New Research Shows a Way Forward on Emissions Trading

21 August 2008

BCA President Greig Gailey today launched the BCA paper, Modelling Success: Designing an ETS that Works, incorporating research from Port Jackson Partners Limited (PJPL) examining the impacts of the proposed emissions trading scheme on 14 businesses across a range of sectors including minerals processing, manufacturing, oil refining, coal mining and sugar milling.

Mr Gailey said: “In releasing its green paper the government has invited input into the final design of its Carbon Pollution Reduction Scheme (CPRS). The BCA fully supports adopting a comprehensive emissions trading scheme as the best way to reduce emissions, but getting the design detail right is critical”.

“The green paper puts Australia on a path to addressing climate change challenges through a partnership between business, government and the community. But the scheme must send the right signals to businesses,” he said.

“We agree with the government that you must assist emissions-intensive, trade-exposed (EITE) businesses to avoid carbon leakage.  The question is how to do that in a way which reduces global emissions without damaging the Australian economy.

“Our research provides the first hard data on what will happen to real companies in Australia unless some modifications are made to the current proposals.”
The BCA paper reveals a number of significant unintended consequences if the mechanisms in the CPRS outlined in the green paper are implemented, including:

  • Compensation for many EITE businesses is not sufficient to prevent them either reducing their operations or moving them offshore in the absence of a global price on carbon.
  • Companies immediately below the proposed free permit allocation threshold get no compensation while those above the threshold will get 60 per cent or 90 per cent of their permits free, producing significant distortionary impact.
  • There is no allowance for growth in EITE businesses required to meet future demand.
  • There are high levels of uncertainty about how the scheme will work in practice.

Based on a carbon price of $40 per tonne of CO2 – the current price in Europe – the compensation mechanism proposed in the Green Paper would likely produce the following outcomes for the 14 businesses studied in the paper:

  • Three will have to shut immediately.
  • Four will have to fundamentally review their operations to remain viable after losing between 32 per cent and 63 per cent of their pre-tax earnings.
  • The rest will have to take immediate action to reduce their costs.
  • Many potential investments will not take place.

“While these case studies have focused on 14 businesses there can be no doubt these outcomes would also apply more broadly across the relevant industry sectors,” Mr Gailey said.

The BCA believes that alternative approaches are available which would achieve the government’s objectives without such a high cost to the Australian economy. Accordingly, the BCA proposes that the CPRS should be modified to include:

  • Full compensation for emissions above a threshold.
  • Use a threshold based on the financial impact of carbon costs.
  • The threshold of between three per cent and five per cent of industry value-add.
  • Provide compensation to all businesses that meet the threshold.
  • Accommodation for growth in EITE industries at world’s best practice in emissions efficiency.

“Demand for EITE products will continue to grow given our population and productivity growth. This growth must be accommodated by either domestic production or imports. The BCA recommends providing permits outside the national cap to accommodate growth in EITE in the absence of a global price, or setting a modest trajectory that maintains the sector’s competitiveness and recognises that growth in these industries must occur,” Mr Gailey said.

“The BCA believes the government is moving in the right direction in responding to climate change but an emissions reduction scheme must recognise business reality if it is to encourage the investment required to reduce emissions and maintain a healthy economy.

“If we design a scheme that makes businesses unviable the end result will be relocation of vital export earning industries to other countries. This will cost Australian jobs without any reduction in global emissions. Australia will simply reduce its greenhouse gas emissions by exporting them to other countries.

“The work by PJPL also highlights the enormity of the task in ensuring the electricity sector can reduce emissions while maintaining reliable supply. Australia’s emissions reduction trajectory must factor in the capacity of the electricity sector to maintain reliable supply.

“Global warming is a global problem which requires a global solution. Australia’s emissions trading scheme can either be a model for the world to follow or an example of the potentially destructive economic impact of moving too fast ahead of a global price on carbon. A modest trajectory is most likely to provide a feasible path for emissions reduction in the absence of a global price on carbon.

“If global greenhouse gas emissions are to be reduced over the long term the world will need examples of how this can be done effectively but also with minimal economic disruption. Our research shows that with some modifications, the green paper can help Australia’s emissions trading scheme become a model for the world to follow,” he said.

Modelling Success: Designing an ETS that Works


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