MORAN, Dr Alan, Director Deregulation Unit, Institute of Public Affairs

[14:08]

CHAIR: Welcome. Although the committee does not require you to give evidence under oath, I should advise that these hearings are legal proceedings of the parliament and therefore have the same standings as proceedings of the respective houses. If you would like to make a short opening statement that would be welcome, but I emphasise the word 'short'.

Dr Moran : It will be short. Thank you very much. May I congratulate the committee on staying awake through all these proceedings—it must be very arduous. Our submission focuses on the economics of Australian action and it recognises that we are a small producer of greenhouse gases and our actions alone will be quite negligible in reducing emissions generally. In terms of our income levels, Australia as a consumer of greenhouse gases is about average. We are relatively high as a producer of these gases, largely because we export aluminium and other metals, whereas other developed countries of our standard of living import them.

Our submission first examines the existing programs. We got quite a good fix on these programs from the Productivity Commission report earlier this year. The report estimated that in 2010 the Australian tax equivalent, largely through renewable energy, was $473 million to $693 million in that year. It showed that in relative terms the EU spends considerably more than Australia but that the other countries it examined—China, the US, Korea and Japan—spend rather less. The countries that it did not examine, which are mainly our competitors—South Africa, Canada, Chile et cetera—do not impose any carbon taxes at all. The PC actually did not say that it had done a comprehensive job in measuring these taxes. It was actually a snapshot for 2010. As you all know, the major program it looked at was the renewable energy target, which ramps up between now and 2020. In fact it is about five or six times as costly by 2020 under the laws that we have in place at the present time. Also, the PC did not include direct expenditure from the taxpayer, from the parliament itself. At the present time, the federal government is spending about $1 billion a year on things like the Carbon Trust, Solar Homes, the Clean Energy Initiative and these sorts of measures.

The carbon tax, of course, and its cap-and-trade successor, would add considerably to these costs, initially probably about $9 billion a year. This raises the cost of coal power, which amounts to about 85 per cent of our electricity generation. It raises that cost by about 50 per cent as a generator. Treasury estimates that the tax eventually will be required to be $131 per tonne, up from the initial $23. This of course lifts the generating costs fourfold from the present time. The tax itself only does about half the job of reducing the emissions under business as usual at about 1,000 million tonnes in 2015. The aim is to reduce it to 111 million tonnes. About half of that reduction is through the tax. The other half is by purchasing emissions from overseas, at quite a considerable total cost, equivalent to something like twice the present value of our exports of food and something like the total cost of our current exports of coal. So it is a large balance of payments, a large impost—a gift, if you like, to the overseas suppliers of these credits, for some of whom their source integrity is under doubt.

There are other aspects in there. One entails buying Hazelwood and closing it down, for $2 billion plus. That not only would be a cost on the budget but would raise considerably the price of electricity across the national market. As the previous people have mentioned, the whole aspect of the carbon tax—the necessity or whatever of it—is creating considerable risk not only for the wind people but also for existing conventional power.

Let me just say finally that there is a great deal of store placed on the Treasury modelling of the economy's response to the taxation shocks that are envisaged. Treasury estimates of the costs we will incur have actually been reduced quite considerably over the past three years in their modelling. They are about half of what they originally suggested: $2,700 per person per year and, in 2052, cumulative costs of about $40,000, five per cent of GDP et cetera. I think we have to be very careful about the modelling. It has got a lot of assumptions, some of which are rather heroic. Several of them, for a start, involve all countries imposing a similar regime to that of Australia. We know at the present time that that is not taking place. Only the EU has similar regimes envisaged, or at least legislated for. Secondly, it does involve also rapid technological development in carbon capture and storage and other renewable technologies, and there really is not any evidence that this is happening anyway. Thirdly, it does entail a continued expansion of coal exports, which is difficult to envisage given the abatement regimes worldwide are intended basically to kill off coal. Certainly it would not be possible unless there were massive breakthroughs in carbon capture and storage, and, of course, there are not any such facilities anywhere in the world.

