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Senate Select Committee on the Scrutiny of New Taxes
01/09/2011
Carbon tax pricing mechanisms

RICHARDS, Mr Andrew, Executive Manager, Government and Corporate Affairs, Pacific Hydro

RYAN, Ms Bridget, Senior Policy Manager, Pacific Hydro

[08:33]

CHAIR: Welcome to today's hearing. Would you like to make a brief opening statement?

Ms Ryan : Yes, thank you. We welcome the opportunity to appear before this committee. I would just like to start by reading an opening statement. Pacific Hydro is a wholly owned renewable energy company which has been successfully developing and operating renewable energy assets for 20 years. Through our owners, Industry Funds Management, approximately five million Australians are shareholders in our company, which continues to deliver economic, social and environmental dividends.

Over the last 10 years, the company has developed renewable energy assets in Chile and Brazil worth nearly $2 billion. In Brazil our investments are underpinned by government incentives to foster the introduction of non-hydro renewable energy. A fundamental driver for our Chilean projects is the ability of these assets to generate carbon credits under the Kyoto protocol's Clean Development Mechanism.

In Australia, Pacific Hydro has developed renewable energy assets worth around $600 million over the past 10 years. The driver of this investment has been the mandatory renewable energy target. The reason for the difference in the investment size between Australia, Chile and Brazil is that in Chile there has been a relatively stable market signal which underpins investment, while Australia has to an extent certainly suffered from an erratic policy and regulatory environment at both state and federal levels. In Australia, the mandatory renewable energy target, initially brought in by the Howard government and later expanded by the current Labor government, has maintained bipartisan support. Even so, its past has been troubled. Nonetheless, we consider the most recent improvements to the renewable energy target to provide a good basis for a much more stable investment environment which will facilitate significant growth in utility-scale renewable energy technologies over the coming 10 years.

Importantly, the Clean Energy Future package announced recently by the federal government includes the continuation of the renewable energy target and direct funding initiatives such as that through the Clean Energy Finance Corporation and the Renewable Energy Agency, and, most importantly for this committee, the introduction of a price on carbon. This provides a best practice suite of measures to address climate change. In fact, the Clean Energy Future package adopts many of the critical success factors identified in a recent International Energy Agency report called the Clean energy progress report 2011. Page 15 of this report puts the following recommendation to IEA governments:

Clean energy technology deployment will therefore require a concerted public and private commitment, supported by more ambitious policies. It is clear that setting a CO2 price will not be enough to achieve the revolution. Governments need to take action on each of the following policy measures:

.    Increase public investment in innovation through support for research and development (R&D), as well as large ‐ scale demonstration.

.    Implement smarter energy policies, including removing non ‐ economic barriers and providing transparent, predictable and adaptive incentives for cleaner options.

.    Facilitate the uptake of clean energy technologies into energy systems by supporting integration of technologies such as smart grids.

.    Phase out subsidies for fossil fuels.

.    Establish a price on CO2 emissions.

We urge both government and opposition to maintain a strong commitment to the continuation of the renewable energy target for utility-scale projects. This policy will deliver on sector-specific emissions reduction, industry investment and regional jobs growth.

In recent times, studies by the Grattan Institute, federal Treasury and even the Australian Industry Group have all shown that the renewable energy target, when focused on delivering utility-scale energy projects, has not driven a significant inflationary effect on retail electricity prices. Despite what you might read in the media, modelling for the New South Wales regulator, IPART, conducted by Frontier Economics, reflected that the large-scale component of the renewable energy target is one of the smaller elements in recent price rises affecting New South Wales consumers. Frontier went on to conclude that the long-run marginal cost to LRET is around $30 per megawatt hour, or $30 per tonne of carbon—basically equivalent. Working through these numbers reveals that the cost of LRET to date is equal to one quarter of 1c per kilowatt hour and in 2020 around 3c per kilowatt hour.

