Carbon Credit Watch

Battle lines drawn over carbon price

(February 19, 2011) The handout queue is growing, but when does transitional assistance become needless corporate welfare?

WHEN heads of industry met federal ministers at Sydney’s Hilton Hotel this month, the company chiefs didn’t beat around the bush.

Executives from BHP Billiton Woolworths and Qantas – just a few of the household names represented at the government’s business roundtable on climate change – all agreed a carbon price was needed. But with these pleasantries behind them, business leaders were quick to direct the conversation to a more pressing concern: the impact on their bottom lines.

In no uncertain terms, the executives asked for more meetings with government to make sure there were no ”unintended consequences” of putting an economy-wide price on carbon.

Climate Change Minister Greg Combet – a veteran negotiator from his union days – is said to have worked hard to reassure the company chiefs. Prime Minister Julia Gillard also promised not to ignore the ”good work” of the carbon pollution reduction scheme (CPRS), blocked by the Greens for its generosity to business. But the soothing words have not calmed the business community’s nerves over Labor’s plan to legislate for a carbon price this year.

In Canberra, the impact of a carbon price on high-emissions or trade-exposed industries is also shaping as a key hurdle for Labor’s plans to cut carbon pollution. With the opposition opposed to the so-called ”big new tax”, the government needs to strike a delicate balance between a policy that is ambitious enough for the Greens without inflicting too much pain on industry.

No one thinks this will be easy. On one hand, business groups are warning of another fight with corporate Australia if they are ignored. On the other, economists say too much compensation for industry simply passes the burden to consumers – who already face surging power bills, with more pain to come.

Gillard says pricing carbon will be the biggest economic reform since the wave of 1980s deregulation, which included floating the dollar and removing trade barriers.

Such big changes inevitably create winners and losers, prompting calls for public help. Car makers, for instance, have received billions from successive governments of all stripes.

But there is a fine line between genuine transitional assistance and public handouts to ”rent seekers” – and the distinction is likely to drive much of the carbon debate.

According to a Grattan Institute report, Kevin Rudd’s CPRS promised compensation worth $22 billion for emissions-intensive and trade-exposed industries. Most of the help was targeted at the aluminium, steel, cement, liquefied natural gas, and coal industries.

This time, carbon-intensive and trade-exposed industries are again calling for financial assistance to help with the transition. But while the CPRS debate took place against the backdrop of the financial crisis, much has changed in the past few years.

Now, many of the companies pushing for compensation are also benefiting from a once in a century resources bonanza.

The liquefied natural gas industry – promised $3.6 billion in free emissions permits under Rudd’s scheme – is a case in point. The chief executive of the Australian Petroleum Production and Exploration Association, Belinda Robinson, says the CPRS did not go far enough in recognising LNG’s ”green” role as a replacement for coal overseas.

”Putting a price on carbon simply serves to make the economics of getting these projects to financial investment decision a little bit harder,” she says. ”Shouldn’t we be looking at how we can encourage the growth of that sector, not winding it back?”

But if there are genuine fears of a carbon price in the industry, it has not stopped gas companies from announcing $31 billion in spending on LNG projects in the past few months alone.

The Grattan Institute report found Rudd’s carbon price was ”highly unlikely” to influence investment decisions. When the oil price was $US80 a barrel (today it is $US100 for Brent crude), the report said LNG projects’ returns on equity would be well above 12 per cent – and carbon was a small fraction of the capital and labour costs.

The institute’s chief executive, John Daley, says Robinson’s argument that LNG is replacing coal overseas does not mean the industry should have no incentive to emit less. ”LNG is a potential replacement for coal, but [eventually] other technologies are going to replace LNG,” he says. ”So LNG should pay its carbon price just like everyone else.”

The coal industry – which stood to receive more than $1 billion in compensation under the CPRS – has also enjoyed a profit boom since the last round of negotiations. Meanwhile, global coal prices have risen between 30 and 60 per cent in the past year alone, and Australian mines have among the world’s lowest costs.

Less contentious is the aluminium sector – one of the most intensive users of electricity.

Under the CPRS, the industry was to receive more than $8 billion of free permits, and Aluminium Association executive director Miles Prosser says he will now push for a similarly ”workable” arrangement to prevent the industry heading overseas.

”If we did close down smelters in Australia, they would be replaced by the investment in China,” Prosser says. ”I would be surprised if the Labor government was happy to see industry move offshore and jobs move offshore to a country which doesn’t have a carbon cost.”

