The Opposition believes its proposed CPRS amendments will have little or no fiscal impact, despite a suggested significant increase in compensation for trade-exposed polluters and the removal of coal emissions from the scheme.

The Climate Institute and the Australian Conservation Foundation have both produced costings for the Coalition’s changes in the last 48 hours. The Climate Institute estimated that the amendments would see a total Net Present Value turnaround in the cost of the CPRS by 2020 from an $11.7billion surplus to a $16.8billion deficit, meaning the CPRS would draw on the Budget.

The ACF calculated that the Coalition’s amendments would cost at least $8.9billion more than the CPRS in the first five years of the scheme. On Monday, I calculated the cost would be of the order of$20billion to 2020. Both the ACF and the Climate Institute support passage of the CPRS in its current form and strongly oppose additional compensation for industry.

Opposition figures note that the package of proposed amendments is broadly similar to the “CPRS Intensity” model developed by Frontier Economics, and that the costs of that model would be of a similar order of magnitude. The Frontier model differs from the Coalition position primarily in relation to fugitive emissions from coal — Frontier included those, but treated coal mining as an EITE, meaning it would receive most of its permits for free, and Frontier adopted the same threshold for EITE industries — 1000t per $1million revenue — as the Government, but the Coalition has proposed dropping the threshold to 850t. This reduction is not expected to allow in a significant number of new industries but food producers may be one.

The key to the limited fiscal impact of the Frontier model lay in its “baseline” approach to electricity generators, who would be required to buy permits only above an intensity threshold, thereby limiting the impact of higher prices on households and businesses. This would free up several billion dollars in compensation to households and indirect assistance to businesses for higher electricity costs to offset the reduced revenue from electricity sector purchasing of permits.

The Frontier model calculated that at least 130-140m tonnes’ worth of permits a year would be available after auctioning and allocation.

The Coalition’s proposals flagged a willingness to move away from the “baseline” approach at the heart of the Frontier model, subject to its replacement with compensation for small businesses.

Coalition figures believe the cost of the CPRS to small business will become a potent issue for them as businesses realise they face up to 25% higher power bills that, under the CPRS, are expected to be passed on to consumers. However, moving back to a full auctioning of permits to the electricity sector, as envisaged under the CPRS, may substantially alter the fiscal impact, especially given the cost of excluding coal mining from the scheme, estimated by the Australian Conservation Foundation to cost $4.8billion over five years. This is the point at which negotiations between the Government and the Coalition could stall.

Opposition sources share the view of some supporters of the CPRS in the environmental movement that major Australian businesses are already including a carbon price in their long-term planning and that this will start driving investment in new energy technology without the dramatic impact that a much higher target or hardline ETS would bring. From this point of view, the issue is more about an effective long-term transition to a world-wide carbon price, over a period of more than a decade, rather than unilateral action by Australia that would harm businesses and reduce employment, especially in regional areas.

Whether the Government accepts the Coalition’s costings remains to be seen. It has not been forthcoming about the fiscal impact of the CPRS itself beyond 2011-12 and 2012-13, making Kevin Rudd’s call for the Opposition to produce detailed costings of its amendments on Monday rather ironic. Rudd’s demand had an air of “what have you done for me lately” after the Coalition finally met his long-standing demand to outline its position.

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Peter Fray
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