I was at the Melbourne Mining Club lunch yesterday where BHP Billiton Chairman, Jac Nasser, delivered a thought-provoking speech which touched on carbon, among many other issues. A transcript of his speech is available here.
His call for a “go slow” on carbon has resulted in front page headlines in The Australian and the Fin Rev. For the former publication, this of course translated to a pressure on the government to “abandon plans for a carbon tax”, which is not what he said.
But it got me thinking about what would constitute a “go slow”. For those of us who have been tracking this issue since the late 1990’s, Australia’s pace has seemed sufficiently slow to meet such a criterion. From the early part of last decade when it was first considered, to when it was ruled out by Howard in 2004, then picked up by the Labor States, then ruled in by Howard in 2007, then proposed and dumped by Rudd, and now the proposals under the current government, we’ve been on a long journey. At all times through this journey, the principle has been that it is in Australia’s interest to do its proportionate part in global efforts to reduce emissions.
Yes, this is in the context of the global pace of abatement efforts, which have also been slow. The failure of Copenhagen to meet expectations for a global binding agreement catalysed a different international approach, where now individual countries commit their own targets and also their own policies to meet these targets. Sort of like a bottom-up rather than top-down approach. China’s approach, as outlined in its most recent Five Year Plan, is substantially different to that of Europe or the US. Each country’s approach is informed by the particular political, social and economic circumstances of that country.
The fact that some other countries have walked away from carbon pricing does not demonstrate that it is the “wrong” answer. Much like increasing globalisation or major tax reform, many things that may be the right answer economically are the most difficult to achieve politically. Clearly in the US context, a hostile Congress made it impossible to pass such legislation. Instead, the US will embark on a more traditional regulatory approach. However, this will be a more costly (economically, if not politically) approach to reducing emissions.
We have already seen in Australia the economic cost of not embarking on the carbon price journey. In its absence, successive State and Federal governments have put in place other policies. These include renewable energy targets, energy efficiency schemes, certificated abatement schemes focused at sub-sectors of the economy, feed in tariffs for solar, specific spending commitments from budgets, and a raft of non-price regulatory regimes on greenhouse emissions. Each of these have has a minor impact on electricity and other prices (the impact will increase over time) and so have been easier politically to achieve. But in terms of abatement achieved per dollar of expenditure, it has been a high price to pay. In the absence of a carbon price in the future, we risk a proliferation of such economically inefficient schemes, the cost of which would be a drag on the economy.
Nasser called for a sector-by-sector approach, starting first with energy. While this has the benefit of addressing the issue of investor certainty in that sector, it doesn’t solve the political problem. If you start with just the energy sector, then electricity prices will go up, subjecting the policy to the same “great big new tax” criticism that the current carbon price proposal is subject to.
It’s also inconsistent with CEO Marius Kloppers’ call last year for a broad based system: “covering the broadest possible range of both carbon emission activities and low carbon energy option in any plan ensures the largest base for emissions reduction”. One of the problems with the European ETS is its limited coverage, and they are addressing this to some extent by broadening coverage in its third phase from 2012 through to 2020.
The other issue with an energy sector only scheme is that a good proportion of the emission intensity trade exposure comes from higher energy prices which are an “indirect” emission rather than a “direct” emission. Aluminium is a good example, where its exposure to a carbon price comes principally from higher electricity prices. So the EITE issue still needs to be dealt with.
In a sense, the provision of free permits to EITEs, as proposed under the CPRS and the current design (details yet to emerge), provides a “go slow”. Bearing in mind that the CPRS design included direct and indirect exposure, if EITEs are compensated somewhere between 94.5% and 100%, their exposure to a carbon price is quite low and the risk of carbon leakage is therefore also quite low. The pace at which the assistance is reduced over time can essentially control the pace at which Australian industry is exposed to the carbon price.