report is the latest in a long line of reports by parliamentary committees into
carbon pricing and climate change policy. It is another in which we see the
Coalition display yet again that it is their intention to do nothing about
climate change by reducing Australia's greenhouse gas emissions.
Coalition's frame of thinking outlined in the Coalition senators report is not
one we share. It is one with which we fundamentally disagree.
dissenting report comprises eight chapters.
one sets a very brief scientific basis for acting on climate change by reducing
greenhouse gas emissions. To be frank, this is the Rubicon that many Coalition
members won't cross. Their rejection of the science is fundamental to their
opposition to a carbon price.
two sets out a brief description of the economic basis for a carbon price
three deals with the myth that Australia is acting alone in reducing greenhouse
four considers the economic modelling carried out by Treasury which informs the
policy design and of the carbon price mechanism.
five considers the tenor of the evidence received concerning the small and
medium sized businesses under the carbon price mechanism.
six considers some of the long-term opportunities the carbon price mechanism
will generate for employment, innovation and business diversification.
seven considers how the carbon price mechanism will deliver long term
investment certainty and the contradictions between what some businesses tell
politicians and the media and what they tell investors.
eight considers the analyses done of the Coalition's “Direct Action” policy and
concludes that it is a sham.
A sets out the details of the carbon price mechanism architecture agreed to by
the Multi-Party Climate Change Committee.
Summary of findings:
is a strong foundation of scientific fact underpinning the imperative to act on
climate change. The Coalition majority report rejects science – it is a recipe
to do nothing.
is a sound economic basis for the implementation of a carbon price mechanism.
is not acting alone - the rest of the world is moving on carbon pricing;
Commonwealth Treasury's economic modelling of the carbon price mechanism is
robust, comprehensive and provides a considerable degree of certainty about the
likely outcomes of the introduction of a carbon price mechanism;
business will not be directly liable for a carbon price under the carbon price
effects of a carbon price mechanism on small and medium sized businesses will
be modest and should be able to be passed through to consumers who will be
adequately compensated under the household assistance package;
volume and intensity of disinformation in the public debate around carbon
pricing has created a level of confusion, particularly among small and medium
sized businesses, that threatens their ability to make sound business and
and medium sized businesses will benefit from the assistance with
assessing the impact of the carbon price mechanism on their operations and to
assist with practical measures that they can take to reduce their energy costs.
pricing will generate for businesses prepared to look beyond the short-term,
long term investment, employment and diversification opportunities that will
far outweigh any modest short-term costs;
carbon price mechanism will bring long-term investment certainty – and some
emissions intensive businesses have been crying wolf. Sections of the business
community are exaggerating the impacts of carbon pricing for political purposes
while presenting a bright future to investors.
Coalition's 'Direct Action' policy should not be taken seriously by anyone. It
is a policy designed to fail. If it meets the Coalition's emissions reduction
target, it will have torn the Commonwealth budget to shreds. It is a policy
designed to be disposed of as soon as it is convenient for the Coalition to do
Chapter 1 - The
Scientific Basis for Acting on Climate Change
is not government senators' intention to traverse in detail the science of
climate change in this report. However, it has become clear during the course
of this inquiry and elsewhere, that there is belief among some of the
participants in this inquiry and in the wider community that there is no
compelling scientific reason to act on climate change. To such people, if there
is no climate change, there is no need for a carbon price. Unfortunately, it
isn't that simple.
Senators wish to make their position clear. There is absolutely no doubt. The
science is irrefutable. The world's climate is changing in ways that will have
a negative impact on the environment, ecosystems and human systems including
our economy, our cities, our food production systems and much else. This
climate change is largely human induced and is occurring at a far more rapid
rate than any naturally occurring climate change in the geological past.
work of the Australian Academy of Science clearly points to greenhouse gas
emissions from human activity causing recent changes in the earth's climate and
anticipates global temperatures continuing to rise significantly over the next
century and beyond.
The Bureau of Meteorology has clearly presented
the scientific basis for greenhouse-gas-induced climate change within the
context of a complex, highly interactive, naturally-variable and
human-influenced global climate system.
a lot of the science of climate change is complex, much of it is high school
textbook material that is over a century old.
scientific understanding of the physics of radiation, combined with our
understanding of climate change from the geological record clearly demonstrates
that increasing greenhouse gas concentrations will inevitably drive global
warming. It is a scientific fact first described by Joseph Tyndall in 1861,
that in the absence of the small fraction of the atmosphere comprised of
naturally occurring greenhouse gases the surface of the planet would be 30
degrees Celsius cooler than it is today. The natural greenhouse effect created
by this small fraction of the atmosphere stops us freezing. To suggest that if
we double the concentration of greenhouse gases in the atmosphere and there
will be no effect, much less a warming of the planet; defies century old
science, which ironically includes the science that is behind most of the
technological advances of the past century or two.
far as we know - which is a lot - what we have on Earth is not replicated
anywhere in the known universe; which is a very, very big place. Earth is a
freak of nature and cosmology. It would be a tragedy that for reasons of
indolence or greed or ignorance or negligence, humans were to do irreparable
damage to the natural systems that support our civilisation having had the
opportunity and the means to avoid it.
this, the science underpinning our knowledge of climate change has been challenged
by a mendacious, well organised and well funded "climate change
sceptic" movement whose goal has been to cast doubt and discredit climate
change science on behalf of interests who for commercial and ideological
reasons are opposed to reducing greenhouse gas emissions.
Authors of Merchants of Doubt, Naomi Oreskes and Erik Conway, supported
by extensive documentary evidence, show that not only is climate change denial
using the same misinformation techniques as the tobacco industry used to sow doubt
about the link between smoking and cancer, that industry used to sow doubt
about the effects of acid rain on northern hemisphere forests and that the
chemical industry used to deny the link between CFCs and ozone depletion; but
that it is often the same groups and the same people. These anti-science
activists often hide behind names as unlikely as “Friends of Science”.
Australia we see a similar phenomenon, with front organisations often using
names that aim to capture the cachet of a well-known “martyr”. They present
themselves as oppressed outsiders being ignored by an elite establishment, when
in reality they are ignoring or distorting accumulated scientific knowledge.
acknowledge that people are free to believe whatever they wish. On the subject
of climate science, we prefer the scientific conclusions of scientific
institutions including the Australian Academy of Science, the CSIRO, the Bureau
of Meteorology, the Royal Society, NASA and the university-based research
academies around the world who provide the evidence on which governments must
base their policy responses to climate change.
Chapter 2 - The
Economic Basis for a Carbon Price Mechanism
change needs to be understood in the context of economic history. Since industrialisation,
the global economy has been based on an energy and production system that fails
to recognise carbon dioxide and other greenhouse gases as pollutants. The cost
of greenhouse gas pollution has not been borne by its producers, but has been externalised
to be borne by the environment and society as a whole. High school business
studies students understand the concept of externalised costs. They understand
that a cost externalised is a cost borne elsewhere.
the price of most goods and services we consume does not include the external
cost to the climate and the environment associated with greenhouse gases
emitted in their production and consumption.
costs need to be considered when governments, businesses and individuals make
decisions about what to produce, what to invest in and what to consume. This
means that the true cost of greenhouse gas pollution needs to be internalised
to its production and use, or put another way; greenhouse gas emissions need to
have a price.
is price that changes behaviour. Price influences production and consumption
decisions, capital allocation and investment flows. In the case of a carbon
price; towards production, consumption and investment in goods and services
with lower embedded emissions.
carbon price will create the incentive for large emitters to reduce pollution,
and stimulate investment in low emissions technologies and processes. It will
provide greater certainty for business investment. A carbon price will enhance
Australia's long-term economic competitiveness.
will also enhance our ability to influence the direction of international
climate change negotiations and provide encouragement for an agreement
including all major emitters.
a carbon price has been established and the incentives have been put in place
to move to a low carbon pollution economy, we will decouple the historically
close relationship between greenhouse gas pollution and economic growth. A
relationship which has our nation’s carbon pollution heading to be 24 percent
above 2000 levels by 2020 and 44 percent above those levels by 2030 if we do
nothing to curb emissions.
carbon price is an essential component of any credible plan to reduce
greenhouse gas emissions cost-effectively. A carbon price gets to the heart of
the issue: it makes activities that cause the problem more expensive, and
activities that address the problem less expensive. This is a conclusion shared
by the OECD, the IMF, the World Bank, the Stern Review, the work undertaken for
the Howard Government by Professor Peter Shergold, the Garnaut Review, and the
recent work by the Productivity Commission.
is worth noting that this view has been the outcome of 37 inquiries regarding
action on climate change. Each inquiry recommending that Parliament take action
to price carbon and that the most effective measure for taking action on
climate change is through a market based mechanism.
This view is
shared by the many of the witnesses who gave evidence to the Committee
agree that a market based approach can be a very efficient economic instrument
to deal with it. That is not the only instrument. We have said elsewhere in
debates in Canberra, and I do not know if you know about these discussions,
that it needs to be a comprehensive and broad ranging approach, not just a
believe it is important to have a measured policy response to the issue of
climate change. Putting a price on carbon emissions, in our view, represents an
economically effective way to reduce carbon emissions... One of the most
compelling reasons why we support a price on carbon is that it will provide
business and investors with the certainty and confidence that they require to
make long-term decisions about the future allocation of their capital. 
pricing works because it sends a clear signal across the economy. It creates an
incentive to uncover the cheapest ways of reducing emissions. It allocates
capital to improve efficiency and reduce emissions intensity. Over time, the
most efficient, least polluting firms will have an advantage over less
efficient, higher polluting firms. Pricing carbon will break the link between
economic growth and emissions growth.
modelling concludes that the Australian economy will continue to prosper while
cutting carbon pollution. Real gross national income per person is expected to
increase from today’s levels by around $9,000 per person to 2020 and more than
$30,000 per person by 2050. Employment is projected to grow strongly with a
carbon price. Around 1.6 million jobs are projected to be created to 2020 and a
further 4.4 million to 2050.
the sectoral level, a carbon price will change the way we produce electricity.
Over time it will dramatically reduce our reliance on emissions-intensive
coal-fired generation, and increase our use of renewable energy, gas and other
low emissions technologies.
noted by Nicholas Stern, “Greenhouse gas emissions are externalities and
represent the biggest market failure the world has seen.”
dealing with this market failure, we face a choice about how to reduce
greenhouse gas emissions.
the one hand, a market based price on emissions that reflects the costs they
impose on society and the environment signals to market participants that they
need to adapt and create solutions that incorporate the cost of their emissions
into the price of their goods and services. This is the price incentive to
the other hand, there is another, non-market, subsidy approach to reducing
emissions; that is by regulation through which government intervenes in
decisions about investment and capital allocation. The price for the right to
intervene directly in these decisions is a subsidy paid off the government's balance
sheet to the emitter. Under this approach, the government seeks to control and
direct production and consumption decisions by individuals and firms by
provision of a subsidy allocated through a process which involves no market
transaction for a good or service.
former market based price is what characterises the government's approach
through the carbon price mechanism in its Clean Energy Future legislation. The
latter non-market regulatory approach is what characterises the Coalition's
Direct Action policy.
carbon price will encourage the largest emitters to reduce the greenhouse gases
they put into the atmosphere. A carbon price will give economic impetus to the
efforts of scientists, researchers, investors and entrepreneurs to find
less-polluting ways of doing the things we take for granted in a modern
economy. It will use the fundamental economics of markets to kick-start this
transformation and to ensure the transformation unfolds in the lowest cost way.
pricing is an economic reform that will put a price tag on activities that have
significant negative spill over effects on the rest of society. In this way,
the costs of carbon pollution will be factored into our behaviour and our
decisions in the future. The end result will be lower carbon pollution, reduced
risks of dangerous climate change and better outcomes for society as a whole.
Chapter 3 -
The Rest of the World is
the course of this inquiry, many submitters and witnesses expressed a view that
while they accept the science of climate change and that there ought to be
carbon price mechanism of some sort to provide a price incentive to reduce
emissions, Australia is acting alone on pricing carbon and will be at a
disadvantage to our trading partners and competitors until the rest of the
world acts. Essentially, the position being put by these submitters and
witnesses is that Australia should continue to wait-and-see.
Queensland Chamber of Commerce and Industry, at a public hearing Brisbane told
business acknowledges that it has a social responsibility to minimise the
impacts that its activities have on the environment. It is also aware that it
needs to work cooperatively with all levels of government and the wider
community to address important environmental issues such as climate change.
However, overwhelmingly, the majority of Queensland businesses do not support
the introduction of a carbon price mechanism, especially in the absence of
international agreement and unilateral (sic) action to address climate change.”
Australian Petroleum Production and Exploration Association put it this way:
supports a national climate change policy that delivers abatement at least cost
and facilitates investment decisions that are consistent with there being an
international price on carbon.”
Minerals Council of Australia told the Committee that they “accept the concept
of global warming” and are “not interested in a debate about the science”.
Furthermore, “We accept the concept of the precautionary principle.” However,
they placed a caveat on actually doing something about it, saying before a
carbon price mechanism could be implemented, three “platforms” need to be
“aligned”; one of which is “global action that is concerted and comparable by
all major emitters.” Or in other words, “A global agreement that covers all
Australian Coal Association, representing the black coal industry, told the
black coal industry supports introduction of a carbon price as part of the
efforts to reduce Australia's greenhouse gas emissions, provided this is
consistent with sound policy principles and the national interest. But
Australia must act in step with, not ahead of, our major trade competitors and
problem with a wait-and-see approach is that it delays reform that is
inevitable and the delay increases the cost. Delay now can only add to business
and investment uncertainty. For firms to be able to make long-term investment
decisions, we need a credible, coherent, long-term, market price signal that is
efficient, least-cost and provides a certain policy framework.
the question of international action, the Productivity Commission, in its
recent report, Carbon Emission Policies in Key Economies
found that in the nine countries it studied: China, Germany, India, Japan, New
Zealand, South Korea, the United Kingdom and the United States who between them
account for a substantial portion of global GDP:
than 1000 carbon policy measures were identified in the nine countries studied,
ranging from (limited) emissions trading schemes to policies that support
particular types of abatement technology.”
measures focus to varying degrees on emissions from electricity generation and
transport sectors, other sectors are commonly targeted as well. For example,
most countries were found to have policies encouraging reafforestation or
the countries studied by the Productivity Commission, 89 countries,
accounting for over 80 per cent of global emissions and over 90 per cent of
global GDP, have pledged to reduce or limit their carbon pollution by 2020
consistent with their commitment made at Copenhagen to take steps to limit
global warming to an upper limit of two degrees Celsius.
of countries have already started the transformation to a low pollution
economy: thirty two countries and a number of sub-national economies including
US states whose economies are bigger than Australia's already have emissions
top five trading partners — China, Japan, the United States, Korea and others
(New Zealand, the United Kingdom, Germany, Italy, France and the Netherlands)
have implemented or are piloting emissions trading schemes or carbon taxes at
national, state or city level.
Zealand introduced a trading scheme in 2008 initially covering only forestry
but in 2010 expanded it significantly to cover liquid fossil fuels, stationary
energy and industrial processes.
has indicated in its current five-year-plan that it will introduce emissions
trading pilot schemes in a number of provinces, including the industrial
centres of Beijing, Shanghai and Guangdong. The World Bank recently reported
that these regional schemes may be expanded to a national scheme by 2015. China
has the world’s largest installed renewable energy electricity generation
capacity - in 2009, China added 37 gigawatts of renewable power capacity, more
than any other country in the world.
has a tax on coal which is expected to generate over half a billion dollars
annually and will be directed to funding research into clean energy
US is committed to achieving its target to reduce its emissions by 17 per cent
by 2020 (on 2005 levels). The US EPA is regulating large stationary sources of
carbon pollution to reduce emissions and incentivise the uptake of clean
technologies, and is increasing fuel efficiency standards for cars and light
trucks. President Obama has committed to establishing a clean-energy standard
to double the share of clean energy (renewables; nuclear; coal with carbon
capture and storage; and “efficient” natural gas) in the electricity supply mix
from 40 per cent to 80 per cent by 2035.
