Jul 8, 2011

Parkinson: carbon chaos in Canberra

There is good reason why the government did not release the details of its carbon pricing package before the weekend.

There is good reason why the government did not release the details of its carbon pricing package before the weekend. Broad agreement with the Greens and the independents may well have been reached on the key parameters, but an absolute bun fight was continuing on the details. Some accounts paint a picture of chaos in the corridors, as lobbyists and MPs and company folk suddenly realised, when Prime Minister Julia Gillard set down this Sunday as Carbon Day, that "OMG! They are going to do it", and dived into the scrum to eke out an exemption or an extra dollar in compensation. Plenty of details have already emerged though leaks -- intended and otherwise -- to the mainstream media. So here’s a quick wrap of what we know so far, and how to tell on Sunday whether Labor and their friends in the crossbenches have done a good thing, or stuffed it up again. Carbon price: The money seems to be on a fixed price of about $23, a compromise between the painless start desired by Labor and the strong signal sought by the Greens. Expect an escalator of 4% a year (plus inflation) till a transition to an ETS in 2015. The transition arrangements will be key, as will the creation of independent institutions to advise on abatement targets and compensation arrangements. There is talk of a floor price and a cap mechanism in the ETS, which will spark much debate among the market boffins on whether this is a good idea or not. Another key point of interest will be access to international permits and the possible inclusion of Carbon Farming Initiative projects. Compensation: Billions of it, everywhere. For consumers, Treasury modelling will suggest the cost is less than $10 a week, pushing up energy and grocery bills by about 1%. The government has indicated 90% of consumers will be covered, 70% fully, through tax adjustments, and for retirees through quarterly payments. Business: Trade-exposed industries will be covered pretty much as under the CPRS, with steel maybe getting some more goodies such as R&D assistance in first few years. Coal mines are getting a little less than last time, with about $1.25 billion focused on gassy mines. Key issues will be the rate of decay for EITEs, the possible introduction of a new tier of compensation, and how compensation is managed over the longer term. There is talk that the Productivity Commission could be given carriage. That could be fun, because the PC thinks such handouts are highly inefficient, as does Garnaut. Coal-fired generators look to have hit the jackpot. There was a choice between giving them $7.3 billion in free permits as in the ETS, providing loan guarantees as suggested by Garnaut, or offering a buyback of capacity under an auction, as demanded by environmental groups and some generators. If the media reports are to be believed, they might get all three. Some politicians are genuinely scared the lights will be turned out, but will argue that an orderly closure of capacity will provide a strong signal for others to build baseload gas -- our fuel of transition -- which might not happen quickly enough without a strong forward price signal. There may be emissions standards as well. Scope: Agriculture is out, and so is petrol, though larger fuel users may be impacted by changes to excise duties. So it’s not quite economy-wide -- about 70%. It seems some other greenhouse gases will be excluded, and covered under ozone legislation, cutting the numbers of affected parties to 500 from about 1000, which starts to make it look like a hybrid scheme between an ETS and the tool the US government is using to reduce its emissions. Renewables: One of the key achievements of the Greens will be the creation of a new body, the Australian Renewable Energy Agency, which will have carriage over possible $3.2 billion a year in funding for emerging technologies, and will take over existing programs such as Solar Flagships. Importantly, this and a new clean energy finance corporation, will be a body independent of the government, which will be good news for the renewables industry frustrated with endless delays under the grants-based schemes managed by Energy Minister Martin Ferguson. Other complementary measures: There's considerable speculation about energy efficiency and whether a trading scheme, as proposed by a government task force, will be introduced; or an extension to the Energy Efficiency Opportunities program. Many will argue that addressing such issues as EE and demand management, and the regulatory barriers, could be the most constructive thing his package could achieve. Infrastructure Australia may be handed additional responsibilities, according to CE Daily. There may be myriad subtle additions and subtractions in the final package. The headlines will certainly focus on the price and the compensation, and there is no doubt that, in the final analysis, billions more than is necessary will be offered to business. But that’s politics. Or so they say. In the end, the starting price will matter less than the signals that will govern the forward price curve -- which is what will drive future investment. And a carbon market already exists, which is why, according to one spokesperson speaking in conspiratorial tones, the lock-up on a Sunday will have as much security (no modems, no phones) as a budget lock-up. And the key to the forward price curve will be set by the abatement targets, the mechanism that will allow for these to be modified and respond to international developments, and the closure of the dirtiest generators. Ultimately, this package will be judged on just a few fundamental criteria: its ability to drive transformation towards a low-carbon economy, and its ability to meet the full range of targets that are on the table in international talks. Baker & McKenzie climate change specialist Martijn Wilder says there are two key points: the details of the policy; and the government’s ability to sell it. "Most of the key industries that are affected know what their obligations will be," Wilder said. "What will be revealed will not just be the carbon price and the fixed period, also the extent to which the greens have been able to effect significant changes from what was outlined in the CPRS." The Climate Institute has published its five key tests for the carbon policy package. They are: 1. Will the package allow Australia to meet at least the full range of carbon pollution reduction targets, backed by both major political parties, of 5%-25% below 2000 levels by 2020? 2. Will the package drive enough investment in clean energy, energy efficiency and carbon farming to see domestic pollution levels fall by 2013 and boost carbon productivity and competitiveness? 3. Will the package strengthen or weaken global co-operation on pollution and climate change? 4. Will decisions related to the scheme’s objectives be subject to transparent and independent advice to the Parliament? 5. Will transitional assistance measures, such as compensation, be fair and maintain incentives to reduce pollution for all parts of the economy? Deutsche Bank analyst Tim Jordan says the key things to look out for include the starting carbon price, the level of assistance to trade-exposed firms and assistance for electricity generators. Analysts will be busy crunching numbers over the next week calculating impacts on company earnings (and acting as a counter balance to the extreme claims of some lobby groups). Airlines may be hit hardest, according to Deutsche Bank, at least in terms of impacts on profits, while utilities such as Origin and AGL may actually experience a bottom line benefit. And what happens next? Once the government has announced the details of its preferred carbon policy, it will present legislation to Parliament in August or September and seek passage by the end of 2011. Can they do it? The independents are on board, and know there is a unique opportunity. Labor knows its future depends on it. "While nothing is certain in politics, we note that the minority Labor government has managed to pass more than 150 pieces of legislation since the election last August, with no rejections," Jordan noted. This first appeared on Climate Spectator.

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