissions, which are
released from coal seams during mining. A small number of mining companies will
need to pay for these emissions. The great majority of mines are not gassy and
so emissions from the actual process of mining are small and these mines will
be largely unaffected by the legislation. Coal exports per se will not be
affected because the burning of the coal and the emissions will occur overseas
and will not be covered.
3.40
The Government has recognised that gassy mines will require some
transitionary assistance. It has allocated $1.3 billion over six years in its coal
sector jobs package. If the package were not implemented, the average gassy
mine would face a cost of $25 per tonne of coal produced at a $23 carbon price.
The package will reduce this to $1.40 per tonne of coal produced. Assistance
will be capped, based on production in 2007-08 and 2008-09, and will cover up
to 80 per cent of fugitive emissions beyond a 0.1 tonne of CO2-e
emissions per tonne of coal produced. This system will give gassy mines an
incentive to reduce their emissions.[31]
3.41
The industry has made a number of statements that an emissions trading
scheme will place it at a considerable disadvantage. The Australian Coal
Association stated in evidence:
Our industry notes that the carbon tax is an $18 billion
impost on the coal industry and it means that the industry ends up paying,
under this particular construct, for about two-thirds of the estimated $25
billion worth of wealth transfer to households, renewables and agriculture. The
specific exclusion of the black coal industry from qualifying for trade exposed
industry status is an unjust and unfair treatment of the coal industry. That in
particular is a fundamental flaw that we see in the bills which the committee
is considering. The primary issue is that the carbon tax will undermine the
industry's international competitiveness ...[32]
3.42
The Association is particularly concerned about the price on fugitive
emissions.[33]
3.43
In June this year, the Australian Coal Association released a report by
ACIL Tasman, which used survey data of coal mines to project the impact of an
emissions trading scheme on black coal mining. The report’s key findings were
that such a scheme would cost the industry $18 billion in the first nine years
and put 4,000 potential jobs at risk (that is, reduce future growth) in the
first three years.[34]
3.44
The statements by the Association and the findings by ACIL Tasman
overlook important facts. For example, the ACIL Tasman report does not consider
whether an emissions price will give an incentive to advances in technology.
3.45
Technical change is constantly occurring and is an important feature of
economic growth. The committee asked the Construction, Forestry, Mining and Energy Union (CFMEU)
how it expected companies operating gassy mines to react to the legislation:
I see every sign that once we get past the initial lobbying,
outcries and all that sort of stuff, they will release all their accountants
and engineers on reducing their costs just like they always do—and they are
very good at it. The Australian mining industry is the best at innovating. I
fully expect them to work hard to reduce their liability to the maximum extent
and that would be a good thing.[35]
3.46
The CFMEU also noted that half a dozen gassy mines are already burning
released methane gas to generate power and income and that they expect more
mines to do so in future.[36] The Australian Coal
Association requested in evidence that the legislation be amended to only apply
to fugitive emissions once the technology was developed.[37]
However, this overlooks the point that an emissions price will be a key
incentive for industry to develop abatement technologies on a commercial scale.
If the Association’s approach were implemented, then the technology will
probably take much longer to develop.
3.47
Finally, the industry overlooks that it is receiving substantial public
assistance to adapt to the legislation through the $1.3 billion coal sector
jobs package. More widely, the industry is also receiving assistance through
the carbon capture and storage programs. The Government launched the Global
Carbon Capture and Storage Institute in 2009 to accelerate the deployment of
carbon capture and storage technology globally. Total Australian Government
funding for the Institute out to 2016-17 is $305 million. The Government has
also established the carbon capture and storage flagships program to support
industrial scale demonstrations of carbon capture and storage technology. The Government
has made $1.68 billion available under the program.[38]
3.48
The committee can only conclude that the Australian Coal Association is
seeking to inflate the effects of the legislation as a means of increasing
government assistance when it has already secured a very suitable group of
programs. The committee considers that the coal industry has received a
balanced package that will give it an opportunity to make the transition to
emissions trading. The coal industry cannot plausibly argue that it requires
more attention ahead of other sectors of the economy within climate change
policy.