Productivity Commission analysed all of the policy approaches and the various
complementary assistance measures that have accompanied them in the countries
where they apply. They concluded:
“In summary, while the overall impacts of the policy measures analysed appears to be relatively small for most countries, the consistent finding from this study is that much lower-cost abatement could be achieved through broad, explicit carbon pricing approaches, irrespective of the policy settings in competitor economies.”
Senators are of the view that claims that other countries are not acting are of
the same character as the claims made by climate change “sceptics” about
climate science. They are wrong, ill-informed and in our view merely intended
to sow doubt in order to discredit Australian policies to reduce greenhouse gas
Chapter 4 - Treasury
Modelling: Robust and Provides
of the perennials of parliamentary inquiries into economic policy is the length
and vigour of discussions about economic modelling. This inquiry has been no
July 2011, the Treasurer and the Minister for Climate Change and Energy
Efficiency released the details of economic modelling prepared by Treasury to
inform the policy design and public discussion of the carbon price mechanism.
economy-wide modelling contained in the report did not include all the elements
of the final policy architecture agreed to by the MPCCC, including a slightly
higher start price. An update to the modelling was published in September 2011
taking into account the finalised policy details.
modelling prepared by Treasury strongly indicates that the cost to Australia of
reducing greenhouse gas emissions through a carbon price mechanism will be very
Australian economy will continue to grow, incomes continue to grow and the
carbon price mechanism will decouple growth from greenhouse gas pollution and
achieve the bipartisan target of reducing emissions to 5 per cent below 2000
levels by 2020 and 80 per cent below 2000 levels by 2050.
carbon price mechanism is expected to slow Australia's average income growth by
around 0.1 of a percentage point per year. In practice, this means that if
average incomes were to grow by say, 3.4 per cent per year instead of 3.5 per
cent per year; it will take 21 years and two months instead of 20 years and
seven months for average incomes to double – a difference of a mere seven
National Income (GNI) per person will grow from $55,800 in 2010 to $64,800 in
2020 and $86,900 in 2050.
Domestic Product will increase from $1.24 trillion in 2010 to $1.72 trillion in
2020 and $3.56 trillion in 2050.
employment will grow from 11.4 million in 2010 to 13.0 million in 2020 and 17.4
million in 2050.
wages will continue to grow.
annual growth in Gross State Product for each of the States will continue to
grow in line with recent trends. Under all policy scenarios modelled, all state
economies grow strongly and greenhouse emissions are reduced significantly from
what they otherwise would be.
the carbon price mechanism every sector in the Australian economy continues to
grow up to 2020 and beyond.
output of agriculture increases 12% to 2020;
output of mining increases on average 77% to 2020, with output of sub-sectors
such as gas, iron-ore and non-ferrous ores doubling to 2020;
output will grow by 5% to 2020, with output in sub-sectors including alumina,
cement and steel expected to enjoy growth of 53%, 34% and 10% respectively;
output will grow by 51%;
freight transport output will grow by 38% to 2020;
output of agriculture increases 131%;
output of mining increases on average 201%, with output of sub-sectors such as
gas, iron-ore and non-ferrous ores doubling to quadrupling by 2050;
output will grow by 69%, with output in sub-sectors including alumina, cement
and steel expected to enjoy growth of 70%, 130% and 79% respectively;
output will grow by 195%;
freight transport output will grow by 225% to 2050.
great deal of effort was made by a number of contributors and participants in
the inquiry to cast doubt and create uncertainty over the modelling prepared by
Treasury. Treasury officials were questioned repeatedly and at length by
Senators on issues going to the robustness of their modelling.
was repeatedly questioned on whether or not it would, to paraphrase, “release
all the information in the modelling?” Presumably the purpose of the
questioning was to imply that the modelling and its results have not been open
and transparent. It has ranged over whether the modelled scenarios have been
accurately reported, whether the modelled scenarios actually reflect the final
policy and whether the modelling software used could be made publicly
available. Significantly, Treasury was pressed by the Coalition on why it had
not modelled an Australian carbon price under a “do-nothing” scenario on the
part of the rest of the world; the Coalition's preferred excuse to do nothing.
Henry Ergas gave evidence to the Committee and has written op-ed pieces in the
press claiming that Treasury has not been open and transparent in relation to
the modelling of the carbon price mechanism.
cause was later taken up by Senator Boswell:
Senator BOSWELL: My question is: will
you allow people access to your modelling to understand the assumptions and
Ms Quinn: We have provided
information about assumptions. That is in the public domain and people can draw
their own conclusions from the assumptions.
Senator BOSWELL: I know that. There
are very prominent and experienced people, Treasury modellers and accountants,
that have gone on record as saying that your modelling has not been released.
Certainly you could say that it is pointless putting 10,000 pages or 14,000
pages or 1,000 pages—whatever it is—of modelling in front of me. I would accept
that. I do not want it; I could not read it. But there are people who can.
Henry Ergas is one of Australia's most prominent people who investigate things
like this. He writes for the Australian. He has said that the Treasury
modelling has not been released publicly. He has asked, in order that taxpayers
can scrutinise all the data, which is financed by them, for you to fully
release the modelling. Those are not his exact words; I do not want to suggest
that that is what he said. He is an economist. He will be coming to this
committee after lunch. He is a professor at the University of Wollongong. He
has made the statement, and I have seen it made by other prominent economists,
that the modelling has not been sufficiently released and they cannot come to
conclusion because of that. My question is: would you allow people like
Professor Ergas to have a look at your modelling?
Ms Quinn: You have raised Henry
Ergas's statements in terms of the economic modelling.
Senator BOSWELL: No, I have not raised
his statements. I raised the point that he has made about the modelling having
not been released. I have not used any quotes.
Ms Quinn: Sure. I take issue
with that statement that the modelling has not been released. There are
hundreds of pages of details about the modelling that are in the public domain.
Senator BOSWELL: Absolutely.
Ms Quinn: So the results of the
modelling have been released in a comprehensive and transparent way.
Senator BOSWELL: Would you—
Dr Gruen: Senator, could you
let Ms Quinn answer the question without interruption?
Senator BOSWELL: I will let Ms Quinn
answer the question but she obfuscates the question all the time. She is good
at it, and good on her. That is what she is supposed to do. She is supposed to
protect the government and she is doing it brilliantly. But, sitting on this
side of the table, it does get a bit wearing. Proceed, Ms Quinn.
Ms Quinn: In relation to key
assumptions that we have put in the public domain around various elements such
as the marginal abatement cost curves, it does appear, despite putting
transparent information in the public domain, that it is not always accurately
interpreted. For example, Henry Ergas has made the statement that the marginal
abatement cost curves are not costed, when in fact they are. He has also made
statements about banking and borrowing and international assumptions and how
that is going to significantly alter the assumptions. Those statements are also
completely inaccurate representations of the modelling. He has also made
statements that the restrictions on international permits as the government has
announced are significantly at odds with the Treasury modelling, which is also
an incorrect statement. There are many incorrect statements in Henry Ergas's
articles relating to publicly available information.
The models that
Treasury has used are available publicly for people to use, so there is nothing
to prevent people from picking up those models—as Frontier Economics has
done—and making their own assumptions, drawing on the information available, to
come up with different results. In that sense, Treasury is using publicly
available information. We then draw on the expertise within Treasury and other
organisations to come up with a comprehensive analysis about what we expect the
impact of carbon pricing will be on the Australian economy.
Senator BOSWELL: I take from that that
you would be willing to provide any information that Professor Ergas wanted. Is
that your statement? You would make available to him—
Ms Quinn: We are more than
happy to engage with people about the information that has been made public—
Senator BOSWELL: I know what
Ms Quinn: to clarify inaccuracies. We would be very happy for people to ask us questions
to prevent inaccuracies being perpetrated, and that would be good for public
debate. We are very open to answering questions that are put to us, as has been
demonstrated through the many appearances before the Senate and other engagements
with stakeholders. In terms of providing detailed information about the
modelling, we have provided—
Senator BOSWELL: Please do not try to wind the clock down. I am
trying to ask questions. You are trying to wind the clock down.
I am trying to answer your question. In providing information to the public
domain, we have provided a comprehensive amount of information. Treasury does
not own these models, so it is not possible for us to hand over someone else's
model. These models are publicly available. They are purchased and available
from organisations within Australia. There is nothing preventing people picking
up these models and doing modelling if they have a desire to do so.
Senator BOSWELL: So, if Professor Ergas were to go with a cheque in
his hand and say, 'I want the modelling and I am prepared to pay for it,' it
would be available to him? Is that what you are saying?
He would be able to pay for the models used by Treasury and, yes, he would be
able to receive those models.
Senator BOSWELL: Comprehensive models?
Yes, he would be able to obtain them from the providers of those models.
theme was reprised later in the hearing:
CHAIR: I do not want to
waste much time on it here. You have taken it on notice. The Hansard record
will show that, from the beginning of our conversation, you said that some
modelling was reflected in the government's report and that some other
modelling results were not picked up in the government's report.
Dr Gruen: No, I did not say that.
CHAIR: Well, you did. You
said: 'If all of the modelling results were reflected in the report, it would
go to thousands of pages.' That is what you said.
Dr Gruen: Let me be completely
clear. In the process of running these models, one runs them many, many times
to get to a stage where one is comfortable with the outcome, and the process of
writing this up into a coherent report involves putting down the models and the
results that make sense—
CHAIR: Make sense to whom?
Dr Gruen: To anyone. There isn't
a modeller in the world who would, in the process of doing a 12-month modelling
Ms Quinn: Just to clarify,
modelling that we do for the government is advice that we provide to the
government, whether that advice is a spreadsheet with a number or a table with
some words in it. It is not the case that Treasury is able to provide all
advice provided to the government to either the Senate or private individuals
through the Freedom of Information Act.
CHAIR: The context of the
question was about political—
Ms Quinn: To clarify, we work
for the government. We provide a large amount of analysis for the government
that they use as part of the cabinet process, as part of their deliberations
and as part of policy processes. We have published information about the impact
of the carbon price on the Australian economy reflecting the government's
policies. We are updating that analysis to reflect elements we did not have
time to complete, and that information has been made public. So it is not
possible for us in the context to provide all the advice we provide to
governments to this committee, and that will likely be the answer.
CHAIR: But not all the
numbers were included in the report, and I want to know whether on notice you
can provide us with all the numbers.
Ms Quinn: I am happy to take
this on notice and be corrected, but my professional assessment would be that,
as part of the drafting process, there was no reduction in the quantity of
information in terms of the numbers in the report. The drafting suggestions
were around changing words here and there and clarifying things. If you get a
bunch of modellers writing a report, other people read it and ask questions and
you clarify it.
CHAIR: Were all the Treasury
modelling results included in the draft report or not?
Ms Quinn: The draft report put
together a comprehensive story, so, no, not all the results that were done were
in the draft.
CHAIR: Indeed. I am asking
you to consider whether you can provide to us on notice that which was not
included so that we can have the full picture. You may say no and you may say
yes. I want to know whether you can assess that and provide it to us on notice.
THISTLETHWAITE: Is the approach that has been taken in preparing this published
report the same approach that Treasury has taken with previous governments of
any political persuasion? When the Intergenerational report was compiled
and when the published reports associated with the GST were compiled, was the
process of Treasury's interaction with the government the same approach as has
been taken on this occasion?
Dr Gruen: Yes, absolutely, and
there is a—
CHAIR: The answer was yes;
that is great.
Dr Gruen: Can I finish the
CHAIR: You answered the
Dr Gruen: I will decide whether
I have answered the question.
CHAIR: No, you will not
decide whether you have answered the question.
Dr Gruen: Excuse me, I would
like to give an answer which is the truth and is not misleading. Can I do that?
CHAIR: Dr Gruen, we now have
25 minutes left. You have answered the question.
Dr Gruen: You interrupted my
answer. I would like to—
THISTLETHWAITE: I would like to hear the answer, Chair, if I can.
CHAIR: It is now up to
Senator Madigan to ask some questions.
Dr Gruen: Excuse me, I have not
finished my answer. May I finish my answer or not?
CHAIR: Are you going to
spend another 25 minutes providing us an answer?
Dr Gruen: No, I am not.
CHAIR: How long are you
going to be?
Dr Gruen: I am going to be
relatively quick, but it is not a single-word answer.
CHAIR: Okay then, go
Dr Gruen: Thank you. It is a
little hard for me to keep my train of thought when I am being told that I am
not allowed to answer the questions.
CHAIR: I think that you are
Dr Gruen: The question was: is
the approach we have used to writing a report and interacting with the
government the same as it was in previous reports. The answer to that is:
absolutely it is the same and the process involves trying things out and making
judgments. There is a lot of toing and froing, not just with the government but
with other experts. It is not a simple process where you know exactly where you
are going. It is a process that takes time and, at the end, you try and write a
coherent report that explains to the best of your professional ability what
useful results you have found. At no time could you possibly put down everything.”
issue was taken up with Treasury again at the hearing on 23rd
Senator CAMERON: So has any of the
modelling that has been done or any of the questions that you have had in the
numerous parliamentary inquiries that you have been involved in caused you to
think that Treasury has got it wrong, that there is a problem with what we have
done and that we need to reassess our fundamental analysis?
Ms Quinn: We certainly take on
board the issues raised in the committees, particularly from stakeholders and
individual companies who raise concerns and provide additional information in
the public domain. We have certainly over the years taken on board that
information and we have, in fact, between 2008 and 2011 had quite detailed
conversations with various industries who had concerns about the analysis in
2008. We have worked through those concerns and taken on board the additional
information that has been made available to us and have incorporated that
information. We have taken on board changes in the economy, changes in
technology options and different concerns people have raised about their particular
industry that we may not have looked at in as much detail as they had. We have
been very open to taking on board information that people have provided to us.
We are very keen, if people have concerns, for them to raise them with us so
that we can talk through those. Sometimes it is a matter of talking through
what we have done so that people understand both sides of the issue and often
there is no disagreement. There might appear to be disagreement at the start
but often, through communication and discussion, things are clarified. We have
not ignored any information that has been brought to us. We have always looked
at it clearly, analysed it, asked questions and incorporated it where we can
and where we think it is important.
Senators have listened carefully to these exchanges during the inquiry and
considered carefully the responses provided by Treasury during some robust, but
nonetheless legitimate testing of the modelling. We are satisfied that none of
the at times robust attacks on Treasury's modelling have in any way cast doubt
on its results. We are satisfied that the modelling exercise has been robust,
has taken into account all relevant and necessary considerations and parameters
and provides with a considerable degree of certainty the likely outcomes of the
introduction of the carbon price mechanism adopted as policy by the government.
stands in contrast to modelling released by the New South Wales Premier which
was intended to cast doubt on the Commonwealth Treasury's modelling.
modelling was conducted on behalf of the NSW government by Frontier Economics
and stands as a case study in how modelling shouldn't be done if it is to
withstand more scrutiny than the news cycle will normally allow. It and the
subject of electricity prices generally was the subject of questions asked of
Treasury at the public hearing held in Canberra on 10th August 2011.
