Wednesday, July 16, 2008

Policy paper seeks to soothe and smooth

YOU can think of yesterday's green paper as a sandpaper job. Labor had already committed to introduce emissions trading as the best way to reduce our greenhouse gas emissions. Such a plan has sharp edges that stand to hurt voters and business alike. The green paper is about keeping the design while smoothing off the sharp edges.

What it sets out is just a framework, a design. It doesn't have the key numbers: what targets Australia will set itself to reduce emissions, and how many permits will be issued each year. It doesn't reveal the "gateways", the high and low ranges for future emissions within which the targets for 2020 and 2025 will be set.

It doesn't tell us what compensation will be offered to households and electricity generators, or in what form. It leaves open which industrial enterprises will be given free permits to pollute. These are crucial issues in determining how well the scheme will work, and how it will affect you and me, but we'll have to wait for December's white paper to know all that.

Instead, the green paper focuses on spelling out how emissions trading will work in Australia — and, in so doing, trying to reassure key interest groups that they will be looked after, at least initially, at least in part.

But in trying to protect itself against political damage — from motorists, the NSW Govern- ment (which is trying to sell its coal-fired power stations), farmers, foresters and ordinary households — has the Rudd Government given away too much? In trying to reduce the cost for specific interest groups, has it increased the cost for everyone else?

The bottom line is: yes, it has, but — from what we know now — it still leaves the broad integrity of the scheme intact. Perhaps that's a judgement you disagree with. The green paper has made a lot of concessions to different interest groups.

Transport — which coughs up 80 million tonnes of greenhouse gases a year — will be effectively spared any of the burden. Agriculture, which pumps up 90 million tonnes, will be left out completely, at least until the Government is confident about how much of that is coming from each farm. Forestry and land clearing (63 million tonnes) will also be left out, except to allow the positive effects of new carbon-absorbing plantations.

Coal-fired power stations will be given cash or free permits to improve the "investment climate" in the industry. A handful of emissions-intensive industries, such as aluminium, cement, gas, basic iron and steel, and pulp-making, will be given free permits for 60% or 90% of their emissions to ensure they don't leave Australia. And until 2015, there will be an overall cap on permit prices so they don't become unaffordable.

That amounts to a lot of concessions. Don't get me wrong, some of them are clearly justified, and most of them, we are told, will be for limited periods. The free ride for petrol, for example, will be reviewed by 2013.

But we know how hard it is for governments to take away entitlements once they become entrenched. Each of these handouts makes emissions trading less expensive for the interest groups concerned, but more expensive for Australia.

The reason business and governments want emissions trading is that — if it works as intended — it will deliver any emissions target at the minimum cost. Business will always look for the cheapest way to do the job. In theory, emissions trading enables those who can find a cheap way to reduce their emissions to sell their surplus permits to those who cannot. If emissions trading covers 100% of emissions, then — whether you want to reduce emissions by 5% or 50% — that's the cheapest way to do it.

Hang on, you say. If it's so good, why does someone as smart as US economist Jeffrey Sachs tell us it's administratively messy and easily rorted, and we should have a carbon tax instead? In part, Sachs exaggerated his case — Australia's version of emissions trading will involve only 1000 or so companies, and is no more complex than the GST — but there is a real risk that instead of trading taking place between emitters, as intended, it will end up like other futures markets, dominated by financial firms with deep pockets that become part of every transaction, taking their slice and adding to the costs the rest of us end up paying.

One criticism of the green paper is that it does not address this risk, which is real, and could destroy the very reason emissions trading was chosen.

But if emissions trading works as intended, taking any sector out of it means removing what could be cheap ways to cut emissions. Take petrol: as Australians have shown since 2005 by flocking back to public transport and driving more selectively, cutting emissions from petrol is not that hard, when our fleet of cars is constantly changing towards smaller, more fuel-efficient vehicles. It's probably one of the easier ways to cut emissions. Yet, like the Howard government before it, the Rudd Government is petrified of adding to petrol prices, forcing us to take the pain in other areas instead.

So what? you say. Ordinary people in the country and outer suburbs are struggling already to cope with the huge price rises at the petrol pump. They've already got the message to cut petrol use. Why should they pay more?

People, this is important. Yes, we pay for petrol. But we also pay for electricity, gas and thousands of goods and services which will bear the cost of emissions trading. Transport emits 14% of Australia's total emissions. If the price of emission permits is $20 a tonne, the green paper tells us, electricity prices will rise 16% while petrol prices rise 0%. We will be paying in electricity bills what we are spared at the petrol pump.

The green paper is vague on what help it will give the electricity generators. Some would come as Government support for clean coal research, development and commercialisation, but the paper seems to imply that Labor's $500 million pledge over five years covers all that. Sorry, mate, that's just the start. Why not invest now to make carbon capture and storage part of the 400-megawatt "clean coal" plant planned for the Latrobe Valley?

It also envisages giving the generators sheer handouts, on grounds that appear rather confused. Yes, coal-fired plants will lose value as assets, because they will cost more to operate and be used less. That is the aim of emissions trading: to shift from high-emission forms of production to low-emission ones. Electricity generators have known for 15 years they will eventually face carbon charges. Any public funding they get ought to be forward-looking, bringing on lower-emission plants, not shoring up the old high-emission ones.

The design of this emissions trading scheme is a political compromise. If the transitional giveaways are indeed merely transitional, and if the targets set in December live up to the expectations Labor has created, then we will emerge with a scheme that ultimately will provide a pretty good way of cutting Australia's greenhouse gas emissions at whatever speed we want.

This is a reasonable start.

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