The bargaining over the CPRS Bill has essentially come down to one thing — how much should the government give to big polluters to compensate them for, or shield them from, the effects of the scheme?

The quantity that has been offered by the government is obscene. Not content with an already offensive transfer of taxpayers’ funds to the downtrodden big polluters (who can’t have possibly seen this coming), the Liberals want to increase it.

Anybody who has followed the CPRS debate already knows this. The point that is worth clarifying now is how much of our money is already on offer. The freebies to the coal-fired power generators is the most inexplicable, inefficient and inequitable component of the package, so it is worthwhile focusing on them for current purposes.

The government has stated that the coal generators will receive $3.8 billion in compensation (in nominal terms) and the media has repeatedly regurgitated this figure, or the 2008 real dollar equivalent associated with the initial package ($3.5 billion). However, the gift to generators is going to be in the form of free permits, creating uncertainty about the exact value of the handouts.

In order to come up with the $3.8 billion estimate, the government multiplied the number of free permits by the projected carbon price from the CPRS-5 scenario in Treasury’s modelling. That is, it multiplied the number of free permits by the expected carbon price from the scenario with the weakest mitigation target (i.e. a 5% reduction in net emissions below 2000 levels by 2020). Of course, the weaker the target, the lower the carbon price — and consequently, the lower the estimated value of the free permits.

This would be fine if the government was openly saying that the most likely outcome of the current negotiations is a 5% target. Although the Opposition has had no qualms in saying this, the federal government has continually suggested that it is willing to go much higher, potentially up to 25% below 2000 levels. NGOs that are close to the government, such as the Climate Institute, have perpetuated this belief, going as far as saying that a 15% target is effectively “locked in”.

If this is true, and Australia is likely to have a national target significantly above 5% for 2020, the free permits to polluters are not going to be worth $3.8 billion. For example, with a 15% target, the value of free permits to coal generators jumps to $5.2 billion (using the carbon price estimates from the CPRS-15 scenario). To put this in perspective, it is more than the total amount the Australian government spent on biodiversity and land degradation measures between 1996 and 2009.

The figure below compares the cumulative nominal value of the free permits to coal generators under the CPRS-5 and CPRS-15 scenarios. It is clear that the mitigation target has a significant influence on the value of the compensation package (hardly a startling finding).

There are three points that fall out of this. First, if a significantly higher mitigation target is still “on the table”, as we are led to believe, the value of the freebies to coal generators is already likely to be well above $3.8 billion — it is more likely to be worth about $5 billion over five years.

Secondly, if a significantly higher target is not on the table, and the government really expects the carbon price to follow the lowest of its projected price trajectories, it should be more open about this fact. The government can’t have it both ways — using low carbon price estimates to reduce concerns about the size of industry handouts but then promising higher targets and higher carbon prices to placate the green lobby.

Finally, if a deal is brokered between the government and the coalition in the coming 24– 48 hours, look for the same method to be applied when estimates are provided of the value of the revised compensation package.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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