The BCA’s Greig Gailey was out on the hustings again last night, taking his campaign against the design of the government’s emission trading scheme to the Sydney Institute, where he added to his predictions of closed businesses and lost jobs with warnings to politicians that this would inevitably lead to lost votes as well.
Gailey insists that the BCA is not opposed to the government’s carbon pollution reduction scheme, per se. It just wants to do this at the lowest possible cost. But the differences that have arisen over the BCA campaign are not about the detail of the CPRS. There is certainly room for the government to make amendments, such as finessing the arbitrary cut-off points and ensuring that the timing of carbon permit purchases can be calibrated so that companies can use their cash flow to maximum advantage.
The problem with the BCA approach lies in its general philosophy — its simple assumption that it is all too hard, and that the entire scheme should be wound back with very modest emission reduction targets and a low carbon price. The BCA paper focuses on the difficulties and the cost, and makes heavily contested assumptions on the capacity of other technologies to deliver solutions. Nowhere, in either the BCA report or Gailey’s speech last night, is a single example of the opportunities and benefits that a carbon scheme can create.
Instead, as Ross Gittins suggested in a column in the Sydney Morning Herald earlier this week, the BCA is assuming that the heads of Australian business are a collection of dolts and dunderheads, incapable of innovation or simple entrepreneurship to jump over hurdles, and that they should be compensated for their ineptitude. This is what Gailey said last night:
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Business has no capacity to magically absorb unlimited cost increases due to emissions trading, any more than it does to absorb any other substantial cost increase. A high enough cost increase will wipe out profits, leaving a board with no alternative but to close the business. A small cost increase may still lower profit so far that the business activity has to shrink dramatically.
It makes you wonder how any Australian business has managed to survive the five-fold increase in crude oil these past few years.
Thankfully, few Australian businesses actually think that way in practice. For example, Toll Holdings, Australia’s biggest transport logistics group, included a special chapter in its annual results on Tuesday on the issue of the CPRS, and how it proposes to address the challenge. Not that Toll got any press or analyst comment on this initiative.
But the approach of Toll, positioned by the very nature of its business as one of the country’s biggest energy users, and therefore one of the most exposed to a carbon price, is highly informative. It says it has been working on its climate change program for many years, developing a system to map its footprint, and instigating measures to reduce its energy usage.
It has designed energy efficient depots and warehouses, worked on improving lighting systems, building design and investigated the potential use of alternate energy sources, such as solar power. It has taken numerous measures to improve operational efficiency, including changes to vehicle specifications. It has recently transformed its entire WA vehicle fleet to gas, and is monitoring the results, and it says it no longer allows vehicles to idle.
Toll CEO Paul Little says this approach has a simple logic. Toll prefers to reduce its emissions rather than having to acquire carbon credits through trading. Little says the company will continue to seek opportunities to reduce emissions, because that is where the greatest savings are to be found.
This emphasis is encouraging. It is what a carbon price signal is designed to support. Toll CFO Neil Chatfield told Business Spectator that saving energy is a better solution for the company and the environment.
“It’s a cost saving, and it’s the right thing to do.”
Besides, he says, Toll’s customers expect it of them.
“We are part of their footprint, and they want to know what we are doing about it. They expect us to be leading the charge.”
This last point, which focuses on how the supply chain is influencing change up and down the vertical links of industry, is crucial, and is a topic taken up by Michael Molitor, the founder and principal of consultancy group CarbonShift.
He argues that, because of these supply chains, and institutional pressure that is putting a shadow carbon price on companies and products even in the United States, the very premise of a trade-exposed, heavy emitting industry can be challenged.
Gailey argues that the price increases forced on Australian products such as aluminium will force them out of the market. Molitor disputes that. He says buyers of aluminium products would be prepared to pay more for a carbon-lite product because of the greater savings that can be obtained further up the line — even in a non-carbon trading economy.
As an example he points to GE’s development of a carbon-free vehicle leasing business in Australia. It charges more than other car leasing operations but it hasn’t gone out of business. On the contrary, business is booming because its customers see greater value in having a carbon-free service.
“Companies don’t come to us and ask us to make sure they can comply with new carbon regulations,” Molitor says.
“They come here because they are under pressure from institutional investors and the people who buy their products to show that they are doing something about their carbon footprint.
“The idea that large buyers of aluminium, and other carbon intensive materials including steel and cement, will disregard the carbon intensity in making their purchases is no longer tenable. The world is moving towards placing a competitive advantage on the low carbon suppliers of key basic resources and other carbon-intensive semi-finished products.”
Indeed, Molitor, in his own submission in response to the Green Paper, argues that the success of the CPRS depends predominantly on its ability to quickly drive large amounts of capital towards the de-carbonisation of the Australian energy system. If properly designed and implemented, the CPRS must allow Australia to create more wealth, not less. And Australia should seek to ensure it becomes a centre of carbon trading in Asia, which is expected to become the biggest source of carbon credit exports towards western economies.
Molitor is horrified by the approach of the BCA, saying its proposals would equate to the “worst case scenario” for the CPRS, as it would led to virtually no carbon cuts and would simply add costs to everyone.
“I am shocked that the BCA doesn’t realise this,” Molitor says.
“It would be like getting everyone out of bed at 5am and forcing them to do laps, with no-one losing weight. I would rather see no carbon regulation than what the BCA is proposing. We’d be better off doing nothing.”