Economics completed modelling for the NSW Treasury on the impact of the carbon
price, focusing on state, regional and sectoral effects. The modelling uses the
Monash Multi-Regional Forecasting model (MMRF), one of the models used by the
Treasury in the Strong Growth, Low Pollution: Modelling a Carbon Price (SGLP)
report, adopting similar assumptions.
an aggregate level, the Frontier Economics modelling endorses the Commonwealth
Treasury report that shows carbon pricing will achieve deep cuts in emissions
with only a modest effect on economic growth.
NSW Treasury notes that the SGLP modelling is ‘considered, rigorous and
complex’. Frontier Economics notes that ‘[a]t an aggregate level, the modelling
results in this report are broadly consistent with the Commonwealth Treasury
with the findings in the SGLP report, the Frontier Economics modelling finds
that carbon pricing will have a modest impact on Gross National Income with a
reduction of around 0.5 percentage points in 2020 against business as usual.
central claim of the modelling, that the economic impact to 2030 of carbon
pricing will be larger on the NSW economy than on any other mainland state, is
at odds with previous modelling that Frontier Economics has undertaken.
analysis undertaken by Frontier Economics projected the impact of carbon
pricing on NSW to be closer to the national average.
the new Frontier Economics modelling suggests that the largest negative impacts
will be on the Tasmanian economy, when previous Frontier Economics modelling
showed a positive impact from carbon pricing.
Economics suggests that the reduction in NSW gross state product due to carbon
pricing will be 1.5 per cent in 2030, the greatest of any mainland state, while
the SGLP modelling found a reduction of 1.0 per cent in 2030. The Frontier
Economics analysis also includes sub-state regional results. However, the
Australian Treasury does not consider this analysis sufficiently robust to
provide insight into the effects of carbon pricing. Rigorously modelling the
interplay between carbon pricing, industry growth, wages and employment growth
at a regional level is not possible with the tools available.
of the regional results in the Frontier Economics report are difficult to
reconcile, for example, the analysis finds that output in the Hunter Valley
will grow by roughly 30 per cent over the decade to 2020 with carbon pricing,
while finding at the same time employment declines. Frontier Economics say this
is because productivity improvements outweigh output growth.
Frontier Economics report shows that slower employment growth for some states
and regions will be largely offset by faster employment growth in other states
NSW Treasury report, which accompanies the release of the Frontier Economics
report, claims that retail electricity prices will rise by around 15 per cent
Treasury estimates are not based on electricity market modelling, but partial
analysis of the impact of a carbon price on residential electricity prices.
Further NSW Treasury estimates of the impact of carbon pricing on electricity
prices in the range of 14 to 20 per cent are based on outdated analysis of the
Carbon Pollution Reduction Scheme, and higher pass through rates of carbon
prices into retail electricity prices than estimated in the latest Treasury
high pass through rate used in the NSW Treasury analysis appears to indicate
that electricity generators will be able to pass on between $40 to $60 for
every $23 tonne of carbon emitted. This very high rate of pass through appears
inconsistent with NSW Treasury arguments around extremely low pass through
rates impacting the asset values of NSW Government owned coal-fired electricity
SGLP modelling showed that electricity prices will rise with carbon pricing,
but by around 10 per cent in the first year of the scheme with a $23 carbon
price, and that household assistance package will help households with the
increase in the cost living. Attachment A contains further details of
comparison between the modelling.
senators do not accept the results of the modelling undertaken by Frontier
Economics. The Commonwealth Treasury modelling for the Strong Growth, Low
Pollution: Modelling a Carbon Price (SGLP) report shows gross state product
of just 1.0 per cent below the base case in 2030, while Frontier Economics
shows 1.5 per cent.
Government has recognised that some industries and communities may be
disproportionately affected in the transition to the carbon price. The Latrobe
Valley was identified by the Garnaut Review as a region severely affected by
national emissions reductions. Brown coal electricity generation is one of the
most emissions-intensive industries in Australia and there may be limited
opportunities for the employment of people who may be made redundant in the
event of industry decline.
the Hunter Valley is identified by some as being adversely affected, it is
likely to face less severe impacts due to the ongoing strength of coal exports
and other employment options.
Government is implementing a range of measures to assist sectors and regions
with the transition to a low pollution economy:
free permits to emissions-intensive trade-exposed industries to guard against
the risk of carbon leakage and to support jobs;
direct assistance to the electricity generation industry of around $5.5 billion
in free permits;
assistance worth over $1.3 billion to the coal mining sector to support their
transition to a carbon price; and
Government has also set aside $200 million to provide support for communities
and regions that experience acute impacts from the carbon price.
by the Commonwealth Treasury shows that NSW coal-fired generators will continue
to supply electricity and operate profitably. This modelling also shows that
some low emissions NSW Government owned generators benefit from the
introduction of a carbon price through increased output and profitability.
the Clean Energy Package’s Energy Security Fund, NSW Government generators will
be eligible to apply for assistance to refinance existing debt and purchase
future vintage carbon permits. The NSW Treasury’s claim that NSW generators
would not be eligible for this assistance is incorrect.
NSW Treasury’s claim that the carbon price will increase household electricity
prices in NSW by around 15 per cent is based on partial analysis.
Commonwealth Treasury's modelling estimates the carbon price will contribute to
a 9 per cent increase in household electricity prices in NSW over 2013-17. This
analysis is based on three different approaches - two specialist electricity
sector consultants and an Australian Treasury model - all of which give
carbon price will be accompanied by an ongoing household assistance package
worth $14.9 billion over four years. Household assistance will be targeted to
those who need it the most and for millions of households; this assistance will
outweigh the price impact of a carbon price, including its impact on
Chapter 5 - Treatment
of small and medium enterprises
common theme among small and medium sized enterprises (SMEs) providing evidence
to the inquiry was their perceived inability to pass on, through increased
prices, their increased costs due to higher energy bills in circumstances where
the business is neither trade exposed nor emissions intensive.
example, Geelong Galvanising, who gave evidence at a public hearing in Geelong,
came to the inquiry with grave concerns about the future of its business under
a carbon price mechanism.
company expressed concerns about increased energy costs on its viability,
citing imports of pre-galvanised steel items from China as its principal
competition. The company indicated that galvanising and its associated
processes is an energy-intensive business.
an email sent to the Committee secretariat prior to the public hearing in
Geelong, the company outlined its current annual energy costs, which were
confirmed during the course of the hearing as follows:
company indicated it has an annual turnover of approximately $11 million.
has modelled energy cost increases for electricity, gas and diesel at 10 per
cent, 9 per cent and six cents per litre respectively.
exchange during the hearing illustrates the issue and the confusion about
whether increased energy costs of small and medium enterprises can be passed
Senator CAMERON: Let me come to this
wealth destruction and the massive job losses. How much is the carbon tax going
to increase the cost of you doing business? Have you done any analysis on that?
Mr Chaston: Do you want to break
it down to gas or electricity or—
Senator CAMERON: Yes. I have done the
breakdown on the figures.
Mr Chaston: Two cents a megawatt
hour on electricity, so 25 per cent. I think it is $1.18 a gigajoule in gas,
which is another 20 to 25 per cent. It is 6c a litre for diesel. Online
suppliers of chemicals is an unknown factor. We do not know how they are going
to be affected. The paint and blast side of the business is of course going to
go up because of the energy intensive way of—
Senator CAMERON: Just before you go
on—I am happy for you to go through some more—let's come back to the big ones.
In your submission you say that your annual turnover is $11 million.
Mr Chaston: That is our plant
Senator CAMERON: Your electricity
costs are $100,000.
Mr Chaston: Yes.
Senator CAMERON: You have had
significant increases in electricity over the last few years in Victoria,
Mr Chaston: Yes.
Senator CAMERON: Not associated with
the carbon price?
Mr Chaston: That is correct.
Senator CAMERON: According to
Treasury, the carbon price would increase electricity costs by 10 per cent. Are
you aware of that?
Mr Chaston: I have only got the
figures that we put at a bit more than 20 to 25 per cent.
Senator CAMERON: Where do you get 20
to 25 per cent? Nobody else has got that figure.
Mr Chaston: It is based on 2c a
Senator CAMERON: Where do you get the
2c a kilowatt hour? Where does that come from?
Mr Chaston: There was a report
put out by Ernst & Young dealing with the carbon tax for the next four
years. I am sure you have read that.
Senator CAMERON: The Treasury say that
the increase to electricity would be 10 per cent, so that is $10,000.
CHAIR: In year one.
Senator CAMERON: $10,000 per annum.
Gas would go up nine per cent. That takes you from $75,000 to $81,000. If you
use about 5½ thousand litres of diesel, which is about average for the $8,000
that you say, it would be up 6c a litre. We agree with that. So the overall
cost to you in terms of energy costs is about $17,000 on a turnover of $11
million. Is that correct?
Mr Chaston: There are other
Senator CAMERON: That is 0.155 per
cent of your turnover. Are you saying that, by increasing your costs by 0.155
per cent, that is destroying your wealth and there will be massive job losses
at your company because of that?
Mr Chaston: Am I saying that?
Senator CAMERON: Yes. That was your
Mr Chaston: That is what possibly
could happen. I am hoping it won't.
Senator CAMERON: That could possibly
happen by an increase of 0.155 percent. What agreements do you have with your
employees in terms of wage increases?
Mr Chaston: They are on a
Senator CAMERON: Yes, but what
percentage increase is factored into that workplace agreement per annum?
Mr Chaston: The last one?
Senator CAMERON: Yes.
Mr Chaston: Over three years it
was 10 per cent.
Senator CAMERON: So you have managed
to deal with a three per cent per annum increase in wages, but you cannot deal
with a 0.155 per cent increase in power. Why aren't these wage increases
Mr Chaston: They are creating
jobs because we are negotiating with that and we are increasing our
competitiveness by up-skilling. Senator, you of all people know about
productivity gains through wage negotiation and what you can do in the
Senator CAMERON: Yes, I know what some
companies can do. I have to wind up here—the chair is winding me up—but the
point that I just cannot understand is that you have considered that you have
to pass through an amount of 0.155 per cent to your customers. That is not
going to destroy jobs in your company, is it?
Mr Chaston: I disagree with your
percentage points and the increase in costs. 
senators are of the view that a 0.155% increase in costs relative to turnover
can be easily passed through to consumers. Indeed, it is the entire point of
the household assistance package that these cost increases incurred by business
that are neither emissions intensive nor trade exposed are passed through. It
is not part of the design of the policy that they be absorbed by businesses
Committee heard evidence from Inverell Freighters, a road transport company
with a fleet of 25 prime movers based in northern New South Wales.
company told the inquiry:
“I will now turn
specifically to the carbon tax. As a company, we are very thankful that the tax
on diesel has been deferred for three years. That is the proposal at this
stage, as I understand it. In the current economic climate, three years is long-term
planning for us, and that in itself is a problem. My concern in regard to the
carbon tax is that, by its very nature, it is designed to inflict pain on us in
order to make us change our ways and our patterns of use. This is the nub of
the problem, and it is why I have a real problem with it. What can we as a
company do? Absolutely nothing. If a carbon tax is imposed on us, we can do
nothing. We are a sitting duck. We just pay the tax and try and pass it on.”
company told the inquiry that its diesel consumption is in the order of 400,000
litres per month and its annual turnover is approximately $12 million. As the
carbon price impact on diesel fuel will be six cents per litre, it will
represent an increased cost of approximately $288,000 per year from 2014-15
when the reduction in the fuel tax credit – an effective carbon price – is
introduced. This represents 2.4% of the company's current turnover.
this cost increase is higher than the energy cost increases to the galvanising
business described above, government senators do not believe that a combination
of passing through cost increases, fuel efficiency measures and greater use of
fuels such as ethanol, biodiesel and renewable diesel, which will not incur an
effective carbon price, will negatively affect the viability of businesses like
Inverell Freighters and the employment they provide in regional areas.
these examples point to is a need for SMEs to have access to information they
require in order to make informed decisions about the future of their
businesses. There is no doubt that the sheer volume of disinformation and
misinformation about carbon pricing put into the public realm in recent times
has had an impact on business' perceptions of their future. Hardly a day goes
by without the Leader of the Opposition appearing in a safety vest to proclaim
the imminent demise of a business, industry, town or region somewhere around
problem is that the disinformation and distortions have almost become
internalised, self-evident truths among sections of the community, including
some small and medium sized businesses. It would be unfortunate if, based on
incorrect information such as the Ernst and Young report referred to by the
Managing Director of Geelong Galvanising, businesses made business and
investment decisions that prove to be adverse to their own interests.
is borne out by part of the evidence provided to the inquiry by Namoi Bricks:
THISTLETHWAITE: So in terms of the point you made earlier that you would be okay
with everyone paying a little bit more on a level playing field—that is the way
the scheme will operate, is it not? All your competitors will have increases in
costs, but they will all pass them through. Consumers will have a bit of extra
money in the hip pocket to spend to compensate for that. That is the best way
to approach it, is it not?
Mr Broekman: It may seem to be
but, at the end of the day, if we are still here today arguing about whether it
is right or wrong or whether it is easy to understand or not, that still means
it is too complex and it is too hard for us to make that assessment. If we had
a system where the tax were just on, say, electricity, then it would be easier
for businesses to manage, because then you would know exactly how much you are
going to have to pay. You would be able to make those adjustments now and set
your business model up. When we do not know what effects that carbon tax is
going to have on all our inputs, we have to sit and wait until the bills start
rolling in after 1 July 2012 before we can start making those assessments. We
can only work on models and hope that those models are right.
THISTLETHWAITE: I am hearing that you are not opposed to the scheme per se but
that you would like a little more information about how it is going to operate
and how it is going to affect your business.
Mr Broekman: Yes, I would like
more information. No, I am not in favour of the scheme. Looking at the scheme
and assessing the information that we are getting you can see that, especially
once we move to a carbon trading scheme, there will be people in the middle who
will be making money out of what should be going to the environment. That is
what concerns many of us: the waste factor relating to the money that has been
collected. What I am trying to say is that if we are going to collect a fund
for the environment we want to see 95 per cent of that fund being directed to
initiatives that are going to affect our carbon footprint.
these reasons, government senators welcome the $40 million program the
government has announced to provide information to small business and community
organisations that require assistance with assessing the impact of the carbon
price mechanism on their operations and to assist with practical measures that
they can take to reduce their energy costs.
will be provided to industry associations and non-government organisations that
have established relationships with small business and community organisations.
These organisations will develop and deliver relevant, tailored information
that may be sector-specific information and recommendations on energy efficient
processes and equipment, workshops and training courses on energy efficiency
issues and provision of on-site energy efficiency advice.
Chapter 6 - Carbon
pricing will generate long-term opportunities
Sugar is a 140 year old grower-owned raw sugar processor supplying
approximately 20 per cent of Australia's raw sugar. It employs over 800 people
during the crushing season and about 550 in the non-crushing season.
Sugar gave evidence to the inquiry at a public hearing in Mackay on 5th
Sugar told the inquiry they have done a preliminary analysis of the effects of
a carbon pricing mechanism on their business. It is as well to set out the
company's statement to the inquiry at some length as it sheds considerable
light on the opportunities that a carbon price mechanism provides in the field
of renewable energy and business diversification:
“Mackay Sugar has
completed a preliminary assessment of the impact of the carbon price on our
direct and indirect input costs. In particular, we have looked at emission
permit liabilities, road freight costs, electricity and chemical costs. In the
long run, the proposed carbon tax policy provides opportunities to Mackay
Sugar. However, there will be a short-term cost impost flowing through our
supply chain that we will not be able to pass on to our customers given that a
large percentage of our product is exported. This impost will possibly be
around 0.5 per cent of our annual revenue stream. Our business is unlikely to
qualify for concessions available to emissions-intensive trade-exposed
industries so we will be looking at the details of the clean energy fund for
possible assistance as an eligible food processor. However, in the longer term,
a carbon price is likely to promote diversification projects for our business.