Senators, I think it would be fairly clear to you by now that Pacific Hydro is a strong supporter of pricing carbon and of well designed and targeted complementary measures, such as those identified by the International Energy Agency report I referred to earlier. However, we recognise that for some pricing carbon is seen as a threat and for others it represents a significant opportunity. We are clearly operating in the opportunity space and will, along with our five million Australian shareholders, unquestionably benefit from its introduction. While our company, along with many others, will benefit from this opportunity, we recognise that companies and industries which are substantially affected should be given the opportunity, with appropriate assistance, to make an orderly transition to a cleaner mode of business. We also support assistance to households, particularly those vulnerable to what is often described as energy or fuel poverty. We are of the view that pricing carbon is a critical element of an appropriate economic and environmental insurance policy. History has shown that to solely rely on government-sponsored programs and voluntary schemes will provide neither a carrot nor a stick big enough to make a material difference to behaviour or investment decisions. When it comes to our nation's role in the world, we do not share the view that Australia is a small part of the problem, that our contribution to a solution is insignificant or that we should wait until a global agreement is in place. Australia ranks in the top 20 polluting nations globally, alongside many key economic and political allies such as the United Kingdom, Canada, New Zealand and Japan. This also means there are approximately 180 nations that pollute much less than we do. If all nations were of the view that they should delay action because their individual contributions to climate change were small, then the logical extension would be that a unified global agreement would never be reached and we would become locked into a form of Mexican stand-off.

From what we have seen over the last decade, introducing a price on carbon in Australia will not see us leading the world but will allow us to keep pace with many of our key economic and political partners while we are able to take advantage of opportunities in our own country. Carbon trading already exists in over 40 economic regions and in these places is driving billions of dollars in investment and creating thousands of new jobs, many of those regions, as well, having faced significant national and subnational schemes which drive abatement, deploy clean energy technologies and encourage the more efficient use of energy. Progressively, these initiatives are being pursued as much for economic reasons as environmental ones.

Within this context, it is in Australia's interest to ensure that we can attract the maximum investment possible to grow cleaner, more efficient and less carbon-intensive businesses while ensuring that our economy becomes more robust and resilient in the face of increasing climate change impacts. The policy frameworks established now must look to a long-term objective to safeguard natural advantages that we currently enjoy and emphasise the positive effect of long-term investor certainty. A legislated approach with appropriate market structures and incentives to encourage private sector capital towards lower emissions and low carbon options will benefit Australia's economy. It will grow jobs in the clean energy sector and provide broad and ongoing benefits, especially in regional and rural Australia. Once again, thank you for asking us to be here today.

CHAIR: Thank you, Ms Ryan. Obviously, the reason Pacific Hydro will do well is because the carbon tax emissions trading scheme will push up the cost of electricity so that you will become more competitive against other energy sources; is that the way it is?

Mr Richards : That is correct, Senator. We would expect that a majority of that carbon price would be reflected in the final energy price that is sent out, which would then be passed through to consumers. So, yes, we would become more competitive. In the suite of measures that has been announced, the renewable energy target still sits within that. So, as the carbon price lifts the electricity price, we will rely less on that renewable energy target going forward. Most of the modelling shows that, at some point in the future, the renewable energy target will not be required as the carbon price has lifted the energy price and as the technology costs that we are deploying start to come down.

CHAIR: So are you saying that sometime in the future the renewable energy target will not be required?

Mr Richards : Correct. There is a view—a strongly held view, actually—that, probably beyond 2025, as that renewable energy target begins to be phased out, it probably will not be required. It will depend on what happens with carbon pricing, though.

CHAIR: So what you are saying is that if the carbon price is high enough and pushes energy prices high enough, then you will not have that additional requirement to have a minimum target in terms of renewable energy?

Mr Richards : That is the view, absolutely. At some point I think the carbon price is designed to level that playing field completely. At the moment, the renewable energy target basically bridges the gap between our technology costs and the currently deployed technology.

CHAIR: So what is your response? Obviously, your business model becoming more competitive is predicated on everybody paying more for their electricity, their energy. But what do you say to those businesses that say, 'Access to competitively priced energy was always our key competitive advantage and we know really we are giving up our key competitive advantage as we are competing with countries like China and others'? What is your response?