Finally, the Treasury submission is based on very strong assumptions, one being that our labour productivity in Australia will continue to increase and, in fact, it will actually increase further than the present 1.4 per cent per annum. This is despite the forced abandonment, with the taxes, of some of our most productive industries under the cost impositions. So, our own view—and, again, we are looking at some of the estimates that Treasury made in its earlier modelling; it is not as quite explicit as this latest one—is that the Treasury's earlier modelling suggested that if we avoid it and defer taking any action until 2020, by which time the whole nature of international agreements and maybe the carbon tax science will be clearer, and then accelerated to where we were going to go to by 2050 the cost would be about 0.3 per cent of GDP, so there would be a net loss of 0.3 per cent of GDP. We think that is quite a good insurance policy, and a policy which this parliament should approach.

Senator MILNE: Thank you, Mr Moran. In the interests of transparency, and as it is always very difficult to know where the Institute of Public Affairs gets its funding, I would like to ask you to tell me, as we are discussing a very significant polity change, whether the Institute of Public Affairs receives any funding from any coalmining or coal-burning companies or any umbrella organisation which represents coal-mining or coal-burning companies.

Mr CHRISTENSEN: Madam Chair, what is the relevance of that to the legislation before us?

Senator MILNE: The relevance of that is to the evidence, if I may respond, Madam Chair. You have just made a number of statements about carbon pricing from a certain perspective. For everybody else who has come before the committee we know the organisations they represent. There is no publicly available information about who funds the Institute of Public Affairs and in the interests of transparency I would like to know.

Mr Moran : There are two ways to answer that question. We have funding from about 800 different sources, of individuals and some firms as well across all industry sectors. We have no one sector which is dominant in that funding. The funding is not tied. The funding we receive comes from all sectors. Does some come from the coal sectors? Probably. Does some come from food? Yes. Does some come from wind supplies? Well, I know for certain it does as a matter of factor. We do not release the names of the companies because malevolent people, and I am sure you are not one of these, take those names, write to them and say, 'If you support the IPA then you are not a friend of the Greens, the Labor Party, or whatever.' Even some Labor Party people have said that. So that cuts off our funding, and you can understand that we do not have any funds from the taxpayer. We do not have funds, which others do have, which we can just corral from the taxpayer. We are reliant on people giving us that money.

Senator MILNE: I am interested that you cite contributions from the wind industry in the same breath as the coal-mining and coal-burning companies. I am interested to know, in terms of all of your funding, what percentage does come from the fossil fuel sector?

Senator CORMANN: What has this got to do with the legislation? What is the relevance of this to the legislation?

CHAIR: Order!

Senator CORMANN: I am raising a point of order.

CHAIR: I am trying to respond. If you let me respond then you will probably be happy with the answer. I am not going to allow the question.

Senator MILNE: Okay, so I will move on. Can you tell me if the Institute of Public Affairs has ever advocated for any renewable energy development anywhere in Australia?

Mr Moran : Not as far as I know. We do not advocate for people generally or for firms generally. We are about public policy. We do not take commissions from firms.

Senator MILNE: I said renewable energy project or development and not a particular company. Has the IPA every written anything in support of renewable energy?

Senator CORMANN: On a point of order, Madam Chair, what is the relevance to the legislation?

Mr Moran : As long as renewable energy is competitive and stands on its feet we are very much in favour of it.

CHAIR: I think renewable energy is very important to the legislation before us, and I am going to allow that question.

Mr Moran : We are much in favour of renewable energy as long as it is not reliant on taxation and other imposts from the ratepayer.

CHAIR: Before we go on can I point out, Senator, that we did not shut down any of your questions to the ACTU. So let us be a bit realistic about this. Senator Milne has the call.

Senator MILNE: So you support renewable energy on that basis. Given what the Australian Energy Market Operator has had to say about the contribution of renewable energy in South Australia, can you just tell me if the IPA supports the conclusion of AEMO that the 20 per cent renewable energy in South Australia has significantly reduced the wholesale cost of electricity in South Australia?

Dr Moran : That is a factual case. It has reduced the wholesale cost because it is a 'must run' supply; it runs at any cost whatsoever. So yes; technically it has reduced the cost. It has not reduced the overall cost to the community, because that renewable energy is subsidised to about three times the price that it actually receives at the market.