As a large sugar manufacturer, Mackay Sugar generates considerable quantities
of renewable energy using by-products of the annual cane crop.
“The 20 petajoules of
renewable energy produced and consumed each year in our three factories is
equivalent to the energy contained in about 700,000 tonnes of coal. If Mackay
Sugar derived its energy from fossil based fuels, like most businesses do, we
would generate an extra 1.7 million tonnes of CO2 each year. We receive no
recognition for this effective carbon abatement. However, under the proposed
carbon tax Mackay Sugar will be largely exempt from direct greenhouse gas
emission liabilities. Also, a carbon price will drive our business to improve
overall energy efficiencies and reduce the use of supplementary coal fuel at
“Mackay Sugar is
currently constructing a $120 million renewable cogeneration plant, which will
supply about one-third of Mackay's electricity. The viability of this project
was founded on the introduction of the Commonwealth government's 20 per cent
renewable electricity target, the RET scheme. Our business future will be built
around further renewable energy diversification projects, such as more
cogeneration, molasses based fuel ethanol and second generation fuel ethanol.
We have already invested in the Racecourse biocommodities research facility and
we are part of the Queensland Sustainable Aviation Fuel Initiative, supported
by the Queensland government. Along with Virgin Airlines, Boeing and Qantas, we
are looking at converting sugar into aviation fuel.
“While these projects
will benefit from a well structured and firm carbon pricing policy that
differentiates between renewable and fossil fuel based products, investment and
renewable projects will also require the support of supplementary energy
policies similar to the RET scheme. A carbon tax alone will not be sufficient
to underpin further renewable energy projects within Mackay Sugar. In contrast
to most businesses opposing any policy that would increase energy prices, the
Australian sugar milling industry has been indirectly disadvantaged by low
domestic energy prices. It might seem a bit bizarre but that is the case. Our
main international competitors, such as Brazil, Thailand and India, which were
mentioned this morning by cane growers, have very high domestic energy prices
and they have invested heavily in renewable electricity generation and ethanol
production to supplement their sugar revenue. This has not been possible in
Australia, leading to a gradual erosion of our international competitiveness.
“The sugar industry
has a large potential to contribute to Australia's renewable energy market.
However, this will not materialise unless there are robust policies
implemented. In qualifying Mackay Sugar's support for the carbon tax, we would
like to highlight a few points. The exemption of primary producers—that is, our
cane growers, who spoke to you this morning—from the carbon scheme will be
critical to contain our whole-of-industry supply chain costs and therefore
protect the viability of cane based renewable energy projects such as
cogeneration and ethanol. Domestic sugar refiners provide a key value adding
stream to the Australian sugar industry, and they typically do not have access
to renewable fuels for their production purposes. Like raw sugar producers, it
is recommended that these businesses receive concessions as food processors
under the proposed clean technology fund.
“The sugar industry
has significant potential to contribute to Australia's renewable energy targets
by providing baseload electricity that does not go on and off as with wind and
the sun—it is there 24/7—and access to funding under the proposed Clean Energy
Finance Corporation would assist in underpinning these projects. The low
domestic energy prices have eroded the national competitiveness of the
Australian sugar milling industry by limiting diversification opportunities in
Australia. While compensation has never been sought, this should be
acknowledged and energy policy should be developed to promote the baseload
renewable potential of the sugar industry.
about fuel, the exclusion of fuel in some forms of transport in the proposed
carbon tax scheme dilutes the benefits of the scheme and will be cumbersome to
administer and police. Mackay Sugar welcomes the announced review of the fuel
excise arrangements by the Productivity Commission and strongly supports an
excise regime based explicitly on the carbon and energy contents of fuels. This
is a structured and equitable way to effectively tax fuels and promote
renewable fuel use while removing the complexity of rebates available to
different fuel users.
Sugar's perspective is perhaps summed up in this exchange:
Senator CAMERON: You indicated that
the carbon price gives you a long-term opportunity. It seems to me that many of
the submissions we have had here today are really looking at the short term and
saying that it is all a big problem. They are not looking at the long term. Is
short-termism a problem in this debate?
Mr Hodgson: Longer term we would
certainly see a higher price on energy in Australia as being good for us in
developing ethanol, biodiesel and electricity. That is going to take some time
to happen. In the short term we will obviously wear an impost with the higher
cost of fuels in particular and the emission liability that we will have at
Racecourse mill with the refinery. We do see a short-term cost impost but a
longer term benefit coming to us.
Senator CAMERON: You indicated that
you will be largely exempt from any costs of the new tax, is that correct?
Mr Hodgson: Two of our mills will
be exempt from permit liabilities, having to purchase and surrender permits
every year. They will fall below the 25 kilotonne threshold for CO2 emissions.
Racecourse, where the refinery is located, will be above the threshold. That is
where we will have the liability. But, as was mentioned before, most of that
liability will be passed on to our joint venture partner.
Senator CAMERON: So a carbon tax is
not a job destroyer for your industry, is it?
Mr Hodgson: No. We are currently
building a $120 million cogen plant. That was based on the 20 per cent
renewable scheme. The carbon tax should enhance our revenue from cogeneration.
We are hoping it will allow us to go ahead with another cogen project within
another couple of years. Those projects typically employ about 250 people
during the construction period and a dozen or so under operations.
Senator CAMERON: And you are in discussions
about diversifying into aviation fuel as well?
Mr Hodgson: It is early days but
we have joined a consortium, under the support of the Queensland government,
with the University of Queensland to develop aviation biofuels from sugar. That
will be another revenue stream. Again, the production of aviation biofuels from
sugar will be more expensive than fuels from a fossil fuel base or from oil, so
there will need to be incentives for those projects to happen.
from representing Geelong Galvanising at the hearing in Geelong, Mr. Chaston
appeared in his capacity as Vice-Chairman of the Galvanisers Association of
Australia. Mr Chaston told the inquiry that a carbon price may provide
opportunities in renewable energy construction projects:
you got projections for growth in the future?
Mr Chaston: I have never
projected growth. I have always projected a status quo and if I get some
growth, that is great.
THISTLETHWAITE: Where do you sell most of your product? Which industries do you
Mr Chaston: The galvanising
industry are involved with clean energy. We galvanise all the wind towers that
are currently being put up around Port Campbell, Warrnambool and that area.
Unfortunately, the government has just said that 80 per cent of Victoria now
cannot have wind farms put on it, so that curtails any growth in that industry.
We galvanise in the transport industry, the agriculture industry, the marine
industry. If it is steel and you want it to last, we will galvanise it.
THISTLETHWAITE: So you have had a substantial advantage for your firm from
increased manufacturing of wind turbines?
Mr Chaston: Absolutely.
THISTLETHWAITE: Under a carbon price, wind power becomes more competitive. We
would like to think that there will be greater opportunities for production of
wind turbines in Australia as a result of that. Won't that be an advantage for
Mr Chaston: It would be an
advantage for the galvanising industry not specifically for my company.
approach of Mackay Sugar in taking a long term view of carbon pricing stands in
contrast to what we would characterise as a particularly short-term view taken
by many who made submissions to this inquiry. We endorse this view, which is
not confined to businesses like Mackay Sugar, but is held among institutional
investors whose views expressed to the inquiry we outline below.
are firmly of the view that innovative businesses with a track record of capital
investment such as Geelong Galvanising and many other businesses involved in
the engineering and fabrication industries will be able to pursue opportunities
such as those arising with western Victorian wind farm developments.
note that the tenor of Mr. Chaston's evidence in relation to immediate threats
to his business and other members of his association are cheap imports of
fabricated, galvanised steel work – not a carbon price mechanism.
Chapter 7 - Carbon
price mechanism will bring long-term investment certainty and emissions
intensive businesses cry wolf
investors know that a carbon price mechanism is inevitable. But uncertainty
about what form the price will take, though less now than in the past two to
three years, is imposing real costs today. Uncertainty is the enemy of
investment and job creation. Electricity generation investments are not being
made because the future price of greenhouse emissions cannot be factored in.
Jobs in emerging low emissions technologies and industries are not being
created today because businesses and investors cannot be certain about the
carbon price mechanism until legislation is passed. Delay is holding back the
inevitable transformation of critical sectors of our economy and the cost of
delay will only make it harder to make change later.
Investor Group on Climate Change (IGCC) represents Australian institutional
investors with funds under management of over $600 billion. This amount is
equivalent to about half of Australia's annual GDP.
members include AMP Capital Investors, Australian Super, BT Investment
Management, Deutsche Bank Equity Research, Colonial First State, Perpetual,
Goldman Sachs and UBS Investment Bank.
members invest in all sectors of the economy and have substantial ownership
shares in many Australian companies; emissions-intensive and low-emissions
it's submission to the inquiry
“...we believe that
addressing the risks of climate change and making adjustments to emissions
intensive industry are long term economic issues that and policy action should
not be delayed because of short-term volatility.”
IGCC fleshed out this submission by making it clear that the greater cost of
climate change is in delaying the introduction of a carbon price mechanism.
They presented research conducted for IGCC by economic modelling firm SKM/MMA
that found that delaying the start of a carbon price mechanism by just four
years would lock in additional costs to the electricity sector of $2.5 billion
in the period to 2030. These costs would arise from:
- delaying the switch from
coal to gas for base load generating capacity;
- less efficient electricity
plant build, locking in additional economic costs of around $500 million
to 2030 and $1 billion to 2050;
- additional emission costs of
$2 billion to the economy to 2030 ($2.8 billion to 2050);
electricity price increases 19% ($13/MWh) higher than would arise from
early introduction of a carbon price.
Nathan Fabian, Chief Executive of the Investor Group on Climate Change gave
evidence to the inquiry at a public hearing held in Canberra.
opening statement to the inquiry, based on the long-term view of the investors
his organisation represents, presents what government senators believe is a
proper perspective on the impacts of the carbon price mechanism proposed by the
government. We therefore set it out in full:
“IGCC is a group of
investors of over $600 billion of retirement savings and private investments on
behalf of millions of Australians. We are wholesale and retail funds managers,
super funds, investment researchers and advisers. We accept the mainstream science
of climate change and, as prudent investment managers, must seek ways to
prepare for the financial risks and economic shifts that responses to climate
change will cause. We are deeply invested in the Australian economy, including
in most of the companies that will pay the carbon price.
“We have closely
examined the financial impact of the proposed carbon price on companies that we
own, on the beneficiaries whose money we manage and on the economy generally.
Our research indicates to us that there is only a modest financial impact on
most Australian companies that will pay the carbon price; that there is a
marginal impact associated with the carbon price on super fund balances; that
there are in fact higher costs associated with delaying the introduction of a
carbon price in Australia for both investors and electricity users, regardless
of the policy actions chosen by other nations; and that there are clear
investment signals that flow from a certain emissions reduction policy
framework such as the proposed carbon price package.
“The first point,
researched by analysts within our membership including Citi, Deutsche Bank and
others and used by us to make investment decisions, indicates that there is no
material short- to medium-term financial impact on any but a handful of ASX 200
companies. In fact, for 188 out of 200 companies the impact is less than one
per cent of earnings in the early years. For investors who invest billions of
dollars this is a marginal number and would not make us change our investment
decisions in and of itself.
“On the second point,
recent research on true cost by the Australian Institute of Superannuation
Trustees indicated that the average financial impact of the carbon price on
super fund balances was 0.8 per cent. Again, this is a relatively marginal
cost—although, of course, when you are managing the money of others any cost
needs to be managed. The prospect of this cost continuing to grow over time is
enough to make super funds start to evaluate where their capital is flowing. Of
course, we understand that reallocation of capital to less emissions-intensive
activities is one of the objectives of the scheme.
“On the third point,
research conducted for IGCC and Catholic Super by SKM MMA examined the costs of
meeting the bipartisan target of minus five per cent by 2020. The research
found that delaying only four years, to 2016, would in fact add costs for both
electricity users and investors—and here it is important to make the point that
this is assuming a target of minus five per cent. We accept that there is no
cost-free way to reduce emissions. As such, the objective is to find ways to
reduce that cost or keep it relatively low.
“Finally, it is our
view that uncertainty over carbon pricing policy is materially impacting
investment decisions in Australia, most obviously in electricity markets. A
long-term carbon pricing framework that is transparent and certain in its
design is the most appropriate way to address the uncertainty and get
investment flowing again. While there are clear limitations on the efficiency
of the proposed framework—for example, in the form of price ceilings and
floors—there is sufficient certainty in the timing of transitions in the price
arrangements for these to be transparent to the market. It is our view that
delaying the introduction of a substantive framework to address emissions will
perpetuate risk to the investment environment and discourage investment. Thank
you, senators. I am happy to take your questions.”
of the perennials of debate about climate change and carbon pricing is the
disconnect between what individual companies tell politicians and journalists
about their financial prospects under a carbon price and what the tell markets
of the things that have puzzled government senators during the course of this
and earlier inquiries, has been the lack of continuous disclosure by companies
in accordance with their obligations under the Corporations Act and ASX listing
rules that mirrors the doom-laden predictions of the future they disclose to
politicians and journalists.
couple of examples arose during the course of this inquiry.
Airlines is a regional airline operator formed in 2002 out of the collapse of
Ansett and its subsidiaries Kendall and Hazleton. Rex gave evidence to the
inquiry on 22nd July that its increased fuel costs would add a cost
of about $2 per passenger and expressed a view that this would be difficult to
pass on through a moderate increase in ticket prices. Through the operation of
various state government regulations, Rex enjoys a monopoly on about 60% of the
routes it services.
The overall tenor of Rex's evidence was that the viability of a number of
routes would be threatened and the airline may withdraw from some.
Express Holdings released it full year results on 24th August 2011.
In an accompanying media release that stated, “...Rex has solid fundamentals
and outstanding financial performance even in the midst of these extremely
challenging times. While the economic turmoil in the USA and Europe is as
threatening as ever, at Rex we approach the new FY with a certain amount of
confidence, serenity and excitement.”
we acknowledge Rex's concerns about fuel prices, we are of the view that
volatile and rising world oil prices are more to be concerned about than the
effects of a carbon price mechanism. This much is actually spelled out by the
company in its 2011 results lodged with the ASX.
Australian Coal Association, representing the black coal industry and some of
the biggest mining companies on the planet has taken a typically bleak view of
the future not only in this inquiry, but in the many inquiries to which it has
made submissions. As described above, its approach has been a delay action,
wait-and-see approach that the weight of evidence tells us is the wrong thing
is puzzling is the lack of any disclosure of this bleak future to be brought on
by carbon pricing by the coal companies to investors or markets.
Metallurgical Coal gave evidence to the inquiry that:
“In summary, the
government's proposed carbon-pricing mechanism has the potential to put the
future of the Australian coal industry at risk. From Anglo American alone,
Australians may lose $4 billion worth of investment and forgo more than 3,200
jobs. It simply does not make sense to implement the proposed carbon-pricing
mechanism and forgo the benefits of the coal industry for little or no
environmental gain. This is especially the case when a better way in the form
of a phased-in auctioning of permits could be implemented at a much lower cost
and ensure both the future of the coal industry and the intended environmental
by Senator Cameron, Mr. Barlow was unable to say whether Anglo American had made
any disclosures to caution investors against the looming carbon price mechanism
that would place at risk, not only investment and jobs, but presumably
company later responded to questions taken on notice that:
“Anglo American has
not released any notices to investors. We have, however, responded to questions in line with our
public statements to date. Anglo American has not lodged any stock exchange
releases. Disclosure to date is responding to questions, and is entirely
consistent with our public statements to date.”
understand perfectly the sensitivities of these things, in our view, this is a
less than convincing answer to the question asked of it; essentially do the
company's gloomy view of the effects of the carbon price expressed to
politicians correspond with what they are telling the actual people whose money
might be at risk. Frankly, the answer appears to be an equivocal 'no'.
