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Nov 3, 2009

Revealed: The high cost of the CPRS

Yesterday’s MYEFO figures reveal in clear terms just what a policy disaster the current version of the CPRS is. It also gives the lie to the absurd line from ETS opponents that the CPRS is a giant tax.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Yesterday’s MYEFO figures reveal in clear terms just what a policy disaster the current version of the CPRS is.

How the government started with the basic principles of an emissions trading scheme and ended up with this car wreck should become one of the key lessons in policy failure for future generations of politicians and public servants.

It also gives the lie to the absurd line from ETS opponents such as the Nationals that the CPRS is a giant tax.

Sorry chaps, but the numbers show that, far from taking money out of the economy, the CPRS requires a huge Budget subsidy until 2016. Even assuming a generous growth in revenue thereafter, the CPRS won’t break even until 2022.

This is the first time the government has provided a full costing of the CPRS — previously we had only seen the figures to 2012-13. And no wonder they kept them hidden. On launching the most recent version of the scheme — with more assistance and a later, softer start — earlier this year, the government released figures showing the scheme in surplus in its first proper year of operation, 2012-13. According to MYEFO, that has been revised downward by $1 billion, so that in 2012-13, the scheme will require supplementation from the Budget of more than  $300 million. The call on the Budget peaks at $1.6 billion in 2013-14.

Part of the problem lies in the strengthening of the Australian dollar, assumed as a consequence of stronger terms of trade and the appreciation of the Aussie since the Budget. This will reduce the cost of Australian permits, and thus reduce revenue. In 2012-13, MYEFO downgrades forecast CPRS revenue from $13b to $11.5b. There is a lower requirement for compensation for households and businesses, but nowhere enough to offset the fall in revenue.

But some of the problems have been built in right from the start. The fuel excise offset, intended to cancel out the impact of the CPRS on motor vehicle fuel, was devised to blunt Brendan Nelson’s hysterical, wheelchairs-in-Taragos-based campaign on petrol prices at the time of the Green Paper launch last year. More than $2 billion a year will therefore be wasted ensuring petrol prices do not go up by a few cents beyond what they otherwise would be — which will inevitably be across a far greater range than the impact of the CPRS.

And then there’s compensation for trade-exposed industries, which, remarkably, increases over the life of the scheme. In 2012-13, free permits to EITEs account for 28% of revenue. By 2020, they account for nearly 35% of scheme revenue, while compensation to households remains steady. This is despite assistance to EITEs intended to taper off.

This was a scheme that was intended — accepting some transitional costs — to be revenue-neutral. By 2016, it will have cost taxpayers nearly $5 billion. All for a scheme that will oversee a rise in Australia’s carbon emissions, courtesy of permits bought from countries such as PNG and Indonesia, and that assumes continuing, subsidised growth of our most polluting industries.

The few remaining supporters of this scheme outside the government must surely now accept that the CPRS in its current form must not go ahead. It will not drive a transition to a low carbon economy and it will impose a significant burden on taxpayers. Only the removal of the fuel excise offset or a significant reduction in assistance to big polluters can justify the introduction of this monumental stuff-up.

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37 comments

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37 thoughts on “Revealed: The high cost of the CPRS

  1. Kevin Cox

    To reduce greenhouse gas emissions we need investment. We can encourage investment by increasing the price of energy obtained from burning fossil fuel or alternatively we can reduce the financial cost of investing in NEW ways to generate energy or in ways to save energy or in ways to remove ghg from the atmosphere.

    The problem is an investment problem NOT a pricing problem.

    The underlying problem is that financial cost of investment in NEW productive enterprises is at least two to three times the financial cost of buying a similar existing productive enterprise. The reason for this is that you cannot get a loan to invest in a future asset but you can get a loan to buy an existing asset. This means that money for new investments must come from savings or from mortgaging existing assets (which is another form of savings). There are less savings than there are loans and so the demand for savings pushes the price up and so pushes up the financial cost of new investments.

    We can solve the problem by allowing the banks to give zero interest loans for NEW productive assets that reduce ghg emissions where the loans are paid back from the investment returns. To see more details on how this can be done visit http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability

    With this approach there will be reduction in energy costs, no drain on the public purse, easy ways to compensate the polluters for the reduction in asset values and a more equitable distribution of the new wealth created from the investments.

    There need be NO losers in this scenario because the approach increases the size of the pie and distributes it ‘fairly”. It will incidently help alleviate the gfc because it increases the money supply without increasing the interest burden.