Senator MILNE: Do you take the same view about the subsidies that have gone to the North West Shelf and also to offshore exploration for oil and gas generally?

Dr Moran : We would be very much opposed to any subsidies to anything, whether it is oil on the North West Shelf or not. I would hasten to add that as far as I know there are no subsidies to the North West Shelf, but you may have some information, in which case—

Senator MILNE: Not anymore, but there were substantial subsidies to the North West Shelf and there are ongoing subsidies to oil and gas exploration. So I take it the IPA does not support those.

Dr Moran : We would not support the subsidies to oil and gas exploration. I doubt very much that there are such subsidies. Certainly the Australian government has said in its response at the G20 recently that there are no such subsidies, so maybe you should ask the government.

Senator MILNE: Perhaps I could ask you, Dr Moran: in relation to your statement just a moment ago, are you aware that Treasury identified 16 or 17 subsidies directly to fossil fuels when the government first asked for that advice from Treasury?

Dr Moran : I am not aware of that. I wonder—

Senator MILNE: Thank you. If I can go on to the issue of subsidies, do you support the abolition of the fuel tax credit scheme, since it is a significant subsidy?

Dr Moran : Yes, we would support the abolition of that scheme.

Senator MILNE: Thank you.

Senator BIRMINGHAM: To flesh out a few points, you have argued that the impact to Australia of deferring action pending certainty around international action would be relatively minimal. Can you explain to me on what basis you understand that it would be minimal and the basis on which you think it is appropriate to defer action to see what happens globally?

Dr Moran : Taking the last one first, I think it is agreed generally that Australia is a small player—1½ or 1.3 per cent of emissions generally—and that, if in fact we were to operate on our own, it would have no effect on the goal of reducing the levels of emissions; it would just be torturing our own economy, costing us a lot of money and losing wealth and income. So I think the first answer is that we would certainly favour deferring any action until we can see a clearer picture of such action globally. I have to say that the picture we see at the present time is that only one group of nations—that is the EU—is taking action in any discernible measure in terms of reducing its emissions.

Senator BIRMINGHAM: The Treasury has made all of its assumptions on the basis that the world will work towards a 550 parts per million stabilisation target, as it is known. Do you see evidence that the world is on track to achieve that?

Dr Moran : No, I do not see any evidence. Indeed, there is no country other than in the EU which is taking action to get anything close to that. There is certainly no country, other than in the EU, that has gone even as far as Australia has with its 20 per cent renewables. Much is said about China, but when you examine China it is less than one per cent and it is not envisaged to grow by very much more than that. The United States is totally paralysed and will not do anything. None of our major trade competitors, who would take up the slack if we move out of this market, are actually envisaging taking any action.

Senator BIRMINGHAM: Can we take a couple of those specific examples, because people often come before committees like this and say that China is implementing a price on carbon. How does that compare with what is being proposed for Australia?

Mr Moran : There was a bit of discussion about the economics consultancy which the Commonwealth let, the Vivid Economics consultancy. It had been suggested that the Chinese were putting a price on carbon, but on closer analysis when the Productivity Commission looked at it they said, 'That price is quite low. It is lower than the price that we have here in Australia and it is not envisaged to go very much higher.'

Senator BIRMINGHAM: Others have suggested that India is putting a price on coal, for example. How does that compare with existing taxation mechanisms that Australia has on coal?

Mr Moran : India does have a price on coal, whether it is imported or domestic, of about $2 per tonne. That is not very much different from the price we have on coal, which we call a royalty in New South Wales and in Victoria. It is a revenue price; it is not a price that would have any effect in terms of the operation of switching between fuels.

Senator BIRMINGHAM: To go back to my initial question, you are arguing that were Australia to defer action or defer taking decisions until 2020 the impact of doing so, were we to get it wrong—and, in fact, the world was taking more action than Australia had predicted or than you are saying at present—would be relatively minimal?