Investor Group on Climate Change was able to shed some light on this perennial
inconsistency; in evidence given at the Canberra public hearing on 23rd
Mr. Fabian was
asked about it in the following questions:
Senator CAMERON: The discussion I had
with Anglo American was on the basis of their opening statement, where they
argued that the proposed carbon pricing mechanism would reduce the value of
four new mines they were planning to open. They also indicated that the carbon
price would mean that they would lose market share and the viability of their
operations would be put at risk. They also indicated that it may mean that they
would look to make investments in Mozambique, Mongolia and Indonesia instead of
investing in Australia—basically, that the company was at risk in Australia. I
asked whether they had made any statements to the stock exchange in relation to
such a dreadful scenario for the company. Would you expect a company that was
in such a bad position as they claim under the carbon tax to advise investors?
Mr Fabian: All companies have
obligations to disclose to the market any material factors that would impact
their earnings or position. So, as a matter of course, all companies should
disclose anything that is material. So, yes.
Senator CAMERON: Are you aware of any
mining company making disclosures either to the Australian Stock Exchange, the
Johannesburg Stock Exchange or the London Stock Exchange about their companies
being in severe difficulties because of the implementation of the carbon price?
Mr Fabian: No. We have studied
announcements to the Australian Stock Exchange of emission-intensive companies
specifically. Although a range of language is used to describe the impact on
the company, I can say that none have indicated that there will be a severe
financial impact on their operations, although some do specify a financial
Senator CAMERON: So how then can we as
parliamentarians balance the message they are sending to the Australian public
and Senate inquiries when that message is not being replicated to investors
anywhere in the world?
Mr Fabian: I think that is
probably a difficult job for you. The information we get as investors is based
on the sound financial projections of the company, and that is how we make our
decisions. What companies do in the public domain is probably more related to
how they want to be treated by governments in periods of policy transition with
assistance than the underlying financial position of the company at that time.
Senator CAMERON: You are being
diplomatic. Is that rent seeking?
Mr Fabian: As an owner of
companies, it would be inappropriate for me to say that a company should not
try to obtain good conditions for itself. That is in effect what we pay them to
do as investors, but the information we get day to day reflects the actual
financial position. We have observed differences I guess between some of the
advocacy positions and some of the numbers that are flowing to us.
Senator CAMERON: So there is a
difference in terms of the public perception about the impact on the mining industry
and what the resource industry is saying publicly and what it is saying to
investment analysts; is that correct?
Mr Fabian: I will give you an
example. Our analysis based on company projections and our own calculations is
that the Australian coal industry will grow roughly 20 per cent in terms of
metallurgical coal exports over the next decade and roughly 27 per cent in
terms of thermal coal. That is pretty attractive growth in the coal export
sector. As a consequence of those projections, we do not have any concerns
about the financial opportunity or stability of the companies we invest in that
Senator CAMERON: With the greatest
respect, Mr Fabian, either you have got it wrong or Mr Nicholas Barlow, the
Head of Resource Development and Operational Excellence at Anglo American
Metallurgical Coal Pty Ltd, has got it wrong. I am trying to find out who has
got it wrong. Mr Barlow said on 1 September to this committee:
“In summary, the
government's proposed carbon-pricing mechanism has the potential to put the
future of the Australian coal industry at risk.”
He has made a jump
from Anglo American to the Australian coal industry. Why would an executive of
Anglo American put that to a Senate committee if they are not putting that to
investors? Is it true, or have you just got it wrong, that the coal industry is
Mr Fabian: We certainly hope and
believe that we do not have it wrong. Our people are highly trained and
exceptionally good at reading company fundamentals and financial performance,
so we believe we have it right. I really cannot comment for the company
specifically, but there is nothing from any of our analysis or any of the
disclosures to the stock market that would indicate to us that any companies
operating in the Australian coal market are under any stress or duress.
Senator CAMERON: So you would not be
saying to any of your clients who you are giving investor advice to: 'Sell
Australian mineral shares. Get out of gas. Get out of coal. Get out of
minerals. It is a disaster there because of this carbon price'?
Mr Fabian: No, quite the
opposite. We think there is good opportunity in the sector in this decade.
Clearly, the export demand or the demand for our coal in regional markets is
substantial and it will grow through the decade. I should say that one would
assume that, if emissions are going to be reduced, eventually, possibly next
decade, maybe some of the coal markets will change depending on the technology
that is available to abate emissions; but, at the moment, it is a good growth
story for Australia. Our investors are invested in it and, frankly, that is
precisely the outcome we want in terms of policy arrangements.
senators think this evidence speaks for itself and requires no elaboration.
Chapter 8 - The
Coalition's “direct action” is a policy for inaction or will blow the budget
While both the
government and the opposition share a common target to reduce greenhouse gas
emissions by 5% on 2000 levels by 2020 that is where any policy similarity
ends. The Coalition released its “direct action” plan to reduce greenhouse gas
emissions on 2nd February 2010. It proposes an Emissions Reduction
Fund to support 140 Mt of abatement by 2020.
government's policy is for the introduction of a market-based carbon price
mechanism with an explicit price and multiple buyers and sellers of abatement;
“direct action” involves a off-market, implied price for abatement set by the
government, only one seller of abatement – the government – and a non-market
tender process where the executive government will determine where abatement
course of the inquiry, a number of witnesses were asked for their views on the
efficacy of the Coalition's “direct action” policy. Most of the small to medium
sized businesses who provided evidence to the inquiry were either unaware of
the detail of “direct action” of felt that it was irrelevant to them because
they would not be in a position to purchase abatement through the tender
carbon is at the heart of the Coalition's policy target of a 5% reduction in
CO2 emissions by 2020. This is the same as the government's target. Soil carbon,
including use of unproven biochar methods accounts for 60% of the Coalition's
mechanism is an Emissions Reduction Fund, from which a Coalition government
will pay farmers to abate “up to” 85 million tonnes of emissions a year by 2020
to meet their emissions reduction target. The overall annual abatement to be
paid for from the fund is 140 million tonnes by 2020. Soil carbon abatement
represents 60% of the total.
to the policy document, under The Coalition's direct action plan:
ERF will buy 'up to' 85 million tonnes of abatement per annum through soil
will be entitled to tender for all verified new additions in soil carbon beyond
the commencement of the Fund.
Coalition government would commence this work by offering to purchase 10
million tonnes of CO2 abatement through soil carbons for 2012-13.
to the Coalition from farm groups support the potential for a minimum 150
of CO2 equivalent per annum to be captured in soil carbons by 2020 and beyond,
with a payment to farmers of approximately $10 per tonne of abatement.
Over the period
to 2020, this means a Coalition government would pay farmers and others for “up
to” 85 million tonnes of abatement through soil carbon, representing
expenditure from the ERF over the period of the program of a little over $850
2010 CSIRO report, Soil
Carbon Sequestration Potential: A review for Australian agriculture concluded:
90% of Australia’s agricultural land is devoted to low-to-medium intensity
grazing of natural vegetation (Table 1). These lands are generally comprised of
soil and/or climate conditions that are not suitable for more intensive
agricultural practices and given these constraints are not likely to be able to
store large quantities of SOC.
“Accurate monitoring and verification of soil C stock changes, due
to the large and heterogeneous
background levels are difficult and often prohibitively expensive (see Section
4). A large-scale monitoring and verification system for estimating SOC stock
changes will depend on the level of stringency that a particular government or
emissions trading scheme finds acceptable and this level may likely be based on
the financial trade-off between the value of the C credits and the cost of the
monitoring program (Smith 2004b). At the national scale, this system may take
the form of robust modelling informed by detailed measurements in
representative systems combined with verification of management practices and
yields via reporting and remote sensing with some economic discounting to
factor in verification uncertainty. (p.48)
this review suggests that stemming the loss of SOC from current agricultural
practices and at a minimum recapturing some fraction of the carbon lost from
soils since initial land clearing is possible from a biophysical perspective.
However, due to the complex web of factors that governs the C balance of any
particular soil; quantitative predictions of SOC sequestration rates will
likely always entail a large degree of uncertainty. Given that many mitigation
options in the agricultural sector have numerous co-benefits in terms of food
security, environmental sustainability and farm profitability, we believe that
governmental policies that promote adoption of these best management practices
should be pursued regardless of the final status of agricultural soils in any
carbon pollution reduction scheme. (p.50)
point the CSIRO makes is that here is a great deal of uncertainty over the
effectiveness of soil carbon abatement. Based on the highly conditioned support
the CSIRO gives to soil carbon as an effective abatement measure, the
government buying abatement through soil carbon measures could well end up just
being a case of throwing good money after bad.
February 2010, Bloomberg New Energy Finance, a UK-based financial analyst
outfit specialising in nuclear energy, CCS and renewable energy investment
released an analysis of the relative merits of Direct Action and the then CPRS.
Its analysis was scathing about “direct action”, saying:
CPRS would cost less than the Coalition plan;
CPRS increased the number of low-cost abatement options by linking to
Coalition plan may not exploit some low-cost abatement options;
Coalition plan couldn’t be scaled up even for relatively modest targets above
Coalition plan relies too heavily on soil carbon, especially given it is not
currently included in greenhouse accounting. Worse, “by earmarking more than
half of the ERF to farmers to increase soil carbon sequestration, the
government has arguably already created a market distortion. While there is no
doubt that carbon sequestration is an important and potentially low-cost
abatement option, there are other low-cost options particularly in energy
efficiency which would be excluded under this scheme.”
homed in on the voluntary mechanism by which the Coalition plan would operate,
saying it would only drive the exploitation of “low-hanging fruit” when it came
to abatement options:
“The semi-market approach suffers from being reliant on the subjective
decisions of an expert body: with only the information submitted by applicants
to go on, such a body can only hope to replicate the efficiency of decisions
taken internally within companies.”
particularly critical of “direct action” over the issue of scalability,
dismissing the Coalition’s claims that the program will be flexible enough to
accommodate higher targets:
“While there is some flexibility
to scale up direct financing of abatement activity in the short term, it is
probably unrealistic to expect that the government will continue to purchase
emissions reductions after the majority of low-hanging fruit is exhausted and
more costly abatement is required to achieve deep cuts in emissions through
2020 and beyond. A direct-action policy may thus be a 10-year policy at best.”
analysis was reflected in the view expressed by Treasury in relation to “direct
Senator CAMERON—Dr Parkinson, again I want to
come to this comparison that I started on carbon price and direct action. The
theory I have heard about investments is that the carbon price gives long-term
investment certainty, but direct action means that there is no investment
certainty. Would that be a fair analysis?
Dr Parkinson—Yes, that is a fair analysis.
Putting in place a carbon price mechanism, and in particular ultimately putting
in place an emissions trading scheme, you have a framework, people can make
investment decisions and they have the capacity to have instruments that hedge
their risk. In the event of a direct action program, essentially they are being
subsidised on particular activities by the government. Ultimately there will be
a question of whether or not the government is able to identify the cheapest
abatement and is able or willing to subsidise to the extent necessary to reach
the target. As a result, if you really believe that ultimately we are going to
go for deeper cuts than the direct action program could deliver at the moment,
you would have to address the question of could the direct action program be
scaled up sufficiently. As soon as you are into that space, you are back into
the material that was released that we had provided last year, which was that
we did not believe the direct action program could be scaled. Ultimately those
subsidies have to be paid for by someone, which means that either we have to
raise taxes or we have to cut expenditure.
One of the most
serious flaws in “direct action” is that while it has the potential to lead to
increased taxes to fund it, or alternatively higher interest rates as the
government borrows to fund its ballooning cost, it offers no compensation to
households for the increased costs they would face under either of these
scenarios. Treasury offered this view of the compensation issue:
Senator CAMERON—........ A carbon price leaves
the potential to assist households in relation to dealing with global warming,
but Direct Action does not provide household assistance, does it?
Dr Parkinson—No, it does not. Ultimately, it
depends on the form Direct Action might take. For example, let’s say we
replaced a brown coal fired electricity generator with a gas one. If Direct
Action simply provided a capital subsidy to make the investment cost—the
capital cost— the same and did not address any differential in operating costs,
then you could not be sure that you had not imposed a cost on the end consumer.
The Direct Action scheme does not raise money to be used for compensation, but
of course it is up to the government of the day if it wanted to pursue that. It
is an option to pay for that out of consolidated revenue.
Group on Climate Change, representing Australian investors with $600 billion in
funds under management was asked during the inquiry about its view of “direct
action”, particularly whether it could achieve its abatement targets and
whether it provided a sufficiently long-lived policy framework to provide
investment certainty. They told the inquiry:
Senator CAMERON:.....There is an
alternative out there and that is the so-called direct action policy. What is
your group's analysis of direct action versus the market approach?
Mr Fabian: We have concerns. Our
preference for any policy framework in this area is that it is transparent,
long-term and relatively certain. We are concerned that a policy that relies on
governments primarily to either regulate or make payments to industry is
vulnerable. For the long-term it is not sustainable simply because of the cost
that is likely to be incurred in that scheme and also because the environmental
outcome in terms of reducing emissions to any target is unlikely to be met. If
that uncertainty exists around the policy, it is probably going to change and
it is probably going to change in the not-too-distant future. That creates
investment risk and uncertainty for us and so we are not generally favourable
on these kinds of policy frameworks in the absence of carbon pricing.
Senator CAMERON: Do you agree with
Malcolm Turnbull's analysis that the best thing about direct action is that you
can wrap it up pretty quickly?
Mr Fabian: An interesting
question. My view is that you cannot meet substantial emissions reductions on
governments' balance sheets, especially in this phase of the global economy. So
whether or not it is intended to be wrapped up early, we think it is not
Senator CAMERON: You have had a close
look at it, I suppose.
Mr Fabian: Yes.
Senator CAMERON: We have had company
after company give us evidence and I have asked the specific question to them:
what is the impact of the direct action policy on the individual company? I
will not put words in their mouths but they have all said: 'We haven't paid
much attention to it'. We don't think it is the way to go.' Or they have dodged
the question. If you use direct action to try to reach the shared reduction
that both the government and the coalition have in terms of a five per cent
reduction on 2000 emissions by 2020, do you think that is achievable under
Mr Fabian: No, we do not,
Senator. The issue we see is that, if you pay some companies in the economy to
reduce emissions, you are not necessarily impacting the emissions of other
companies and so it is possible that emissions will grow enormously from
sectors that are not touched by the direct action scheme, and that of course is
the benefit, alternatively, of a pricing scheme that includes most sectors of
the economy that they are covered. So, frankly, we are talking about a decade
in which targets at some point are going to get steeper and deeper. It may not
be steeper and deeper for 2020 but they are going to be in the next decade. The
UK experience gives us an example of that, and so we need a framework that can
adjust to the reality of having to reduce emissions substantially. As I have
said, we do not believe a policy based on governments paying for abatement is a
sensible long-term framework.
Senator CAMERON: The other argument
that has been put to the committee is that the direct action scheme is market
based. Given that you are operating in the market, what is your analysis of
Mr Fabian: Most markets have
multiple buyers and multiple sellers. In fact, that is how good markets work.