Steel makers have also signalled they will be asking for more this time, with a BlueScope Steel spokesman highlighting the competitive threat of low-cost Asian producers. ”It is not in Australia’s interests – economic or environmental – to force domestic industries to shut down or curtail production, only to see that production replaced by higher-emissions overseas production,” the spokesman said.

Most people, including the Greens, agree these emissions-intensive, trade-exposed sectors such as aluminium and steel should receive some help. But whether they need as much as Rudd promised is hotly debated.

Rio Tinto – which owns half the country’s smelters – was reminded of the looming battle on this front last week after posting a $US14 billion record profit. Greens leader Bob Brown accused the mining company of trying ”gouge” public money in lobbying for compensation. He also promised to drive a harder bargain this time around, claiming Rio would have pocketed $565 million a year in taxpayer support under the CPRS.

But the most controversy is reserved for the electricity industry. Power stations are responsible for about half the country’s carbon emissions, and Labor’s climate change adviser, Professor Ross Garnaut, has argued there is no justification for giving them public support. In stark contrast to his recommendation, the CPRS promised $7.3 billion in free permits.

Energy Supply Association of Australia chief executive Brad Page says removing this assistance would ”strand” billions of dollars worth of power station assets and threaten the sector’s ability to raise capital.

Help is needed to encourage investment in new plant, he says, and to close the highest-polluting power stations without punishing investors and creditors.

”That is no different to exactly what has gone on in the automotive industry over 15 to over 20 years, with well over $12 billion spent on it,” he says. ”These can’t be payments for business as usual … that’s pure rent seeking.”

But since cutting carbon has been on the agenda for the past two decades, won’t it create a moral hazard if investors in the most carbon-heavy power stations are bailed out? No, says Page, who argues that the public should help the investors because the community has been the real winner from unpriced carbon.

”You’ve got to look at who the beneficiary has been of this, and it isn’t simply the power generators,” he says. ”Frankly, the community is a massive beneficiary out of this, so there is a responsibility there for some reasonable funding for a transition.”

For consumers, however, all these business pleas for special treatment may be hard to stomach. With electricity costs already soaring, every handout to industry comes at a price to the economy.

Australia Institute executive director Richard Denniss explains there is no ”free lunch” when trying to reduce carbon – it requires a change in behaviour in the entire economy.

”The more compensation you provide to the polluters, the duller the price signal and the less money left over to invest in alternatives,” says Denniss, an economist.

Compensation can make sense on equity grounds or if it is politically necessary to pay to get what you want, he says. But otherwise, the economic case for handouts is difficult to make.

The Grattan Institute’s Daley says that the CPRS arrangements were also excessive when it came to saving jobs. For instance, his research found protecting the aluminium sector amounted to an annual subsidy of $161,000 a worker.

”The most important thing is to get a carbon price in. It would be good policy to have much less compensation than was offered last time around,” he says. ”If we’re doing this to protect jobs, it’s not obvious that we need to do anything like what was suggested last time.” But these calls for restraint are unlikely to quell the demands of many smaller businesses, which are also joining the rush for help.

Key independent Rob Oakeshott this week said small businesses’ views had not been heard in the carbon debate, in a sign he could push for wider compensation for this sector. His remarks were pounced on by Australian Chamber of Commerce and Industry chief Peter Anderson, who wants small and medium companies also to be reimbursed for higher energy costs.

Australian Industry Group chief executive Heather Ridout also said a ”standout weakness” of the CPRS was its failure to help moderately emitting trade-exposed industries, such as food processing, paper and chemicals. Ridout – a member of the business roundtable on climate change – said her group would push for more help for these industries.

Whatever happens in the carbon debate, it appears the big companies will face plenty of competition as they demand similar compensation to last time. In part, this is because the terms of the debate have changed. Rather than being the ”greatest moral challenge of our time” that one either supported or opposed, pricing carbon has become yet another economic debate. Whether Australia opts for a carbon tax or an emissions trading scheme, there is likely to be a feisty debate over how to spend the revenue.

Denniss, for example, says unions that support a carbon price could be more emboldened in their demands this time, such as making sure higher electricity prices do not affect the quality of social services. With resource companies posting record profits and asking for help at the same time, such appeals to the public good could be popular indeed.

”People thought it was an environmental issue, but this time around it’s being seen as more of a market reform issue,” Denniss says. ”It means people say ‘if this is about the economy, why don’t we spend $10 billion on education, rather than giving it to coal-fired power stations?’ ”

Clancy Yeates, WAtoday.com.ua, February 19, 2011

Read the original article here [PDF version here]

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