Mr Moran : My estimate was simply based on the Treasury modelling, which they have not actually updated in the latest version. The Treasury modelling did infer that there would be a 0.3 per cent cost if we did nothing to 2020 and then caught up between 2020 and 2050 to where we are intending to be. That, to me, sounds quite a modest insurance policy that we would be buying, given the fact that there is a great deal of uncertainty that the rest of the world will rush headlong into carbon pricing, as we appear to be intent on.

Senator BIRMINGHAM: We heard some evidence earlier today from Exigency, an energy and carbon market advisory firm. They contend that there are better or alternative means to achieve abatement, and to effectively price and achieve that abatement, than a tax across all emissions. Is that a view that you would share or that you have an opinion on?

Mr Moran : It is not a view we would share. I think it was mentioned in the various studies done by McKinsey's et cetera, and they have done the same study all over the world showing profiles of what could be achieved at what price in theory. But that does rely on things going perfectly. Indeed, as we have seen in some of our own programs here in terms of the roofing et cetera, things do not go perfectly. It is most unlikely, in our view, that selectively picking winners in that way, which I understand is the coalition's policy, would be any more effective and it would probably be less effective than the carbon tax.

Mr CHEESEMAN: I want to pick up on that particular question. Are you asserting that when the rest of the world is sufficiently moving we should move, and we should move along the lines that the government is proposing—that is, a market based mechanism—rather than the more expensive approach, the direct action approach, that has been proposed by the coalition?

Mr Moran : I am certainly asserting that if the rest of the world moves, we should move. There is no question about that. That certainly has to be the case and would be the case.

Mr CHEESEMAN: Would it be on the basis of a market based mechanism as proposed by the government?

Mr Moran : We would see a market based mechanism as being superior to a specific targeted approach in any way.

Senator BIRMINGHAM: In terms of the government's marked based mechanism, as I like to describe it, do you see in looking at the structure of it serious flaws in relation to how rent seekers are treated and issues about the need to provide industry assistance to the scale that is proposed? Is it the case that those flaws are there because there is an absence of a global market and comparative action in our competing countries and that they have been designed to try to offset carbon leakage problems and the like that, if you had a true international market, may not exist?

Mr Moran : Quite so. If the whole world said, 'Bang! We are going to have a carbon tax of $23 or whatever it is going to be and it is going to be on all countries,' there would be no or far less need for that sort of action. There would still be some issues. There are two matters. One is how we compete with the rest of the world, which is the nub of your question. We have to have a level playing field. The other is that people would have made investments based on certain assumptions of government and, if the government changes those assumptions, it could reduce the value of those investments and they may well request and receive compensation. That goes to the question: where are the property rights there? What would have been expected? What is reasonable? Is not clear, usually.

Senator BIRMINGHAM: So this type of pricing mechanism works, say, in the perfect economists' model, where you can create a nice vacuum and put all other issues to one side and everyone acts in unison, but does it work in the real-world situation we confront today?

Mr Moran : No. Obviously the government does not think it does either, because it does not have a perfect price mechanism; it has various industries in, various industries out, compensation here and compensation there. Essentially, there is a recognition on the part of the government that the perfect solution is not the carbon price. Indeed, it has its carbon price and all the other accoutrements of the 20 per cent renewables and various subsidies in place. With a pure carbon price you would say, 'There is a carbon price. Get rid of the rest of it and let's go on from now.' I do not see anybody in government saying that.

Senator CORMANN: Isn't the problem that what we are told this whole carbon pricing package is supposed to address is for Australia to help reduce global greenhouse gas emissions but we are operating as part of a global market? The problem we are trying to address is a global problem. Because putting a price on carbon outside of an appropriately comprehensive global framework of pricing emissions does have international competitiveness implications, as well as creating various other distortions, the problem, really, is that we are trying to address a global problem through a domestic policy without being able to influence what happens in other parts of the world. Is that a fair comment?

Mr Moran : Yes, it is. It is almost like just putting a carbon tax in place in New South Wales and not the rest of Australia. You would see the industries migrating away from New South Wales to the rest of Australia. That is the same situation as what you are suggesting, I think.

Senator CORMANN: This is the last point I will have time to make. If there was an appropriately comprehensive global agreement, then addressing a global challenge through a global market based mechanism would be an effective way of going about it. The reason this is not effective is that the proposal is for Australia to act outside an appropriately comprehensive global carbon pricing framework. Is that right?

