Green paper exposes hard times ahead

Tag : Hole Punch Tool

COMMITTING to a national emissions trading scheme (ETS) is likejumping off a cliff. It's not the leap of faith that kills you, butthe sudden deceleration at the bottom.
Kevin Rudd promised Australia a trading scheme by 2010 as theheadline act in last year's climate change strategy during thelead-up to the election. The most difficult policy decision of ageneration was framed by politics.
Like his promise of a 20 per cent mandatory renewable energy targetby 2020, Rudd was determined to go one better than whatever JohnHoward could put on the table.
By the time his task group report came out a year ago, Howard hadalready decided to announce his climate epiphany by committing thenation to an ETS by 2011. Anticipating this, Rudd had alreadycommitted to a 2010 start date, typical of the clever politics thatdefined Rudd's victory. Only now are we starting to discover thepotential downside.
None of the four Australian reports over the past two years on thepossible design of an ETS has seriously discussed the suitabilityof such a scheme for one of the most trade-exposed,energy-intensive economies on earth.
For starters, no one has had the data. Bureaucrats are sceptical ofthe claims by electricity generators that some will be forced toclose if the price of emissions gets too high. But not toosceptical. They're nervous enough that they're going to get theirown modelling of the national electricity market done, just to makesure.
It has just been assumed that since the largely intra-trading,high-value-added, energy-constrained European economies were optingfor emissions trading, this would also be the first best policyresponse for Australia.
The European Union spent five years just designing its scheme andit's in the middle of another seven years of phased transitions toiron out structural problems. They don't actually switch tounconditional trading of permits until 2020.
Their phase-in process transcends political terms and thereforepolitical cycles. Perhaps we should interpret the scale and tempoof this approach as a measure of how seriously they take the issue.
Only now are we doing the same, supposedly less than two years fromthe first day of trading on July 1, 2010. Already themulti-billion-dollar screaming has begun in earnest. We might wantto get used to it.
Australia's second-biggest export industry, liquefied natural gas(LNG), was the first to the barricades, led by Woodside Petroleum.It has been excluded from compensation under the proposed schemedesign.
LNG is a huge growth sector for the Australian economy that couldtriple in a decade on the back of $60 billion of investment here.LNG could play a critical role in helping other economies make thetransition to a low-emissions future.
Liquefying the gas for transport is an energy-intensive process.Without some protection from a price on emissions, it makes itharder for Australian suppliers to compete in a global marketagainst competitors from Nigeria, Malaysia and Qatar.
Trading scheme designers know this, yet their decision to excludeLNG was deliberate. Compensating such a fast-growing industry couldpunch a huge hole in the revenue stream of the new scheme alreadyhemorrhaging revenues to insulate industries such as aluminium,cement and some types of steel. And, of course, motorists have tobe protected.
The green paper has starkly revealed how difficult it will be tosustain, let alone allow, growth in Australia's trade-exposed,energy-intensive industries, which account for 40 per cent ofnational emissions.
Woodside is only the tip of the iceberg. Oil refiners have joinedin and you can expect some heat soon from paper, plastics,chemicals and metals processors. Things will get really ugly inOctober when emissions trajectories are finally proposed and allfirms will be able to calculate what this will actually cost them,how much business they will lose and how many people they will haveto lay off.
Their stories of entrepreneurship and smart business crushed by onesweeping regulatory reform will be told over and over again. Itwill be a bloody November.
The objective of successful greenhouse policy is to make the switchto a low-carbon economy as smoothly and painlessly as possible. Anational ETS could be an important tool in that process oftransition.
Hurting Australian firms by making them less competitive andsurrendering business to offshore rivals unconstrained by a priceon emissions does not cut global emissions. A confidential MorganStanley review of the green paper last week predicted a carbonprice of between $50 and $100 a tonne would be needed to stimulatethe $60 billion of new investment needed to drive the new,low-carbon economy.
Weakening industry's ability to invest in the technologies willundermine public support for sustained and decisive action. Itcould create a political climate conducive to backtracking andconservatism: a delay caused by unnecessary haste. As with anyother economic reform, suffering and hardship are not measures ofsuccess _ but of failure.