Markets where there is a constraint of market power, like only one seller, do
not necessarily drive the behaviours that you would expect of a market, like
people competing to do things for the lowest cost. So we would not consider an
arrangement where tenders were put and decided by governments behind closed
doors around what abatement will be paid for to be a very transparent
arrangement. It is a single buyer of abatement from multiple sellers, so we
would not really consider that to be a market mechanism.
Treasury Executive Minute released under Freedom of Information on 2nd September 2011,
the costs of “direct action” become clear.
Treasury analysis states that the economic costs of Direct Action would be
higher for two reasons: first, direct domestic action would forego
opportunities for cheaper, internationally sourced abatement and second, direct
action programs are generally less effective at driving take up of all
potential abatement opportunities.
action” does not allow for emissions reduction through sourcing abatement
internationally through the Clean Development Mechanism.
modelling for the government's carbon price mechanism shows that, “a carbon
price in 2010 dollars of around $62 per tonne would be required to meet the
abatement task of 159 million tonnes in 2020 using only domestic abatement,
compared with $29 per tonne in the core policy scenario with international
economic cost will almost certainly be larger because “direct action” will be a
far less efficient abatement mechanism than a market-based carbon price
Treasury Minute continues:
on DCCEE analysis, the funding committed under the Direct Action plan ($1.2
billion per year on average through to 2020) could not purchase sufficient
domestic abatement to meet Australia's bipartisan emissions reduction target of
a 5 per cent cut in emissions compared with 2000 levels, which would require
159 Mt CO2-e of abatement in 2020.
analysis from DCCEE estimates that it is unlikely that the Direct Action plan
could secure more than around 40 Mt in 2020.
particular, the Coalition policy of directly funding abatement would mean that
no price signal would flow to consumers to drive demand side abatement. SGLP
shows that demand side abatement accounted for half of electricity sector
abetment to 2020.”
analysis is entirely consistent with the advice we've seen from leading
economic institutions like the IMF, OECD, Productivity Commission and others.
action is funded entirely on Budget, using taxpayer funds to pay polluters to
lower their pollution. In contrast, a carbon price is paid by greenhouse gas
emitters. It raises revenue and this will be used to assist householders,
support jobs and invest in climate change programs.
Coalition's scheme will cost the Budget at least $48 billion to 2020, almost 5
times the stated cost of the Coalition policy. This would mean that the average
Australian household will have to pay an extra $1,300 in taxes.
is likely to be an underestimate, as it assumes that the cost to the Budget of each
tonne of abatement would be the same as the carbon price. The Treasury explains
that much of the abatement funded under Direct Action would happen anyway,
resulting in a more expensive cost per tonne of real abatement. This is in
addition to the inefficiency of grant-based tenders compared to the price
signal generated by a market mechanism such as a carbon price.
Treasury also dispels the argument that Direct Action could deliver abatement
at a price below the carbon price by paying different prices for different
abatement activities. The Treasury finds that this is impractical because
businesses have more information about costs of abatement and are likely to bid
strategically. This finding is backed up by detailed analysis by the Department
of Climate Change and Energy Efficiency.
example, if the Coalition were in Government, farmers would know that Mr Abbott
would be paying for abatement in other sectors at $40 or $50 a tonne for
example, and so would have no incentive to sell soil carbon abatement for $8 a
tonne (the price assumed by the Coalition).
is borne out in practice in multi-round environmental tenders in Australia and
internationally, where bids quickly converged close to the highest expected bid
from previous rounds. So the Coalition's scheme is based on ripping off farmers
and would not work in any case because it is based on an unrealistic and naive
his hard to imagine that a Coalition government, even one led by Tony Abbott,
could be so fiscally irresponsible to pursue “direct action” in the event they
are elected to government. So the only prudent course of action would be to
jettison the policy altogether. The only conclusion government senators can
come to is that the policy is a sham. It is a fig leaf over their determined
position to do nothing about climate change. The Coalition's stated commitment
to a 5 per cent emissions reduction target is a fiction. Should they ever be
elected to government, the target and “direct action” along with it will be
dumped, and the Coalition will return to the position they have been
comfortable with for years; doing nothing. The Coalition is either fiscally
irresponsible or cynical.
question is; which one is it?
DOUG CAMERON SENATOR MATT THISTLETHWAITE
Dissenting Report: Appendix A
Price Mechanism Architecture
inquiry began its public hearings in March 2011. On July 11, 2011, the
government released the details of the carbon price mechanism including the
starting price, a transition to an emissions trading scheme, household and
industry assistance, employment support, support for agricultural businesses
and programs supporting innovation in new technology, energy efficiency and
section sets out in detail the architecture of the carbon price mechanism
agreed to by the Multi-Party Climate Change Committee.
Starting price and fixed price period
carbon pricing mechanism will commence on 1 July 2012. There will be a three
year fixed price period.
carbon price will start at $23.00 per tonne in 2012-13 and will be $24.15 in
2013-14 and $25.40 in 2014-15. The prices in the second and third year reflect
a 2.5 per cent rise in real terms allowing for 2.5 per cent inflation per year
(the midpoint of the Reserve Bank of Australia’s target range).
entities will be able to purchase permits from the Government at the fixed
price, up to the number of their emissions for the compliance year. Any permits
purchased at the fixed price will be automatically surrendered and cannot be
traded or banked for future use. Permits freely allocated may be either
surrendered or traded until the true-up date for the compliance year in which
they were issued. They cannot be banked for use in a future compliance year.
holders of freely allocated permits will be able to sell them to the Government
from 1 September of the compliance year in which they were issued until 1
February of the following compliance year.
price paid by the Government will be equal to the price of the fixed price
permits for that year, discounted to 15 June of the compliance year by the
latest available Reserve Bank of Australia index of the BBB corporate bond
rate, so that the buy-back price reflects the present market value of the
permit. From 15 June onwards, the price paid will be equal to the fixed-price
permits for that vintage.
arrangements and setting pollution caps
carbon pricing mechanism will transition to a flexible price cap-and-trade
emissions trading scheme on 1 July 2015.
Government will announce the first five years of caps in the 2014 Budget and
will be required to table regulations setting five years of pollution caps in
the Parliament no later than 31 May 2014.
pollution cap will be extended by one year every year in regulations from
2015-16 to maintain five years of known caps at any given time. For example, in
2015-16, regulations will be made setting the pollution cap for 2020-21. In
2016-17, regulations will be made setting the pollution cap for 2021-22, and so
setting pollution caps, the Government must consider Australia’s international
climate change obligations and the recommendations on pollution caps made by
the Climate Change Authority.
Government would also have regard to:
medium- and long-term national emissions reduction targets;
toward emissions reductions;
of the global emissions budget;
economic and social implications associated with various pollution caps,
including implications of the carbon price;
action to reduce Australia’s greenhouse gas emissions;
of the greenhouse gas emissions that are not covered by the carbon pricing
past or planned government purchases of international units;
extent of non-compliance under the carbon pricing mechanism; and
matters (if any) the responsible Minister considers relevant.
the event that the Parliament disallows the regulations presented in 2014, the
legislation will provide for a default pollution cap that will ensure that
covered emissions are reduced in absolute terms each year by a specified
amount, expressed in million tonnes of CO2-e, at least consistent with meeting
Australia’s unconditional pollution reduction target of reducing pollution by 5
per cent below 2000 levels by 2020.
this, each year the Government will be required to make regulations setting the
next five years of pollution caps. If the Parliament disallows these
regulations, then the legislation would provide for a default pollution cap for
each year until regulations setting the next five years of pollution caps are
made and not disallowed.
after the initial regulations setting five years of pollution caps have been
made, the Parliament rejects the regulations setting the pollution cap for the
sixth or any subsequent year of the flexible price period, the legislation will
provide a default pollution cap for that year that would ensure that emissions
are reduced in absolute terms each year by a specified amount, expressed in
million tonnes of CO2-e at least consistent with the annual reduction in
emissions implied by the 5 per cent emissions reduction target.
price ceiling will apply for the first three years of the flexible price
period. The price ceiling will be set in regulations by 31 May 2014 at $20
above the expected international price for 2015-16 and will rise by 5 per cent
in real terms each year.
the world is on a 450 parts per million carbon dioxide equivalent (CO2-e)
trajectory or higher, this will be reflected in international prices and the
price ceiling will automatically be $20 above this price. The level of the
international price will be examined closer to the point of transition to a flexible
price period to ensure that the price ceiling reflects a $20 margin above its
price floor will apply for the first three years of the flexible price period.
The price floor will start at $15 and rise at 4 per cent in real terms each
banking of permits will be allowed in the flexible price period. There will be
limited borrowing of permits such that, in any particular compliance year, a
liable entity can surrender permits from the following vintage year to discharge
up to 5 per cent of their liability.
will be allocated by auctioning, taking into account transitional assistance
provisions for key sectors. The policies, procedures and rules for auctioning
will be set out in a legislative instrument. The Government will advance
auction future vintage permits. There will be advance auctions of flexible
price permits in the fixed price period. There will be no double-sided
auctions. There will be no deferred payment arrangements for auctions.
and liable entities
carbon pricing mechanism will have broad coverage of emission sources from
commencement, encompassing: stationary energy; industrial processes; fugitive
emissions (other than from decommissioned coal mines); and emissions from
non-legacy waste. An equivalent carbon price will be applied through separate
legislation to some business transport emissions, non-transport use of liquid
and gaseous fuels, and synthetic greenhouse gases.
and land sector emissions will not be covered.
from the combustion of biofuels and biomass, including CO2-e emissions from
combustion of methane from landfill facilities, will not be covered.
carbon pricing mechanism will cover four of the six greenhouse gases counted
under the Kyoto Protocol — carbon dioxide, methane, nitrous oxide and
perfluorocarbons from aluminium smelting.
global warming potential synthetic greenhouse gases (with the exception of
perfluorocarbons from aluminium smelting) will not be included in the carbon
pricing mechanism but will be subject to an equivalent carbon price using
existing import and manufacture levies under the Ozone Protection and Synthetic
Greenhouse Gas Management legislation. Levies will be adjusted annually to
reflect the prevailing carbon price. From 1 July 2013, incentives will be
provided for destruction of waste synthetic greenhouse gases, including ozone
depleting substances, recovered at end of life.
general, a threshold of 25,000 tonnes of CO2-e will apply for determining
whether a facility will be covered by the carbon pricing mechanism. All scope 1
(direct) emissions covered by the carbon pricing mechanism, and legacy waste
emissions, will count towards thresholds, but not scope 1 emissions from fuels
or other sources excluded from the carbon pricing mechanism.
facilities will not be liable for emissions that arise from waste deposited
prior to 1 July 2012, but those emissions will count towards facility
thresholds. To avoid waste displacement from covered to non-covered landfill
facilities, an additional threshold of 10,000 tonnes of CO2-e will apply to
landfill facilities within a prescribed distance of large landfill facilities.
gas retailers will be responsible for emissions from the use of natural gas by
their customers. There will be flexibility for large facilities that purchase
natural gas from a retailer to assume responsibility for emissions from their
use of natural gas. Where natural gas is not supplied by a retailer, emissions
from that natural gas will count towards the liability of covered facilities.
Where the gas is not used at a covered facility, the owner of the gas will be
the liable entity. Natural gas retailers will be responsible for emissions from
the use of natural gas by their customers. There will be flexibility for large
facilities that purchase natural gas from a retailer to assume responsibility
for emissions from their use of natural gas. Where natural gas is not supplied
by a retailer, emissions from that natural gas will count towards the liability
of covered facilities. Where the gas is not used at a covered facility, the
owner of the gas will be the liable entity.
obligation transfer number (OTN) mechanism will provide for the voluntary
transfer of carbon price liability from natural gas retailers to large natural
gas users in prescribed circumstances. In general, large users of natural gas
will be permitted to quote an OTN to their supplier to assume liability for
their own emissions. Businesses that use natural gas as a feedstock will also
be able to quote an OTN in order to avoid paying the carbon price on natural
gas that does not result in emissions.
quotation and acceptance will in general be voluntary. However, as a
retailers will be required to accept an OTN quotation where natural gas is
supplied under a contract entered into before the Royal Assent to the
legislation and where the natural gas is to be used as a feedstock or where
more than 25,000 tonnes of CO2-e per year are attributable to the natural gas
supplied under those contracts.
liable entity for direct emissions from a facility will generally be the person
with operational control over that facility (that is, authority to introduce
and implement any or all of the operating, health and safety, and environmental
policies for that facility).
a facility is operated by an Unincorporated Joint Venture and no one person has
operational control over the facility, the emissions liability for that
facility will instead be allocated between the joint venture participants in
proportion to their interest in the facility.
operator of a facility will be able to apply for a liability transfer
certificate to transfer liability for emissions from that facility to:
member of its corporate group;
person outside of its corporate group that has financial control over the
Joint Venture participants in proportion to their interest in the facility
where the facility is operated for the Unincorporated Joint Venture.
commercial vehicles (vehicles 4.5 tonnes or less gross vehicle mass) and
households will not face a carbon price on the fuel they use for transport. In
addition, the agriculture, forestry and fishery industries will not pay a
carbon price on their fuel use.
business transport emissions from liquid fuels (rail and shipping) and
non-transport emissions from businesses using liquid fuels will be subject to
an equivalent carbon price, generally applied by reducing business fuel tax
credits by an amount equivalent to that of placing the carbon price on liquid
fuel emissions. Fuel tax credit reductions will apply to fuels acquired after 1
transport use of Compressed Natural Gas (CNG), Liquefied Natural Gas (LNG) and
Liquefied Petroleum Gas (LPG) (such as freight transport) will not face a fuel
tax credit reduction due to the imposition of the Road User Charge. Off-road
transport use of these fuels (such as on a mine site) will face a reduction in
fuel tax credits equivalent to placing the carbon price on emissions from that
use of CNG, LNG and LPG currently benefit from an automatic remission of
excise. This will be replaced by a partial remission to reflect the effective
biodiesel and renewable diesel will not incur fuel tax credit reductions or
changes to excise as these fuels are zero rated under international carbon
fuel tax credits are not available for aviation fuels, domestic aviation fuel
excise will be increased by an amount equivalent to the effect of placing the
carbon price on aviation fuel in order to provide an effective carbon price for
aviation. Changes to aviation excise will apply to fuels acquired after 1 July
2012. The additional revenue from increasing aviation excise by an amount
equivalent to the carbon price will not be appropriated to the Civil Aviation
aviation fuel use will not be covered as this is subject to international
to fuel tax credits and excise to reflect the carbon price will be based on the
specific emissions intensities of CNG, LNG, LPG, aviation gasoline, aviation
kerosene, petrol and diesel, with all other liquid fossil fuels based on the
diesel emission rate. Adjustments to credits and excise will be annual during
the fixed price phase and every 6 months (based on the average carbon price
over the previous six months) during the flexible price phase.
