The Government’s Carbon Pollution Reduction Scheme should be rejected by the Senate. It is structurally flawed and unlikely to drive Australia’s transition to a low carbon economy.

True, it will provide billions in handouts to our biggest polluters, in effect giving them a competitive advantage over industries and businesses with low emissions. It is based on targets that accept a significant and highly-damaging rise in global temperatures. It is accompanied by a risible scheme to con the community into thinking they can play a direct role in reducing emissions.

But each of those factors, on their own, is not sufficient to reject the significant step of establishing a framework that aims to reduce our emissions over the long term — a step that, for 12 years under the Coalition, Australia refused to take. Those factors are reasons to dislike the scheme and criticise those who have formulated it, but not to reject it.

Instead, the CPRS should be rejected for the simple reason that the compensation provided to big polluters will never be removed, preventing the scheme from ever functioning effectively.

First, on compensation: by giving our biggest polluters nearly all of their permits for free, while requiring industries with lower emissions to pay the full cost of their emissions, the scheme in effect privileges big polluters. It continues the carbon protectionism built into our existing economy, under which sectors can externalise the long-term costs of their activity to the rest of the planet. Moreover, they directly undermine the purpose of the scheme in a way that other forms of compensation — say, the same value of permits delivered as a tax rebate — would not.

However, compensation arrangements are only intended to be temporary. They will only apply to emissions-intensive, trade-exposed industries (except coal mining, which has been singled out for the full emissions trading treatment), and ostensibly only until an international agreement comes into force that removes the problem of Australia’s polluters competing with foreign polluters who face no charges for their emissions.

The point is both to protect Australian jobs and prevent “carbon leakage”.

Carbon leakage is an economic argument without, as yet, a skerrick of evidence that it will ever occur. It assumes minimal relocation costs, that there are no exchange rate fluctuations and that companies can be confident the jurisdictions to which they are moving will not impose their own carbon abatement measures or present other forms of sovereign risk.

In fact even the most apocalyptic modelling from rentseeking bodies such as the Minerals Council of Australia acknowledges continued growth in affected sectors, with jobs “leakage” occurring from future growth, not from existing employment.

It also ignores the lower costs and first-mover advantages of commencing a transition to a low-carbon economy as soon as possible, which may eventually be far greater than initial costs. Further, experience with other emissions trading schemes such as the US Acid Rain Program, and other major economic reforms such as the GST, suggests the costs of major reforms tend to be overstated in advance of implementation.

Nevertheless, temporary protection until an international agreement comes into operation can justified on the basis that, if there is no international agreement, it matters little what Australia does or how it compensates its polluters; the planet will cook, and we’ll be among the first to feel it.

And governments routinely make similar decisions to benefit some sectors at the expense of others. Australia’s unviable car industry continues to be protected by punitive tariffs on foreign-made vehicles are gifted billions in handouts from taxpayers. Cheaper, better, foreign ethanol is similarly subjected to punitive tariffs while motorists in some states are compelled to buy the version produced by local agribusiness companies.

In fact the Australian economy is rife with oligopolies and rorts that governments have permitted to flourish, at the expense of consumers. A few billion in CPRS handouts to transnational companies, however outrageous, won’t make a great deal of difference in the scheme of things.

On targets, the chances of there being an international agreement on a more ambitious objective than that on which the Government has based its 25% commitment is remote. In the event one is reached, the Rudd Government will come under significant international pressure to increase its target beyond 25%, which will in any event be a solid start in the long-term project of moving to a low-carbon economy. In short, 5-25% is not good enough, but it’s not a reason to reject the scheme entirely.

As for the Carbon Trust, intended to enable householders to contribute directly to reducing emissions by establishing a vehicle to purchase and retire permits, while that demonstrates the lengths to which this Government will go to spin its way out of a problem, it doesn’t bear directly on the scheme itself.

The threshold issue for the scheme is whether it will work. If it will work, than the handouts to rentseekers, the poor targets and the Carbon Trust figleaf, are of secondary importance.

But the CPRS won’t work. The problem lies in the mechanism to end compensation. Under the legislation and regulations establishing the Scheme, an independent panel will review compensation arrangements, and the status of international agreements that may remove the need for them, in 2014 and every five years thereafter. Alternatively, the Climate Change Minister can order a review. The independent panel — appointed by the Minister — will report back to the Minister, but a decision about whether to remove compensation will be one for Government.

Normally the principle of electoral accountability suggests that it is elected officials who should make key economic decisions, rather than unelected officials, who do not have to answer to voters for the consequences of their actions.

In this case, however, based on what has occurred over the last 12 months, as rentseekers have convinced politicians to extend them more and more largesse, does anyone seriously think that major party politicians can be trusted with the task of deciding to withdraw that largesse?

Particularly as that largesse will have grown into the tens of billions of dollars by late next decade, as big-polluting industries expand and soak up more and more free permits.

Particularly when most of the recipients are generous donors to the major political parties.

You know what will happen. More garbage modelling will be produced by Big Carbon showing the need for continued compensation. News Ltd will run stories about rorting in other countries’ trading schemes and argue Australia should not “go it alone”. Thousands of jobs will be threatened. Ministers will get nervous, with an eye on the next election, and figure a more detailed review is needed, or put the decision off for several years.

The decision will also be one for the Parliament, because it will require the amendment of regulations that require the CPRS establishing body to provide permits to eligible EITEs on application according to the relevant formula. A recalcitrant Senate could disallow the regulation amendment removing compensation for EITEs, should a Government decide to take the bold step of doing that.

Moreover, the Government has made it clear that any such decision would not commence for at least five years, to provide certainty for business. This is not entrenched in regulation or legislation, but the independent committee is required to have regard to the need for a five-year wait.

Meaning, in the event an international agreement was struck to commence a global emissions trading scheme in, say, 2015, there would be no review of compensation arrangements until 2019 unless the relevant Minister decides not to wait until the next five year review was due — and then, should there be a Government decision to remove compensation, a five year wait.

Under the most optimistic scenario, Australia’s biggest polluters will be protected most of the way til 2020. And that assumes our politicians ever find the nerve to end compensation.

The CPRS will not ever function effectively without the removal of the five-year compensation overhang and the shift of responsibility for ending compensation from Parliament to an independent body such as the Productivity Commission. Based on their form so far, our politicians cannot be relied on to ever flick the switch to a fully-effective emissions trading scheme, regardless of what happens internationally.

Passage of the CPRS bill will protect and entrench in the economy the very carbon pollution the scheme purports to address. It will establish a framework skewed massively in favour of Australia’s current, high-carbon economy — overseen by politicians too scared, and too well-rewarded, to challenge those who benefit most from our current carbon addiction.

The only sensible vote from any perspective is “No”.

Peter Fray

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