A NEW CARBON PRICING SCHEME

Summary Points

An integrated policy approach is necessary.

  • An Australian carbon pricing scheme will be effective only as part of an integrated policy approach which includes:
    • a global agreement that includes concerted and comparable action by all major emitters
    • a measured transition to carbon pricing, with cost burdens comparable with those facing our competitors, and
    • the development and deployment of low emissions technologies.

But international action is weak, and where action is underway, carbon pricing has been phased in to prevent carbon leakage.

  • Many of Australia?s leading trading partners ? the USA, Canada and Japan ? have rejected or postponed plans for carbon pricing schemes.
  • Free (or virtually free) allocation of all permits is a common feature of carbon pricing schemes that are being implemented or planned around the world, including in the European Union, regional US schemes and Korea.

Australia is not lagging the rest of the world.

  • Australian emissions have grown by just 3 per cent since 1990 despite recording the strongest economic and population growth amongst developed nations over this period.
    • The emissions intensity of the economy has been reduced by 44 per cent since 1990, outperforming the EU and the USA.
  • Unlike many other developed nations, Australia will meet its Kyoto targets.

There has been no serious consideration of alternate carbon pricing options.

  • Despite a commitment that ?all carbon pricing options were on the table?, the Government has refused to consider alternate approaches and simply reverted to a model based largely on the Carbon Pollution Reduction Scheme.

A re-run of the flawed CPRS is the wrong approach.

  • A CPRS-style approach to the treatment of trade exposed sectors will put Australia?s export and import competing sectors at a severe competitive disadvantage.
    • Most of Australia?s key competitors have no plans to adopt comparable carbon pricing and proposed transitional safeguards are vastly inferior to those adopted by the EU emissions trading scheme.
  • The minerals sector faces combined carbon costs nearing $30 billion (in current dollars) over the period to 2020, threatening an investment pipeline worth $140 billion, and directly contradicting the Government?s own strategy of ?maximising the opportunities of the Asian Century?.
    • On the Government?s own modelling, output in key minerals sector will be slashed, while investment in coal mining will fall by 13 per cent.
    • The beneficiaries will be other nations - not a single Top 4 competitor/producer in any of 13 key minerals commodities has a functioning carbon pricing scheme.
  • Treasury modelling also found that a CPRS-style scheme would produce ?up to 10 years? of ?temporary unemployment,?2 a substantial contraction of investment in key export sectors, and ?reduce growth in aggregate productivity?.
  • A repeat of the flawed CPRS-style scheme will fail to meet the principles developed by the Multi Party Committee on Climate Change.

Uncertainty about the 2020 target means damaging uncertainty about future carbon prices.

  • The hybrid approach, as proposed, will result in substantial volatility in carbon prices, and will compromise investment certainty.

A better way.

  • A new approach is proposed to prevent loss of export competitiveness under carbon pricing.
    • Australia should follow other nations and adopt a phased approach to the introduction of auctioning of permits.
  • All international schemes are based on a model where trade exposed sectors are safeguarded from carbon costs during a lengthy transitional period
    • In contrast, more than 80 per cent of Australia?s merchandise exports will face the full brunt of carbon costs from the outset of the scheme.
  • In the absence of a binding international agreement on greenhouse gas emission reductions, there should be a full or 94.5 per cent allocation of permits to trade exposed firms.
    • This allocation of permits would cover both Scope 1 (direct) and Scope 2 (indirect electricity, heat or steam) emissions.
  • Under such an approach, all trade exposed sectors would be treated equally ? there would be no arbitrary emissions intensity thresholds or complicated formulae for determining eligibility.
  • Given the slow progress in global negotiations and to provide clarity and certainty for investors, the initial allocation should be fixed for 5 years, with an independent review conducted thereafter to assess progress made by other nations towards binding emission reduction commitments.
    • The auctioning of permits to trade exposed firms could be increased as trade competitor nations take on comparable commitments.
  • This approach would be consistent with that adopted by the European Union Emissions Trading Scheme since 2005 as well as the approach proposed or being contemplated in Korea and in regional trading schemes in the United States.

Failing to deal with the trade exposure issue will mean that the environmental integrity of Australia?s scheme will be compromised.

  • The effect of the policy will not be a reduction in global emissions, but a simple reallocation of where those emissions take place.
  • The costs borne by the Australian community will therefore have no environmental benefit.

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