Mr Moran : That is right. There is no global carbon pricing framework; there is no policeman set up to do it; there is no way in which it can be done. It is basically goodwill and, indeed, it means Australia is certainly moving ahead of all its competitors and relying on the fact that they will come in behind us—which, if they do, it is well and good but, if they do not, it will destroy huge segments of our industry.

Senator CORMANN: Sacrificing Australia, increasing emissions.

CHAIR: So IPA would contend that our top trading partners are taking no action in this space?

Mr Moran : Very little, yes.

CHAIR: You would contend that China, Japan, the US, Korea and India amongst others—the UK and Germany—are not taking action?

Mr Moran : No, that is not quite what I said. I fully acknowledge that the EU is taking considerable action. Spain has 13 per cent wind and Germany has seven per cent wind. They are taking very strong action in those countries, and they have a sort of carbon tax of €16 or €17. They have action, but none of our competitors have action. The agricultural producers and the mineral producers that we are competing with do not have any action, nor in fact do other countries like the United States, Canada, China or India.

CHAIR: The IPA would contend that the US is taking no action in this space?

Mr Moran : Not the IPA; the Productivity Commission said that.

Senator Cormann interjecting—

CHAIR: That is all right—I am just clarifying.

Mr HUSIC: Mr Moran, did I hear correctly? In your opening remarks did you express a view that you believe that the carbon price would go from a starting price of $23 to $131?

Mr Moran : That is the Treasury modelling. In today's dollars, that is their—

Mr HUSIC: In what year?

Mr Moran : In 2050.

Mr HUSIC: Senator Cormann stated—and if I misrepresent your position as you expressed it, Senator, I am more than happy for you to correct me—that we were trying to deal with a global problem with a domestic solution. But in fact what we are trying to do, and both parties have committed to it, is reduce emissions by five per cent by 2020. What do you see as helping us meet this target as opposed to us acting blithely oblivious to any benchmark that both parties have said we need to meet?

Mr Moran : Just because both parties have said we should meet the five per cent by 2020 does not mean it is right. In our view, it is wrong. We should not be trying to meet any such target unless the rest of the world moves in lock step with us.

Mr HUSIC: You acknowledge the science of climate change that is suggesting that there will be a greater number of intense weather events over the course of the century?

Mr Moran : I do not know that any more than you do.

Mr HUSIC: Well, I do actually, because I have read the Climate Commission report.

Mr Moran : So have I.

Mr HUSIC: So are you contending that their work is wrong?

Mr Moran : No. I am not suggesting it is right or wrong. I am suggesting that whatever we do is irrelevant unless the rest of the world does it.

Mr BANDT: Your submission canvasses a number of options before settling on the one that you have put forward to us. One of the options that you consider is the coalition's direct action model, but you do not advocate for that. Why not?

Mr Moran : We have some experience in that kind of direct action with various schemes—roof cladding et cetera—which have not worked according to plan. The direct action all stems from McKinsey-type analyses, and it says, from a theoretical point of view, 'If we replace electric motors with this sort of motor, if we go to low-tillage farming rather than high tillage, these are the savings that could be achieved.' But they are all highly theoretical savings and they need to have a perfect situation in place. That is why we tend to the view that, rather than legislators going through thousands of different ways and allocating some sort of weighting to them, it is better to have an overall system of a tax or a cap and trade et cetera.

Mr BANDT: You say in your submission that few would see much chance of the coalition's approach achieving its stated goals. Does the IPA see much chance of the coalition's direct action proposal meeting its stated goals?

Mr Moran : We would say that it would be very difficult for it to achieve its goals, yes.

Senator PRATT: Does the IPA believe that carbon is an externality that needs to be priced at all?

Mr Moran : The IPA has many views on this. I do not know whether it is an externality or not, but that is not the nub of our submission.

Senator PRATT: I understand that, but should carbon be priced in any way, shape or form whatsoever?

Mr Moran : I do not think I can answer that question. Well, I can answer the question, but I appear here as an expert on economics, not on science.