Certainty for business
3.49
Although many countries and regions are moving to pricing emissions,
this will not be sufficient of itself to provide incentives to developing clean
technologies within Australia. Passing the bills will provide certainty for
business and will allow firms to start pricing risk and determining which
investments provide a sufficient return over the cost of capital. Pacific Hydro
stated in evidence:
Without the legislation and a price, they do not know how to
price that risk so they do not invest. If they can price the risk, they will invest.[39]
3.50
Westpac, which has the core function of pricing risk and deciding
whether to invest in projects, strongly supports the legislation for its
ability to reduce uncertainty and allow the Australian economy to keep pace
with the rest of the world:
Failure to implement an effective and comprehensive policy
response which includes a price on carbon as a key foundation stone will increase
the amount of regulatory uncertainty currently hindering investment in clean
technology and the structural adjustments required to decarbonise the
Australian economy. This is part of an inexorable global market trend. There is
no competitive advantage to Australian businesses to maintain the status quo.[40]
3.51
This potential for investment is not hypothetical. A leading law firm,
Baker and McKenzie, advised the committee that a great deal of investment is
pending the passage of the bills:
The committee should not underestimate how much money is
basically on hold at the moment and how much investment in the renewable
sector, in carbon offsetting and in some of the green infrastructure is all
contingent on this legislation passing—as well as the negotiation of long-term
hire-purchase agreements. A lot of the economy which operates in those sectors
is pretty much on hold, waiting for this legislation to get through.[41]
3.52
Regulatory certainty has many aspects. It applies to the future as well
as to the present. Comments have been made in political debate that the
legislation might be repealed at a later date.[42] A Parliament cannot bind
a future Parliament through legislation, so repealing the bills is clearly
possible as a matter of law. However, the costs of so doing are high. Firstly,
such action would hold Australia back from joining the rest of the world in
clean technologies and a clean economy.
3.53
Secondly, it would reduce Australia’s standing as a place in which to
invest. The committee heard evidence from the wind energy sector that
Australia’s regulatory certainty helps offset our lack of scale in
international markets:
One of the strong points that Australia has in any investment
platform—and I was in banking for a number of years—is certainty. Australia is
always seen by international investors as a market that has regulatory certainty.
It is one of our strongest platforms in investment. We do not have the scale
and cannot compete with the scale of renewables in China or the USA or parts of
Europe. Why companies like us are here in Australia, and we have been here for
seven years and we have invested nearly three-quarters of a billion dollars, is
because of regulatory certainty.[43]
3.54
The Australian national economy is highly reliant on its external
sector. From 2008-09 to 2010-11, foreign direct investment in Australia was
$48 billion, $40 billion and $37 billion respectively. These sums compare
with our GDP in 2010-11 of approximately $1.3 trillion, which means that
Australia receives between 3 to 4 per cent of its GDP annually in foreign
direct investment.[44] Repealing the clean
energy future package would place some of this investment at risk and would
reduce our current and future output, while at the same time exposing us to the
risk of trade related sanctions at a future date.[45]
Repealing the package is not a credible option.
Community understanding of the reforms
3.55
The committee received submissions and correspondence and heard evidence
that suggest a widespread lack of understanding about the nature of and
potential liabilities under the mechanism.
3.56
Given the highly contested nature of the policy debate, this is, to some
extent, understandable, as many Australians have only heard about the general
policy issue, as set out in news media reports and advertisements, which have
tended to focus on specific elements of the bills, but not the totality of
issues. While this is not unusual in the development and implementation of
public policy, it is also a matter for concern, given the intended commencement
of the mechanism on 1 July 2012.
3.57
In particular, the committee is aware that three sectors affected by the
mechanism appear to require a great deal more information to understand the
implications of the mechanism for them: small and medium-sized businesses, the
agricultural sector and local governments. The particular issues concerning
these sectors are addressed in more detail in Chapter 4.
3.58
The committee is aware of the Government’s efforts to explain the
reforms to the Australian people generally and to specific business and other
groups, through approved government advertising, the Clean Energy Future
website (www.cleanenergyfuture.gov.au) and the work of DCCEE in conducting
workshops and discussions with businesses, local councils, farmers and others,
and with their advisers.
3.59
The role of the Clean Energy Regulator will be critical in the effective
establishment of the mechanism and related reforms, which will necessarily
include considerable effort in working with those who will be liable under the
mechanism.
3.60
The committee also notes that clause 295 of the Clean Energy Bill 2011
provides that the functions of the Clean Energy Regulator include, among other
things:
n promoting compliance
with the clean energy legislation;
n conducting and
coordinating education programs about the clean energy legislation and
emissions trading schemes;
n advising and
assisting persons and their representatives about compliance with the clean energy
legislation;
n advising and
assisting persons and their representatives about the steps that can be taken
to avoid liability for a unit shortfall charge; and
n collecting,
analysing, interpreting and disseminating statistical information about the
operation of the clean energy legislation.
3.61
The committee is also aware of some fundamental misconceptions about the
operation of the mechanism, which are addressed below:
n The mechanism does
not create a broadly-based tax payable by individual taxpayers along the lines
of the Goods and Services Tax or income tax. The mechanism creates a price on
greenhouse gas emissions which is borne by those entities which produce the
emissions. The added cost to those entities of emitting greenhouse gases is
then either absorbed or passed on to consumers of the goods and services they
produce.
n The mechanism does
not, except in some limited circumstances, apply to the purchasers of energy or
energy intensive services, and so large users of energy, or consumers of
energy-intensive services (such as transport or heating) are generally not
liable entities under the mechanism. Rather, the cost of these services will
reflect the inclusion of the price on greenhouse gas emissions, and liability
will rest with the supplier of those services.
n The mechanism only
creates compliance obligations for persons who are directly liable under it and
those that may assist them in compliance.
n The changes to the
fuel tax system apply an equivalent carbon price to the use of liquid transport
fuels in specific sectors, by reducing the fuel tax credits available to
businesses. This uses the existing regulatory framework.
n The powers of the
Clean Energy Regulator to take enforcement action are limited in their
application to people who have obligations under the legislation.
n The bills do not
contain provisions which would prevent the future repeal or alteration of the
mechanism. While there may be considerable practical and policy challenges in
repealing or fundamentally altering the legislation after the commencement of
the mechanism, a Parliament cannot bind its successors through provisions in
the bills, unless the Constitution provides otherwise.
