Growth Key to Emissions Plan

The Age

By Greig Gailey
President
Business Council of Australia

The introduction of a national emissions trading scheme is the single most important policy decision the Rudd government will make before the next election.

It will affect business, industry and households in ways that many of us are yet to fully understand. The right design will allow Australia to contribute to reducing global emissions in a manner that does not lead to excessive costs to our domestic economy.

Getting the policy right requires balancing often competing but interdependent demands. This includes fostering economic growth while cutting emissions, providing assistance to households and industries adversely affected, and aligning Australia’s strategies with global action.

Business must be involved in getting the policy frameworks right, as it is business that will enable the long-term transition to a low-emissions economy. What should not be underestimated is the complexity associated with the introduction of a national emissions trading scheme in Australia, particularly as our economy and high standards of living have been built on an abundance of energy and mineral resources. This complexity is compounded by the absence of a common global approach to emissions reduction.

Implementing an Australian scheme that recognises that – in the early years at least – we will be moving ahead of our competitors, and managing the risks associated with this, requires a considered approach.

Given the complexity of many of these issues, it seems likely some will be put in the “too-hard basket”. But simplicity at the expense of effectiveness increases the likelihood that we will get the policy wrong – at a tremendous cost to households, businesses, the economy and environment.

The Business Council of Australia supports the government’s plans to introduce an emissions trading scheme. The priority for the BCA and its members is to work with the government on a scheme that is credible and effective, and achieves reductions at least cost. The government does not see climate change as an environmental issue to be tackled at any cost. Rather, it is seen as an economic issue to be dealt with through economic policies and market mechanisms – in a way that balances the costs of inaction with the costs and benefits of action.

Business and government know the solution is not to arbitrarily limit economic growth or aspects of economic activity, as some would have it. On the contrary, growth will provide resources and opportunities to reduce emissions.

We also agree that this issue is not a zero-sum game, or one to be tackled in isolation. Business and government also know that while Australia can play its role in reducing emissions, global action is the only way to tackle climate change.

The challenge we face stems from the failure historically to price carbon to reflect the potential costs of accumulated greenhouse gas emissions. Much of the world’s postwar prosperity has been built on energy that has, with hindsight, been too cheap. A significant part of Australia’s comparative advantage has, of course, been built on cheap energy. We must recognise that shifting from this way of life represents a big transformation for the economy.

By putting a price on carbon, we are raising the cost of energy. Even though the cost of purchasing carbon credits will fall to business in the first instance, business cannot be expected to absorb these costs. Business will respond in the usual way: it will seek to use energy more efficiently and will pass on higher costs to consumers.

Efforts to force business to absorb these costs or to limit the extent to which business can pass on costs will only result in less investment, fewer jobs and lower growth.

Where costs cannot be passed on and energy efficiencies are not available, business will simply cease to exist if this prevents them from earning an adequate investment return. Raising the price of energy, including petrol, is not going to be politically popular.

But it has to be done if we are to achieve a lasting reduction in emissions.

  • What is required to reduce emissions include: 
  • Restructuring of business processes and operations. 
  • Greater use of low-emissions technologies that now exist. 
  • Further development and commercialisation of emerging low-emissions technologies. 
  • Discovery of new technologies.

Business, motivated by the right incentives and price signals, will provide the lasting foundations for success in the transition to a low-emissions economy.

The only reason Australia is introducing an emissions trading scheme is to play its role in reducing global emissions. Establishing a scheme that results in emissions simply shifting elsewhere – along with the jobs and economic activity – benefits neither the environment nor the economy. Secondly, a global price on carbon is needed.

We are calling for a policy response that meets the twin objectives of contributing to a reduction in global emissions and maintaining Australia’s economic capacity to respond.

Now is not the time to exaggerate the negative impacts of a national emissions trading scheme – doing so risks government closing its ears to what we have to say.

Nor is it a time to overlook the complexity of the process we are embarking on. Government must be prepared to listen – even if the message is one it does not want to hear.

If we want an emissions trading scheme to be as effective as possible, it should be complemented by research and development, innovation, and policies that support low-emissions technologies.

At the least, policies must avoid creating incentives that work contrary to the scheme or that increase the adjustment burden associated with reducing emissions. As an example, state-based caps on retail energy prices will need to be removed.

Careful consideration will need to be given to how the revenue generated by a scheme is used. Some will need to be directed to help households and heavily exposed industries adjust. Revenue should not be allowed to become part of a permanently higher revenue base for government.

The answer to the risks associated with climate change is not restricting growth. It is far easier to modernise plant and equipment, to develop processes and drive structural adjustment when a business is growing.

The government has outlined an ambitious reform agenda. If it is implemented, it will provide a significant boost to productivity and growth. Key priorities include: 

  • Implementing a seamless economy for business regulation. 
  • Raising the effectiveness and efficiency of our tax system.
  • Lifting educational outcomes and skills. Better enabling innovation. 
  • Improving the co-ordination and planning of infrastructure investment. 
  • Strengthening our global engagement.

Australia has an opportunity to achieve better social, economic and environmental outcomes based on higher productivity – and carbon productivity in particular.

The government has the opportunity to support our transition to a low-emissions economy and can lead the way in implementing a credible and successful national scheme that provides an example of what can be achieved for other countries to follow. Business has a critical role to play and it is committed to playing that role.

This op-ed is an abridged version of a speech given by Greig Gailey to the Committee for Economic Development of Australia on 3 July 2008. 

Australia's Emissions Trading Scheme: An Opportunity (speech)