Senator PRATT: You have said that, if the rest of the world were to price carbon then Australia should too. Does the IPA think the world should price carbon or reduce it? You do not have a position?

Mr Moran : We do not have a view on it. We have a view on what is appropriate for Australian public policy but not world public policy.

Senator PRATT: It seems to me that you do have a view about climate change. It would seem to me in large part that you do not believe that carbon dioxide is harmful.

Mr Moran : No, it is not harmful to humans—it is an odour.

Senator PRATT: I would assume, therefore, that you are arguing that is an externality that does not need to be priced.

Mr Moran : No. Nobody says that the gas itself is harmful. You could walk and live in concentrations tenfold the present ones.

Senator PRATT: Yes, we could all live in a greenhouse, but the point is that it might get a little bit hot and unpleasant.

Mr Moran : It might be, yes, but it would be like living in Sydney rather than here.

Senator PRATT: I just find it a little bit contradictory that you believe that, if Australia were to take action on climate change to price carbon, we should only do so if the rest of the world does, but you do not have a view on whether the rest of the world should do that or not.

Mr Moran : I come here because of my own expertise. We have a fellow of the IPA, who is not here, Bob Carter, who certainly subscribes to the view that there is negligible global warming. He is a scientist. It is well founded. He has published books on it.

Senator PRATT: But the two things are inextricably linked.

Mr Moran : Not necessarily, no.

Senator PRATT: They are linked because taking action on climate change is all about the environmental impact and acting soon enough to mitigate that impact. If we send a message to the rest of the world that we are prepared to wait until 2020, then they will all be prepared to wait too and we will never get around to fixing the environmental problem.

Dr Moran : If you think Australia is that powerful then you may be right, but I see no evidence that the rest of the world is waiting with bated breath to see what Australia does and will then say, 'Okay, those wise people in Canberra, we're going to do the same.'

Senator PRATT: I appreciate we are but one of many nations, but if Australia has high per capita emissions, and our emissions are around the same level as the UK's or France's, then in terms of getting global momentum for action we must be one of the players that provide momentum to all other nations, in the same way that we expect them to, because climate change is something that we must mitigate.

Dr Moran : That is an interesting point of view, and one day when you are the foreign minister you will be able to try it out, but I do not fancy your chances. I do not think other countries will follow our example.

CHAIR: Mr Cheeseman, very quickly because we do have to wind up. The committee has to get to Sydney for tomorrow's hearing so we are quite time constrained.

Mr CHEESEMAN: Thank you, Chair. My question goes to the IPA's credibility. I would like to know how much money the IPA has spent on supporting books, forums, publications and the like to provide a podium for climate change sceptics.

Dr Moran : That is a difficult question. I suppose there is an answer to that. The IPA has a budget of $2 million a year—we are a small outfit. What percentage of that is on books, podiums? I would be absolutely astonished if it was more than $20,000. It is zero, virtually.

CHAIR: I am going to move on. Do you have something else to ask?

Mr CHEESEMAN: No.

CHAIR: Mr Christensen, one quick question.

Mr CHRISTENSEN: Dr Moran, in your statement at the start you mentioned assumptions that Treasury had made in terms of shocks to the economy. Professor Ergas this week has talked about that, saying that Treasury has in other areas measured longer times for the labour market to adjust to the shock impact of new taxes. What is your view on that?

Dr Moran : I think Professor Ergas is drawing attention to deficiencies in the Treasury modelling generally. I have read his articles, of course, but I have not investigated in the same way as he has investigated the Treasury modelling. The Treasury modelling as such has not been released in any detail, so people cannot examine it in the forensic way that he would like to. Certainly in my own examination of where they state their assumptions they all seemed to be very circular to me. The assumption is that we will continue growing as an economy. The finding is that we will continue growing because they assume we will. I think we have to be very careful in looking at models of that nature and drawing conclusions from them.

Mr CHRISTENSEN: Thank you.

CHAIR: Dr Moran, thank you. I am sorry we are shutting you down when I know other people had some questions. Thank you for your attendance here today. If you have been asked to provide additional information would you forward that to the secretariat. We will send you a copy of the transcript to make any grammatical or factual corrections.