Productivity Commission will conduct a review of fuel excise arrangements,
including an examination of the merits of a regime based explicitly and
precisely on the carbon and energy content of fuels.
domestic unit for compliance with the carbon pricing mechanism will be the
‘carbon permit’. Each carbon permit will correspond to one tonne of greenhouse
creation of equitable interests in carbon permits will be permitted, as will
taking security over them.
addition, carbon permits will:
regulated as financial products;
transferable (other than those issued under the fixed price or any price
a unique identification number and will be marked with the first year in which
they can be validly surrendered (‘vintage year’);
have an expiry date; and
represented by an electronic entry in Australia’s National Registry of
compliance year is the Australian financial year, from 1 July to 30 June.
discharge their emissions obligations liable entities will be able to surrender
an eligible emissions unit for each tonne of emissions for which they are
liable during the compliance year.
the fixed price period, most liable entities will be required to discharge
their emissions obligations in two parts:
‘progressive’ surrender obligation of 75 per cent of their emissions obligation
by 15 June of the relevant compliance year; and
‘true up’ (surrender) for the remainder of the obligation by 1 February
following the compliance year.
approach is similar to payment arrangements used for corporate taxes and allows
time for entities to finalise annual emissions reports before making a final
surrender of carbon permits.
progressive surrender obligation will not apply for direct emissions in respect
facility that reported emissions of less than 35 kilotonnes CO2-e in its
previous year’s National Greenhouse Emissions Reporting System (NGERS) report,
or was not required to provide an NGERS report in the previous year; or
facility that is expected to have emissions of less than 35 kilotonnes CO2-e in
the current compliance year.
these circumstances, there will be a single date for meeting emissions
obligations, which will be the ‘true up’ date of 1 February.
the flexible price period, emissions obligations for each compliance year must
be met by 1 February following the compliance year.
obligations that are not met through the surrender of eligible emissions units
will need to be met by paying an emissions charge.
the fixed price period, the emissions charge for the progressive surrender
obligation and ‘true up’ (surrender) will be 1.3 times the fixed price for
permits (that is, $29.90 for 2012-13, $31.40 for 2013-14 and $33.00 for
2014-15). The emissions charge for any shortfall for a compliance year in the
flexible price period will be double the average price of permits for that
year. The emissions charge will apply for each tonne of greenhouse gas
emissions (carbon dioxide equivalent) for which an eligible emissions unit has
not been surrendered.
of units from the Carbon Farming Initiative (CFI)
carbon credit units (ACCUs) issued under the CFI will be eligible for
compliance under the carbon pricing mechanism if they are:
compliant Australian carbon credit units (Kyoto ACCUs);
compliant Australian carbon credit units (non-Kyoto ACCUs) derived from
emissions sources and sinks that would have been credited with a Kyoto ACCU if
the abatement had occurred before the end of the relevant accounting period for
the Kyoto Protocol first commitment period (31 December 2012 for reforestation
and avoided deforestation activities, or 30 June 2012 for all other
other type of ACCU prescribed in regulations.
the fixed price period, liable entities may surrender eligible ACCUs totalling
no more than 5 per cent of their obligation. In the flexible price period,
there will be no limit on the surrender of ACCUs.
units will be bankable for future use. CFI units will be able to be exported
during both the fixed price period and the flexible price period.
use of international units to meet carbon pricing mechanism liabilities will
not be permitted in the fixed price period. Export of domestic permits will not
be permitted in the fixed price period (with the exception of Kyoto ACCUs).
units can be used to meet carbon pricing mechanism liabilities in the flexible
price period, subject to certain qualitative and quantitative restrictions
of domestic permits (with the exception of Kyoto ACCUs) will not be permitted
in the flexible price period while a domestic price ceiling is in place, except
as part of a bilateral link to another emissions trading scheme with
appropriate provisions in place to maintain the environmental integrity of the
linked schemes. Unrestricted export of units will be permitted when there is no
longer a domestic price ceiling in place.
2020, liable parties must meet at least 50 per cent of their annual liability
with domestic permits or credits. This restriction will be reviewed by the
Climate Change Authority in 2016.
following international units will be included in the legislation establishing
the carbon pricing mechanism:
emission reductions (CERs) from Clean Development Mechanism projects under the
Kyoto Protocol, other than temporary CERs, long-term CERs, and CERs from
nuclear projects, the destruction of trifluoromethane, the destruction of
nitrous oxide from adipic acid plants or from large-scale hydro-electric
projects not consistent with criteria adopted by the EU (based on the World
Commission on Dams guidelines);
reduction units (ERUs) from Joint Implementation projects under the Kyoto
Protocol, other than ERUs from nuclear projects, the destruction of
trifluoromethane, the destruction of nitrous oxide from adipic acid plants or
from large-scale hydro-electric projects not consistent with criteria adopted by
the European Union (EU) (based on the World Commission on Dams guidelines);
units (RMUs) issued by a Kyoto Protocol country on the basis of land use,
land-use change and forestry activities under Article 3.3 or 3.4 of the Kyoto
other international units that the Government may allow by regulation.
restrictions placed on the acceptance of international units will be to ensure
the stability and ongoing credibility of the carbon pricing mechanism, the
environmental integrity and effectiveness of the carbon pricing mechanism, and
consistency with Australia’s international objectives and obligations. The
Government may disallow the use of a given type of international unit at any
time to ensure the environmental integrity of the mechanism. Liable parties
holding such units in their registry accounts will be able to use those units
for compliance in the compliance year in which the units were disallowed, but
Government may allow other international units by regulation where:
addition does not compromise the environmental integrity of the carbon pricing
addition is consistent with the objective of the carbon pricing mechanism and
with Australia’s international objectives; and
has been consultation with stakeholders, and analysis of the expected impact on
the permit price, by the Climate Change Authority, and advance notification to
the market by the Government.
types of units accepted and qualitative restrictions on use imposed by the EU
Emissions Trading Scheme and the New Zealand (NZ) Emissions Trading Scheme will
be taken into account when determining what international units may be accepted
for compliance under the carbon pricing mechanism. The Climate Change Authority
will advise on the integrity of international units, and recommend which units
should be accepted and which should be prohibited.
to other credible trading schemes, including the EU Emissions Trading Scheme
and the New Zealand Emissions Trading Scheme is in Australia’s national
interest. The Government will only consider future bilateral links with schemes
that are of a suitable standard, based on a range of criteria including:
internationally acceptable (or, where applicable, a mutually acceptable) level
of mitigation commitment;
and comparable monitoring, reporting, verification, compliance and enforcement
in design and market rules.
of Voluntary Action
Government will take voluntary action into account when setting pollution caps.
Voluntary action will be treated as additional when accounting for Australia’s
the flexible price period, permit holders may voluntarily cancel their permits.
These will not be counted towards meeting Australia’s national emissions
targets and their cancellation will reduce the number of permits available in
the market. Holders of international units and ACCUs may voluntarily cancel
their units at any time, as soon as the Registry is in operation.
Pledge Fund will be established from the commencement of the carbon pricing
mechanism to help individuals access the carbon market and voluntarily cancel
emissions units. The units the Pledge Fund will voluntarily cancel will include
Australian carbon permits, Kyoto compliant and non-Kyoto compliant ACCUs, and
eligible international units. Contributions to the Pledge Fund will be tax
purchases of accredited GreenPower from the date that the carbon pricing
mechanism commences will be accounted for as voluntary action. In the fixed
price period, the Government will measure GreenPower purchases on an annual
basis and take these into account when setting the initial pollution caps. As
pollution caps are to be set by 31 May 2014, only those GreenPower purchases
measured at the time of making regulations will be counted in the initial caps,
that is, GreenPower purchases for 2012-13. The remaining GreenPower purchases
during the fixed price phase will be accounted for in later caps. In the
flexible price period, the Government will measure GreenPower purchases on an
annual basis and directly take these into account in setting the pollution caps
five years into the future. Adjustments to the pollution cap for GreenPower
will be backed by a commitment not to count those emission reductions towards
meeting the national emissions reduction target.
action in addition to GreenPower and voluntary cancellation of units could also
be recognised, on advice from the Climate Change Authority on whether a robust
methodology can be developed to recognise additional voluntary action by
Treatment of Permits
cost of a permit will be deductible, with the deduction effectively being
deferred through the rolling balance method until the permit is sold or
surrendered. The proceeds of selling a permit will be assessable income on
revenue account in the income year the permit is sold.
the rolling balance method, any difference in the value of permits held at the
beginning and the end of an income year will be reflected as a variation in a
taxpayer’s taxable income with any increase in value included in assessable
income and any decrease in value allowed as a deduction.
a permit is surrendered for a purpose unrelated to producing assessable income
(for example, voluntary cancellation by an individual), the deduction of the
cost of the permit will be reversed by including an equivalent amount in
will be able to elect to value permits that they hold at the end of the first
income year they hold permits either at historical cost or at market value,
with the default being historical cost.
will be able to change their valuation method once during the fixed price
period, and after a method has been in use for four years during the flexible
value of a permit will be deemed to be its market value where:
is transferred under a non-arm’s-length transaction between related parties or
a transaction with an associate;
is issued to the taxpayer as part of an assistance arrangement; or
is an ACCU issued under the Carbon Farming Initiative.
income tax purposes, a permit will be deemed to be held by the beneficial owner
of the permit.
permits are imported or exported they will be treated as if they were sold and
repurchased in the relevant registries at market value.
incurred in becoming the holder of a permit will be deductible in the year the
taxpayer starts to hold a permit, except where the permit is:
as part of an assistance arrangement, in which case the deduction will be
ACCU issued under the Carbon Farming Initiative, in which case the existing
income tax law will apply. An exception to this rule is expenditure incurred in
preparing or lodging reports necessary for an ACCU to be issued.
deduction will be denied for any penalties (including shortfall charges) imposed
under the carbon pricing mechanism.
grants will be subject to the existing tax law, not special provisions.
that are freely allocated to entities undertaking an eligible
emissions-intensive, trade-exposed (EITE) activity will be valued at zero
taxpayer held the permit at the end of the relevant income year;
taxpayer held the permit at all times from when it was issued to the end of the
income year; and
income year ends on or before the last surrender date for the compliance year
for which they are issued.
the normal valuation rules will apply.
providing for the income tax treatment of permits will necessarily create a
range of interaction issues with the rest of the tax law. The general rules
include principles to manage these interactions.
will be made to the A New Tax System (Goods and Services Tax) Act 1999 to make
supplies of permits under the carbon pricing mechanism GST-free. Application of
the normal GST rules will apply to transactions in financial derivatives of
permits and payments of grants of assistance.
accounting treatment of permits and transactions under the carbon price
mechanism will be determined in accordance with international accounting
standards, as adopted in Australia. The auditing of potential emissions
liabilities will continue to meet Australian auditing standards which conform
with the International Standards on Auditing (issued by the International
Auditing and Assurance Standards Board).
Climate Change Authority (the Authority) will be established by legislation as
an independent body to provide expert advice on key aspects of the carbon
pricing mechanism and the Government’s climate change mitigation initiatives.
Government will remain responsible for carbon pricing policy decisions with
significant and far-reaching implications.
Authority will perform a number of functions. It will:
recommendations to the Government on future pollution caps. In making its
recommendations the Authority will have regard to:
Government medium and long-term targets;
of the global emissions budget;
towards emissions reductions;
social and other relevant factors; and
action, including GreenPower and any approved new methodologies;
recommendations on the indicative national trajectories and long-term emissions
budgets, having regard to the long-term target set by the Government and
estimates of the global emission budget;
independent advice to the Government on the progress that is being made to
reduce Australia’s emissions to meet national targets, any indicative national
trajectory or budget. As part of this, the Authority will provide analysis of
the extent to which the emissions reduction objectives are being achieved from
reductions in domestic emissions and from the purchase of international units;
regular reviews of and make recommendations on the carbon pricing mechanism
(household assistance and the Jobs and Competitiveness Program will be reviewed
reviews of and make recommendations on the National Greenhouse and Energy
Reporting system, the Renewable Energy Target and the Carbon Farming
recommendations to the Government on whether a robust methodology could be
developed to recognise additional voluntary action by households;
advice to Government on the role of the price floor and price ceiling beyond
the first three years of the flexible price phase;
reviews and make recommendations on other matters as requested by the Minister
for Climate Change and Energy Efficiency or the Parliament; and
or commission its own independent research and analysis into climate change and
other matters relevant to its functions.
Authority will engage with representatives interested in climate change from
across Australia in order to share research and information on climate change
and gain input into its analysis.
Authority will be made up of nine experts with a particular focus on climate
science, economics, climate change mitigation, emissions trading, investment
and business. The Authority will be supported by an independent staff.
Authority will provide recommendations to Government on the pollution caps for
the first five years of the flexible price period by 28 February 2014. Starting
in 2016, the Authority will produce annual recommendations for the annual
one-year extension of pollution caps.
Authority will provide advice to Government on the indicative national
emissions trajectory or carbon budget at the time of reporting on pollution
caps. The first report on progress in meeting national emissions reduction
targets and trajectories will be provided to the Government by 28 February 2014
and then reported annually.
first review of the carbon pricing mechanism will be provided to the Government
by 31 December 2016, the second review by 31 December 2018 and then each
subsequent review within five years of the last.
review of the Renewable Energy Target will take place in the second half of
2012 and every two years after that.
review of the Carbon Farming Initiative will take place by the end of 2014 and
every three years after that.
review of the National Greenhouse and Energy Reporting System will be conducted
at least every five years and may be done as part of the review of the carbon
Authority will prepare a public report with each of its reviews.
Authority will be required to hold public consultations as part of each of its
reviews. This will include public hearings and a process of public submissions.
receipt of the Authority’s first report by 28 February 2014, the Government
will include its formal response in the 2014-15 Commonwealth Budget and a
separate statement will be produced and tabled in Parliament.
Government will introduce the first carbon budget regulations (comprising the
first set of pollution caps for the next five years) into the Parliament no later
than the end of May 2014. If the pollution caps presented in the regulations
differ from the recommendations of the Authority, the Government will justify
the difference in its response.
Clean Energy Regulator (the Regulator) will be established to administer the
carbon pricing mechanism within a limited and legislatively prescribed
of the Regulator will include:
education on the carbon pricing mechanism, particularly about the administrative
arrangements of the carbon pricing mechanism;
emissions data to determine each entity’s liability;
the Australian National Registry of Emissions Units;
facilitating and enforcing compliance with the carbon pricing mechanism;
permits including freely allocated permits, fixed price permits and auctioned
legislative rules to determine if a particular entity is eligible for
assistance in the form of permits to be allocated administratively, and the
number of other permits to be allocated;
the National Greenhouse and Energy Reporting system, the Renewable Energy
Target and the Carbon Farming Initiative, the regulatory functions which will
be brought together with the Clean Energy Regulator to form an independent
regulator from July 2012; and
auditors for the Carbon Farming Initiative and the National Greenhouse and
Energy Reporting System.
Productivity Commission (PC) will be commissioned to undertake ongoing work to
quantify mitigation policies in other major economies. It will start
immediately to expand the number of countries, industries and policies
evaluated and to build up a comprehensive, robust and up-to-date data set.
arrangements will be reviewed by the PC in the third year of the carbon pricing
mechanism (2014-15) and thereafter consistent with the timing of general scheme
reviews. A review of assistance provided to a particular activity could be
conducted earlier than 2014-15 if requested by the Government, and priority
could be given to:
sectors receiving the greatest level of assistance;
sectors experiencing the fastest rates of growth in assistance; or
sectors where there is strong evidence of windfall gains as a result of the
an alternative pattern and level of assistance would meet the Program’s
objectives particularly economic and environmental efficiency, more
feasibility of, and availability of data for, amending the Jobs and
Competitiveness Program assessment framework to one based on an assessment of
the estimated expected global uplift of prices of individual EITE products if
other countries had implemented a carbon price equivalent to that applied in
Australia, as proposed by the Garnaut Climate Change Review—Update 2011. This
review will consider whether it is the most effective and efficient means of
preventing carbon leakage and assisting the industry to transition and whether
the Government should adopt this approach;
EITE activities are making progress towards best practice energy and emissions
efficiency for the industrial sector to which those activities relate;
additional activities should be added to the Jobs and Competitiveness Program
on account of commodity price movements or other relevant matters;
windfall gains are being conferred on entities carrying out EITE activities;
effect of existing facilities having no cap on permit allocations;
growth in the EITE sector and implications for total free permit allocations
under an emissions cap;
existence of broadly comparable carbon constraints applying internationally;
appropriateness of the LNG supplementary allocation policy;
impact of carbon pricing on the competitiveness of EITE industries, including
an analysis of carbon cost pass-through, the level of abatement achieved and
the effect of the carbon productivity contribution on EITE activities over time
and whether the carbon productivity contribution should be changed for a
specific industry; and
less than 70 per cent of relevant competitors in each industry have introduced
comparable carbon constraints, taking into account all mitigation policies and
relevant assistance policies, and hence whether the application of the carbon
productivity contribution rate for a specific industry should pause when
assistance rates reach 90 per cent for highly emissions intensive industries,
or 60 per cent for moderately emissions intensive industries.
least two Associate Commissioners with experience in the markets and production
of EITE products will be appointed to the PC to take part in these Reviews.
the carbon pricing mechanism has commenced, firms may make a request to the
Government to have the impact of the mechanism on their sector assessed. The
Government will establish guidelines which set out when such requests will be
referred to the PC and the terms of reference for these reviews. These assessments
into account the industry’s circumstances, including a range of factors related
and unrelated to the carbon pricing mechanism that affect the competitiveness
of the industry, and any assistance provided to the industry; and
recommendations to the Government about whether it should adjust support to the
industry and the appropriate mechanism for that assistance.
