Reject Devilish Detail in Carbon Laws

The Australian

By Greig Gailey

President, Business Council of Australia

Legislation for the most comprehensive and ambitious emissions trading scheme in the world was introduced last week into the Australian parliament. Over the weeks ahead it must be shaped into a law that truly delivers Australia the lowest-cost and smoothest transition to a low-emissions future, while contributing to global greenhouse gas emission reductions. This task will test lawmakers on both sides of politics.

The proposed Carbon Pollution Reduction Scheme will cover about 75 per cent of Australia’s economy. It will put an additional cost on electricity, transport and products and services made and sold in Australia. It has substantial implications for Australia’s economy and jobs if not handled correctly, especially in the immediate term when our competitors are not making the same changes.

As with any complex issue the devil is in the detail, and what has not been highlighted is that vital issues about the detailed design of the scheme are yet to be resolved.

The CPRS must take into account the present economic environment, as well as set Australia on the long-term path to emissions reduction.

This means particular attention must be paid to Australia’s trade-exposed emissions-intensive industries, its coal industry and its electricity sector.

The government this month made important changes to the proposed CPRS. It took the responsible decision to delay the start of the scheme by one year to July 1, 2011.

The government also recognised that the global recession will adversely affect many of Australia’s trade-exposed industries. In doing so it has included temporary assistance for emissions-intensive, trade-exposed industries and fixed the price of permits for the first 12 months of the scheme.

These further modifications by the government should be applauded.

The government has also sought to provide business with certainty about how the CPRS will be implemented by continuing to draft the necessary legislation with the view to passing it this year, a proposition supported by business so long as the detail of the legislation is right.

But even with the introduction of the legislation, there remain many details to be resolved to provide business with the confidence they need to effectively operate and plan for future investments. These details must be addressed before finalisation of the legislation.

There is a need to ensure the smooth transition of the electricity sector to low-emissions technology. There is also a need to recognise that coal-based generation will need to be part of the mix for the foreseeable future here and internationally. The final design of the CPRS must, therefore, provide coal-based generators with the capacity to supply electricity through the transition period and incentives for investment in low emissions technologies in the sector, including the commercialisation of carbon capture and storage.

It is estimated that achieving a 10 per cent reduction in electricity emissions will require investment of $4 billion a year over at least the next decade. This is a near doubling of recent investment. To achieve such a reduction not only must there be CCS but also a trebling of gas use, a six-fold increase in wind and the take-up of geothermal, solar and biomass at commercial levels.

There remain major concerns relating to the treatment of the coal industry under the CPRS where coal has been excluded from the emissions-intensive trade-exposed industry arrangements, although it meets the threshold test. Discussions continue with the government on matters related to competitiveness risks and measuring of emissions from coal mines. The CPRS plans to include fugitive emissions from coal mines, yet no other coal producing country has included, or is contemplating including, fugitive emissions. What remains essential is establishing arrangements that ensure the competitiveness of this vitally important industry is sustained and jobs are not lost in the absence of a global approach to reducing greenhouse gas emissions.

The legislation released last week does not include the critical details related to the defining and treatment of individual emissions-intensive, trade-exposed industries. It has been suggested much of this detail will not be available until later this year, but it is this very detail that will be critical to businesses. Firms must know what aspect of their business will be included in the scheme and the level of permits they will receive.

Until there is a consistent global price on emissions, recognition of the position of Australia’s emissions-intensive, trade-exposed industries is essential to ensure the preservation of Australian jobs and to avoid ‘carbon leakage’, where emissions-intensive Australian industries simply move to other countries.

The impact of the CPRS in the Australian economy is so fundamental and far-reaching it needs support from both sides of politics.

There are substantial benefits in the government and Opposition working together to resolve the outstanding matters. Together they can ensure the scheme does not risk reducing the competitiveness of Australia’s industries, deferral of investment or business closures and employment losses.

If the world is to address climate change, it will only be because many nations are persuaded to implement effective emissions reduction initiatives. A successful Australian CPRS will provide an example to many other nations. To provide that example, we must find the right economics, and we must find it together.