  2. MichaelT

    If we’re going to do anything, surely a straight carbon tax would be better than this camel.

  3. Graeme Lewis

    Yes – the truth will out!!

    But by now is anybody listening. Certainly Penny and Kev07 stopped listening long ago.

  4. james mcdonald

    Interesting Bernard that you’re starting come to the same conclusion–albeit for diametrically opposed reasons–as those who want no greenhouse bill until after Copenhagen.

    It’s crap. It will still be crap if amended. It always was going to be crap, because it was never written for an Australian audience, it was written to be waved proudly for the other world leaders and make Rudd look like the man of the hour. Rudd just assumed, following the election mandate for greenhouse action, that the same voters would would support anything that looks like a big extravaganza and has “carbon reduction” written on the front cover. The standing ovation was supposed to come from other global leaders.

    But, being Rudd, all he’s got to offer is crap. He sprays his crap with rose perfume, but when the perfume wears off, all anyone can smell is crap.

  5. Roger Clifton

    As our government has failed to provide alternatives to carbon, we must expect that our industry will use international offsets to cheat and that our government intends to condone the traffic.

    Vigilance may be up to the watchers in the street. We need criteria to assess whether an offset is legitimate or not.

    I suggest that to offset an emission into the atmosphere, a valid scheme must guarantee to store the same amount of carbon in a place where none would otherwise have been stored, for a period longer than 1000 years. Can you imagine any place that would qualify? On that basis, you must expect that any proposal for offset is fraudulent, should be checked and called “out” as soon as any industry tries it on.

    Planting of trees and non-clearing of forests don’t meet that criterion. Those trees and forests should not need dirty money to survive. Beware that a large amount of dirty money might corrupt the defenders of trees, forests, orangutans, foreign aid, charities and NGOs.

  6. Altakoi

    Not trying to defend this sorry piece of rubbish, I am also in the carbon tax camp, but when a policy fails so spectacularly in its ostensible goals one has to ask whether it has succeeded in other terms.

    The ETS will, I think, convince many Australians who are not looking too closely that the government is ‘doing something’ without actually requiring any horse-frightening changes to lifestyle. Big Coal will go along quietly because it is getting bajillions of dollars in public money, which many in the public will take as the government having acheived consensus, and the industry might even choke down the hairball and manage begrudging praise. And all those who don’t believe in climate change/AGW etc will get behind it because they know it isn’t going to acheive anything, so thats a good laugh on the lefty greentards (not my terms).
    Its only a failure in terms of outcomes. If there is a lesson, I think it is that we have to demand outcomes from government not policies, not process. Don’t ask them how much they are spending, what they are promising, what the strategic governance framework is or anything else – just ask what the KPIs are for the plan and what happens if they fail to acheive them.

  7. james mcdonald

    Roger: “I suggest that to offset an emission into the atmosphere, a valid scheme must guarantee to store the same amount of carbon in a place where none would otherwise have been stored, for a period longer than 1000 years. Can you imagine any place that would qualify? … Planting of trees and non-clearing of forests don’t meet that criterion.”

    The soil. Not just tree cellulose; terrestrial bacteria, like you get in healthy rich soils. Variations on terra preta (biochar) and similar catalysts can enrich the soil under our feet and increase farm productivity, and incidentally draw down more carbon than emission reduction/geosequestration could hope to achieve. The main bottleneck in Australia is water–not a showstopper, but requires careful management. In the long term, landscape revegetation will tend to increase rainfall.

  8. Kevin Cox

    The book http://www.amazon.com/gp/product/157504112X (much of which can also be found on google books) says that if more farmers adopted mulching, no-till farming, and the use of cover crops and manure, 3,700 million acres worldwide could sequester 1 gigaton per year of CO2, roughly 12 percent of annual global emissions.

    As 3,700 million acres appears to be a small percentage of the total cropland in the world the ability of changing farm practises to reduce levels of ghg is considerable.

  9. MichaelT

    Altakoi, I think you are on to something here. Funny how the most basic aspects of planning & performance monitoring don’t seem to apply to governments.

  10. Scott

    Kevin Cox, no bank is going to invest in new technology for no interest. Maybe Super funds and investment companies might be interested. But new technology is risky. Most would want an interest rate to offset the potential losses (especially when they can invest in Government debt and get a riskfree 3.5%).

    As for the CPRS, I’ve been saying all along it needs to happen but is going to cause no end of grief. And the MYEFO guys haven’t factored in the macroeconomic effects of such a policy on GDP and inflation. There is a real danger of stagflation with this.

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