Good Start on Greenhouse Plan

The Australian Financial Review

By Rod Sims
Director
Port Jackson Partners Limited

All Australian businesses now need to plan on a future with emissions trading, which will be a fundamental change for many of them. The federal government and opposition, and all of the Labor states, now favour the introduction of such a scheme.

Friday’s report from the Prime Ministerial Task Group on Emissions Trading reaches two important conclusions.

First, Australia should begin immediately to implement an emissions trading regime, and not wait for other countries. This is wise. Business needs the certainty (for example, to avoid the current impasse over investment in base load power generation). Australia can now design a scheme that suits its circumstances, and we can influence the world in sensible design directions and link our emissions trading scheme with others as they emerge.

Second, the market and not governments should decide how best to reduce emissions. This is fundamental. The task group is clear that current renewable energy targets, for example, are inconsistent with an emissions trading scheme and must be phased out.

Australia can meet its greenhouse targets without significant damage to the economy provided it employs sound policies. Alternatively, if Australia’s policies are the result of a policy feeding frenzy for those pushing particular technologies, or wanting to stop specific projects, the costs will be very high.

The key emissions trading design features recommended by the task group are sensible. Indeed, they are consistent with those proposed by the Business Council of Australia.

Targets are to be set over at least 30 years and are to begin with moderate emission cuts and then increasingly require deeper cuts. We can thereby create a “virtuous cycle” as initial targets are met, giving credibility to the later year targets and prices that will drive the required new investment.

The community will know the immediate emission caps from 2011–20, it will know the bands within which the 2020–2030 caps will fall, and it will know the end point target we are seeking 30 to 40 years out. This should provide enough certainty for investment decisions.

The scheme is to cover about 70 per cent of emitters. This contrasts sharply with state government proposals which focus on the electricity sector and with the European Union scheme, which is not much wider.

While many permits will be auctioned, there will be a once-up free permit issue to those businesses facing a disproportionate loss, and continuing free permit issues to those in trade-exposed/emissions-intensive industries until our competitors face similar policies. This approach is similar to state government proposals and so has bipartisan support. In particular, it avoids unnecessary harm to our economy, and prevents industries going offshore and emitting more that they would in Australia.

Crucially, the task group wants a wide range of carbon offset regimes allowing businesses to reduce emissions in innovative ways in Australia and particularly overseas. Such offsets are unnecessarily tightly limited under Kyoto.

Finally, in the early years we will have a “safety valve” emissions fee to cap the price of permits. This provides training wheels while we understand how to live in this very different emissions trading world.

The key criticism of the task group report, of course, will be that we should have seen it a few years ago. Now that we have it, however, such a large change needs to be implemented with care, which means that the proposed start date of 2011 is appropriate. The states cannot complain about this date as their scheme was to have started in 2010, yet the federal scheme will cover many more emitters and so is more ambitious.

An area for concern is the timetable for setting targets. Not the 2008 timetable for setting the 30 to 40-year end point or the ALP’s 2050 target; such targets alone provide little guidance to business. The targets business needs to see are those for the next 20 years, which are not to be known until 2010.

The good news is that such targets are to be set after further study of the costs and benefits of various target levels, with transparent advice from an expert body. This will ensure the community buys into the targets Australia will set, which is important to avoid later opposition to the scheme as it inevitably begins to have a major effect on people’s lives.

Rod Sims is a director of Port Jackson Partners Limited. He also advises the Business Council of Australia on infrastructure, water and emissions trading issues. The BCA released its Strategic Framework for Emissions Reduction in April 2007.