3.62
In some cases, these issues are addressed in more detail in Chapter 4.
Conclusion
3.63
Australia has had a long and extensive debate on how best we will meet our
international commitments to reduce greenhouse gas emissions. Australia has
committed to reduce its total greenhouse gas emissions by between 5 per cent
and 25 per cent from 2000 levels by 2020. This international commitment is
accepted and supported by all major Australian political parties, and reflects
an acceptance of the scientific evidence underpinning the need for global
action to address the impacts of human-induced climate change.
3.64
The Clean Energy bills will implement a market-based mechanism and complementary
reforms to meet Australia’s international commitments.
3.65
The committee heard evidence about the importance of establishing the
least-cost mechanism to meet its international commitments, and the serious and
long-term consequences of delay to the Australian economy, but also directly to
Australian citizens.
3.66
In particular, there are potentially serious consequences of further
delay for investment in Australia’s energy sector, both in terms of ensuring
Australia’s ongoing energy security and in the direct and significant costs to
Australian consumers of further delaying much needed infrastructure
investment. There are also many new opportunities for accessing cleaner energy
sources in many different contexts, which will be opened up through the adoption
of a price on greenhouse gas emissions.
3.67
The committee is aware of, and received evidence about, the claimed
impacts on Australian businesses of the implementation of the mechanism and
related reforms. Some of these views were positive and constructive, reflecting
an optimistic outlook for an Australian economy which places a price on the
emission of greenhouse gases and which endeavours to minimise the role of
government in determining the shape and direction of future business activity.
3.68
Other views were more pessimistic, suggesting the potential for the
mechanism to harm Australian businesses when international efforts to reduce
greenhouse gas emissions appear uncertain and because it is a time of global
economic uncertainty and our own economy is experiencing some specific
transitions. For these reasons, it was suggested to the committee that the
bills should either not be implemented or be delayed.
3.69
There are widespread and significant international efforts to reduce
greenhouse gas emissions, and these are increasingly linked. Perceptions about
a lack of coordinated international progress should not influence Australia’s
decision to act.
3.70
Australia has committed to reducing its own greenhouse emissions by
between 5 per cent and 25 per cent below 2000 levels by 2020 and is obliged to
take action to meet this commitment. International efforts take different
forms, and different countries are adopting measures appropriate to their
particular circumstances. The mechanism and related reforms have been designed
to suit Australia’s circumstances.
3.71
Australians are rightly conscious of the broader economic context in
which reforms take place. However, the claim that significant economic reforms
should be delayed to take account of current circumstances is one which could
be made at any time and for many differing reasons which suit the interests of
those making such claims.
3.72
The relevant consideration for governments in undertaking reforms should
be whether the reform over time will benefit the Australian economy as a whole
and whether the costs of further delay will only serve to increase future costs
to be borne by the Australian people.
3.73
The bills contain measures designed to mitigate the transitional effects
on those parts of the Australian economy and society most exposed to them,
including through the jobs and competitiveness program, assistance to
coal-fired electricity generators, specific assistance measures for businesses,
communities and others and household assistance.
3.74
While some may have specific concerns about the appropriateness and
adequacy of these measures as they may apply in specific circumstances, they
reflect a necessary balance between the need to ensure that any disadvantages
are minimised, while at the same time ensuring the transition can occur as
efficiently as possible.
3.75
The committee notes that, in the case of the jobs and competitiveness program
and the assistance to generators, the detail of these measures is still being
designed, and that many of the views received, particularly from business,
reflect this fact.
3.76
Taking into account the evidence before it, including the comprehensive
modelling prepared by the Treasury, the committee believes that the positive
outcomes flowing from commencing the shift to a low-emissions economy
considerably outweigh the transitional costs of doing so.
3.77
In the committee’s view, the bills implement the least-cost option to
meet Australia’s obligations to reduce greenhouse gas emissions through a
market-based mechanism, while also providing transitional assistance to
Australian households, businesses and others as the economy adjusts over time
to cleaner and more efficient energy sources.
Recommendation 1 |
| 3.78 |
The Senate and the House of Representatives pass the
following bills:
n the
Clean Energy Bill 2011;
n the
other 17 bills in the clean energy package; and
n the
Steel Transformation Plan Bill 2011. |