PC will conduct a review of fuel excise arrangements, including an examination
of the merits of a regime based explicitly and precisely on the carbon and
energy content of fuels.
Pensioner, Veterans and Aged Care Assistance
Government’s commitments to households are:
than 50 per cent of the carbon pricing mechanism revenue will be used to assist
of households will be better off under the carbon pricing mechanism;
will be permanent;
households (including all pensioners) will be eligible for assistance that at
least offsets their average expected cost impact from carbon pricing;
households will be eligible for assistance that helps them to meet the expected
cost impact from carbon pricing; and
containing individual/s with a relevant concession card and who are certified
by a medical practitioner as having a medical condition or disability that
means they have high essential electricity costs are eligible for additional
assistance through the Essential Medical Equipment Payment.
assistance will be delivered through the tax and transfer system. Assistance
provided through transfer payments will be permanent and increase with the cost
will be delivered through a lump sum payment — the Clean Energy Advance — made
to eligible recipients in May-June 2012. On-going assistance will then be
provided through a new Clean Energy Supplement.
pensioners will receive annual assistance through their pension equivalent to a
1.7 per cent increase in the maximum rate of the pension. This includes those
on the Age Pension, Service Pension, Carer Payment, Disability Support Pension.
Assistance for pensioners will be:
to $338 per year for singles
to $510 per year for couples combined.
funded retirees who are holders of the Commonwealth Seniors Health Card (CSHC) will
get $338 per year for singles and $510 per year for couples, combined, through
their Seniors Supplement. Allowance recipients get annual assistance through
their payments equivalent to a 1.7 per cent increase in the maximum rate of
families get assistance through a 1.7 per cent payment increase in Family Tax
to $110 for each child; and
to $69 per family in receipt of Family Tax Benefit Part B.
addition, up to $300 in Single Income Family Supplement will be available for
single income families with a primary earner between $68,000 and $150,000, who
would receive little or no assistance through tax changes compared with dual
income families with similar income.
new Low Income Supplement of $300 will be available to those who can show they
did not receive enough assistance to offset their average cost impact. People
can apply for the payment from 1 July 2012.
on compensation payments made under the Veterans Entitlement Act 1986 —
including disability pensions and the war widow/ers pension — and the Military
Compensation and Rehabilitation Act 2004 — including permanent impairment
payments and wholly dependent partner payments — will receive assistance
equivalent to a 1.7 per cent increase in their payment.
Government will deliver tax cuts to target assistance to low- and middle-income
individuals by more than tripling the statutory tax-free threshold from $6,000
to $18,200 on 1 July 2012, and adjusting the first two marginal tax rates. This
will replace all but $445 of the low-income tax offset (LITO), and provide
current tax payers with annual incomes up to $68,000 with a tax cut of at least
statutory tax-free threshold will be further increased to $19,400 when the
carbon price is replaced with an emissions trading system in 2015-16. This will
reduce the LITO to $300, and bring the total value of tax cuts to people with
annual incomes up to $68,000 to at least $385.
current and new personal income tax rates and thresholds are shown in the
Statutory Rates and Thresholds
Effective tax free threshold
4% withdrawal rate from $30000
1.5% withdrawal rate from $37000
income definitions for the household commitments are set out in the following
Couple without children
Couple with children
Low (less than)
$30,000 to $80,000
$45,000 to $120,000
$60,000 to $150,000
$60,000 to $150,000
of the household assistance paid to residents of aged care facilities will be
distributed to their aged care facilities, which pay for most of their
residents’ costs of living.
assistance will be shared between aged care providers and their residents in an
approximate 55:45 split, by increasing the percentage of the basic pension
payable to the provider (from 84 per cent to 85 per cent).
arrangements will be established for around 2 per cent of existing residents
not in receipt of a pension or other income support payment and not holding a
CSHC, so their fees do not increase as a result of the change in fee structure
care facilities will be provided with additional funding to address the costs
they incur in respect of their ‘grandfathered’ residents.
Essential Medical Equipment Payment will be provided to households containing
individual/s with a relevant concession card and who have very high essential
electricity costs due to a medical condition or disability.
annual cash payment of $140 will be paid through Centrelink and the Department
of Veterans’ Affairs (DVA) to people using pieces of equipment recognised by
any state or territory medical electricity assistance scheme. People with
thermoregulatory dysfunction and a relevant concession card will also be
eligible for the same level of assistance.
claimant must meet the following criteria to be eligible for the Essential
Medical Equipment Payment:
claimant is a current Australian Government concession card holder (Pensioner
Concession Card, Health Care Card, CSHC or equivalent DVA concession card
excluding DVA Gold Card);
claimant must show that they, or the concession card holder they care for in
their household, meet specified medical condition/medical appliance
claimant or the person they care for is the holder of the electricity account.
Treasurer and the Minister for Families, Housing, Community Services and
Indigenous Affairs, in consultation with relevant ministers, will annually
review the adequacy of household assistance in the Budget process. This review
will examine the real value of the assistance provided on the introduction of
the carbon pricing mechanism taking into account:
in prices for a consumption basket used in calculating the assistance;
indexation arrangements for the assistance provided, including the adjustment
for the bring forward; and
new information about the weights of items in the consumption basket.
addition to these annual reviews, there will be a review of the household
assistance package in parallel with the carbon pricing mechanism review in
and Competitiveness Program
will be provided through allocation of permits early in each compliance period
to new and existing entities undertaking an eligible emissions-intensive
trade-exposed (EITE) activity prescribed in regulations.
will be based on an individual entity’s previous year’s level of production
with a true-up to account for actual production.
closure, recipients must relinquish permits for production that did not occur
in that year.
per cent of permits allocated in respect of indirect emissions and 75 per cent
of permits allocated in respect of direct emissions will be provided early in
each compliance period, with the remaining 25 per cent of permits relating to
direct emissions allocated early in the following financial year. This means
that permits will be provided in line with progressive payment obligations.
Government will provide a buy-back facility for firms in receipt of free
permits to sell these permits back to the Government as outlined under the
scheme architecture. In the flexible price period, assistance will be provided
early in each compliance year.
of activities will be based on an assessment of all entities conducting an
activity during the historic baseline period consistent with the process,
criteria and requirements currently used for Partial Exemption Certificate
assistance under the Renewable Energy Target.
is assessed through quantitative and qualitative tests:
quantitative test threshold would be a trade share (ratio of value of imports
and exports to value of domestic production) greater than 10 per cent in any
one of the years 2004-05, 2005-06, 2006-07 or 2007-08; and
qualitative test threshold would be a demonstrated lack of capacity to pass through
costs due to the potential for international competition.
emissions intensity assessment is based on average emissions per million
dollars of revenue or emissions per million dollars of valued added.
period for assessment:
data: 2006-07 to 2007-08; and
or value added data: 2004-05 to the first half of 2008-09.
situations where a given output was produced from eligible activities using
either primary materials or recovered or recycled materials as inputs, the same
rate of assistance will be applied to both activities. Activity assessments and
activity definitions that have already taken place will remain valid.
will receive assistance for their direct emissions as well as the cost of their
indirect emissions from electricity and steam use, and the cost increases for
upstream emissions from natural gas and its components (for example, methane
and ethane) used as feedstock and sequestered in the output of the activity.
baselines for activities will be based on the historic industry average level
of emissions per unit of production for all entities conducting an activity
during the assessment period. The electricity allocation factor will be set at
one permit per megawatt hour. However, this may be adjusted in respect of
existing large electricity supply contracts for entities consuming greater than
2,000 gigawatt hours per year, and where contractual arrangements entered into
before 3 June 2007 are still in force (without having been renegotiated or
reviewed) within 60 days after Royal Assent of the Act. In such a situation,
these contracts will be considered by the Regulator with a view to determine an
entity-specific electricity allocation factor. The natural gas feedstock
allocation factor will be set state-by-state.
rates of assistance will be:
per cent of the industry average baseline for activities with an emissions
intensity of at least 2,000t CO2-e/$million revenue or at least 6,000t
CO2-e/$million value added.
per cent of the industry average baseline for activities with an emissions
intensity between 1,000t CO2-e/$million and 1,999t CO2-e/$million revenue or
between 3,000t CO2-e/$million and 5,999t CO2-e/$million value added.
projects will receive a supplementary allocation to ensure an effective
assistance rate of 50 per cent in relation to their LNG production each year.
rates of assistance will be reduced by a carbon productivity contribution of
1.3 per cent per year.
maximum cap on allocations will apply to existing facilities. Allocations to
new facilities will be limited by regulations in a manner which avoids windfall
gains from assistance arrangements.
entities conducting an existing EITE activity will receive the same assistance
as existing entities conducting the same activity. Activities new to Australia
will be able to apply for EITE eligibility. Assessments and baselines will be
made on the basis of international best practice emissions intensity.
Allocations to existing entities conducting EITE activities will not be
adjusted for allocations to new entrants.
changes to assistance arrangements that will have a negative effect on business
will not occur before the sixth year of the carbon price.
years’ notice will be provided of modifications to EITE allocations that will
have a negative effect on business. The notice period may overlap with the five
year minimum assistance period. Assistance arrangements will be reviewed by the
Productivity Commission as outlined in the policy on Productivity Commission
Government would implement the approach proposed by the Garnaut Climate Change
Review—Update 2011 if the Productivity Commission recommends that it is the
most effective and efficient means of preventing carbon leakage and assisting
the industry to transition and recommends that the Government adopt this
approach. This will be subject to the minimum assistance and notice period set
Energy Security Fund will provide transitional assistance to promote the
transformation of the electricity generation sector from high to low-emissions
generation while addressing risks to energy security arising from the carbon
Energy Security Fund will comprise:
for payments for the closure of around 2,000 megawatts of very highly
emissions-intensive coal-fired generation capacity by 2020, according to a
publicly announced schedule. This measure will commence the process of
transforming our electricity generation sector, by delivering concrete closure
outcomes and providing clear signals to potential investors in low-emissions
limited transitional administrative allocation of permits and cash estimated at
$5.5 billion over six years to assist highly emissions-intensive coal-fired
generators adjust to the introduction of a carbon price and prepare for a lower
new Energy Security Council including energy and financial market experts will
be created to advise the Government in the event that systemic risks to energy
security emerge from the financial impairment of power stations arising from
any source, including from the introduction of carbon pricing.
Council will provide advice to the Treasurer on the appropriate policy
instruments available to address energy security risks. This will include
providing advice to the Treasurer on the provision of Government loans to
generators which need to refinance their debt if finance from the market is not
the difficult borrowing conditions faced by coal-fired generators, transitional
loans may also be offered to emissions-intensive generators to provide
additional working capital for the purchase at auction of future vintage carbon
both of the above cases these loans will be priced on terms that encourage
generators to seek private finance in the first instance.
mitigate energy security risks arising from the introduction of carbon pricing
and to incentivise a transformation to low-emissions generation, focusing on
the most emissions-intensive coal-fired generators.
to participate in an expression of interest process for closure contracts will
be limited to coal-fired generators with emissions intensity greater than 1.2t
CO2-e per MWh of electricity on an ‘as generated’ basis.
an expression of interest process and negotiations with selected generators the
Government will contract with one or more generators for closure of agreed
capacity on the basis of value for money.
to close will be contingent upon power system reliability requirements, payment
of workers’ entitlements and arrangements for appropriate remediation of the
site of the power station (and of a related coal mine where appropriate).
allocations of free carbon permits will be limited to generators with emissions
intensity above 1.0t CO2-e per MWh of electricity on an ‘as generated’ basis.
support energy security, generators will be eligible to receive administrative
allocations only if they comply with power system reliability requirements and
develop and publish Clean Energy Investment Plans (see below). Generators may
exit the market and still receive their administrative allocations if they
satisfy the Australian Energy Market Operator that there is alternative
capacity in the market available to meet demand, or where they have invested in
new lower-emissions replacement capacity themselves.
loans will be available for the purchase at auction of future vintage carbon
permits for the first three years of carbon permit auctions. The Government
will also consider making loans available where generators need to refinance
their debt but finance is not available from the market. The Energy Security
Council will provide advice on the provision of loans in these circumstances.
both of the above cases, loans will be priced on terms that encourage
generators to obtain private finance where possible and there will be an
assessment of a potential recipient’s capacity to repay the loan.
Energy Security Council will advise the Government on systemic risks to energy
security arising from the financial impairment of any market participants.
Eligibility for assistance to address any systemic risks to energy security
would be assessed on a case-by-case basis. The Energy Security Council will
provide advice to the Government on other measures that may be required should
systemic risks to energy security emerge.
contracting with the Government to close will be required to forego their
administrative allocations (and will not have to comply with associated
conditions) but will receive value equal to that foregone assistance plus an
additional payment for closure.
allocations of free carbon permits and cash payments will be provided to the
value of $5.5 billion (nominal) in five separate instalments. $1 billion of
assistance will be provided in 2011-12, followed by annual allocations of
41.705 million free carbon permits per year in the period 2013-14 to 2016-17.
with an emissions intensity of above 1.0 tCO2-e/MWh of electricity ‘as
generated’ will be eligible for administrative allocations of free carbon
permits and cash. For these generators, shares of administrative allocations of
free carbon permits and cash will be based on the extent to which each
generator’s emissions intensity exceeds 0.86 tCO2-e/MWh ‘as generated’,
multiplied by their historical energy output, calculated over the period
2008-09 and 2009-10.
ensure that assistance is not inappropriately skewed towards the most
emissions-intensive generators, for the purposes of calculating administrative
allocations where an individual generator’s emissions intensity exceeds 1.3t
CO2-e per MWh of electricity on an ‘as generated basis’, it will be capped at 1.3t
CO2-e per Mwh.
comprehensive structural adjustment support package will be made available to
the workforce of generators which contract with the Government to close. This
includes personalised advice on searching for a job; career options and
employment programs; information about local job vacancies and access to job
search facilities; help with a résumé and job applications; and advice on
interview skills. Job Services Australia will also help job seekers access
skills assessments, training and other employment support that will help them
find new employment.
receiving administrative allocations of free carbon permits will be required to
provide Clean Energy Investment Plans, which will be made public. These Plans
will identify their proposals to reduce pollution from existing facilities and
to invest in research and development and new low or zero-emissions capacity.
Information on possible projects identified under the Energy Efficiency
Opportunities program will also be included in these Plans.
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