Driving Business Offshore Is No Carbon Solution

14 October 2008

The Australian

By Katie Lahey
Chief Executive
Business Council of Australia

The Business Council of Australia (BCA) fully supports the introduction of an emissions trading scheme in Australia capable of international linkages over time. We have, however, responded to the government’s request for comment by pointing out some places where we think the scheme could be improved.

Chief among these is the scheme’s treatment of a particular problem that any such scheme must solve: the problem of emissions-intensive, trade-exposed industries such as cement and steel – or, in the jargon of the climate change policy specialist, EITEs.
The EITE problem occurs because – to put it simply – investment money moves much more freely than people do. If people in Australia are asked to pay for their carbon emissions, they are unlikely to move overseas to escape that payment.

But large corporate investors operate in a different environment. Their funds are foot-loose, with investments moving from country to country to produce the best return. They continually decide whether to keep existing operations going in Australia. They continually decide whether to build new facilities in Australia or overseas. And if they are trade-exposed – that is, they face strong competition from overseas suppliers – they have relatively little ability to pass on to customers new costs imposed only on Australian firms.

If Australia starts levying a carbon price on these investors – a price not levied in other countries – then these investors’ decisions will change. Some investment in emissions-intensive industrial facilities that would have gone into Australia will instead head overseas.

Emissions-intensive facilities will still be built in trade-exposed industries. They will just not be built in Australia. Instead of reducing global emissions, Australian law will simply move these facilities to somewhere outside Australia’s borders. There they will be less visible to Australians. But they will still add to the world’s stock of greenhouse gases.

Australia is introducing an emission trading scheme for one reason: to help cut global emissions. Establishing a scheme that simply shifts emissions elsewhere – along with jobs and economic activity – benefits neither the environment nor the economy.

Professor Ross Garnaut, the noted economist whose reports this year have set out how the government should deal with climate change, acknowledges that this is a difficult and important challenge for Australia. In fact, he has dubbed it “a truly dreadful problem’’.

Garnaut argues this ``truly dreadful problem’’ is tough to solve. The ideal solution, he notes, would be world-wide agreements on a carbon price and carbon trading. As he acknowledges, we don’t have such agreements right now. So, he argues, businesses in emissions-intensive, trade-exposed industries must be compensated. And they must be compensated enough to ensure their production does not fall below what it would be in a world that had world-wide agreements.

The government, in its green paper, has essentially accepted Garnaut’s compensation argument.

This is a point sometimes missed in the debate: among those who have examined the problem carefully, there’s no argument about the “dreadful problem’’ – Ross Garnaut, the government, the BCA and leading economists all agree that the “dreadful problem’’ is real. Our only disagreement is over what represents the best solution to it. Garnaut proposes one, the government’s green paper suggests another.

The BCA’s research looked at 14 case-study businesses, and found under the government’s solution three would shut immediately while another four would have to fundamentally review operations. Generalised to the whole economy, that suggests that the government’s solution would lead to a number of businesses shutting doors or shrinking operations.

The BCA has offered a couple of its own solutions to this “truly dreadful problem’’, but we are happy to discuss other solutions as well. We simply want to avoid a policy that causes a pointless shrinking of Australian industry, the Australian economy and the standard of living for all Australians.



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