Mr Richards : At the end of the day, what we are trying to achieve is a phased approach to decarbonising our energy costs, if you like, or our energy supply system. We are of the view that more and more countries, including China and India, are looking towards carbon pricing in their own right. It may not happen in the next couple of years but certainly they are moving towards that goal. We are of the view that nations around the world are moving towards a position of decarbonising their energy supply.

CHAIR: Have you looked at Treasury's modelling and their expectations as to what will happen to emissions in China between now and 2020?

Mr Richards : Yes.

CHAIR: Treasury had some modelling in 2008 where they thought that by 2020 China's emissions would be about 16.1 billion tonnes. They have actually revised their expectation upwards to 17.9 billion tonnes. The expectation as to what Chinese emissions will be like by 2020 has gone up between 2008 and 2011 by 1,800 million tonnes, which is three times as much as Australia puts out in a whole year. So just the margin of error in three years is three times more than the emissions we put out in Australia in a year. It puts into context what we can realistically achieve while we are putting manufacturing and other businesses under significant additional competitive pressure.

Mr Richards : The Treasury modelling, and a lot of other modelling, shows that the costs of renewable energy targets or emissions trading are a relatively small factor in both the price increases we have seen now for energy and what they expect to see in price increases in the future. The recent IPART modelling showed that recently the biggest impact on electricity costs in New South Wales has been building new power lines. The biggest cost beyond that that we are seeing is the change in coal contracts, with thermal generators. So there are a whole lot of other factors driving that.

CHAIR: Sure. There are a whole lot of factors that are always driving these sorts of things, and certainly manufacturing is under pressure because of a whole lot of factors, including the Australian dollar and economic conditions more generally. But the carbon price—the carbon tax, the emissions trading scheme—is the one self-inflicted factor, isn't it? It is the one that we choose to impose or not to impose on ourselves, whereas a lot of the others we cannot as directly influence.

Mr Richards : I guess it also depends on your view of what the competitive environment is going to be like in 2025 or 2030. But we are also seeing a lot of our trading partners, including countries like Japan and others, obviously mostly in Europe, looking at legislation to put border adjustments in place with those countries that are selling products that have a carbon liability effectively. If you take a longer term risk management view, then you could argue that a slower transition to decarbonising our economy now is much more beneficial than having to do something much faster later on. In fact, there are a number of studies that have been produced over the years that show, if you want to preserve the majority of your coal-fired power stations, for example, or the majority of your competitive industries, early action that allows a transition preserves more of those industries than an ad hoc chaotic approach later on does.

CHAIR: What was your take on the Productivity Commission assessment of things like the renewable energy target and so on? It generated a lot of debate. The Productivity Commission's take seems to have been that it was expensive and not as effective as people might have thought. I am talking about the report the Productivity Commission released a couple of months ago.

Ms Ryan : Are you asking about the Productivity Commission report that looked at a range of different policy—

CHAIR: That is right, and their findings in relation to things like renewable energy targets—because you mentioned it.

Ms Ryan : I believe they also looked at fuel policies. The cost of abatement policies in transport fuels was much, much greater—

CHAIR: As you have said, there is bipartisan support for the renewable energy target, but I am just interested in your policy argument as to why you think what might have come out of the Productivity Commission is wrong.

Mr Richards : At a broad philosophical level, we agree with the Productivity Commission that a single market mechanism like a carbon price should be the thing that drives change in the economy, specifically in the energy sector, but the Productivity Commission also says there should be no support for industries during that transition, so they take a very pure economic approach to it. We would say that the main reasons for things like the renewable energy target are twofold. One is that, while we wait for that carbon price to come up to a level that would justify investment, the renewable energy target does some of the heavy lifting in the stationary energy sector to start that transition immediately. If you have got a $50 equivalent carbon price sitting in the renewable energy target to drive cleaner investment, the rest of the economy can gradually change with a $20 carbon price or a $25 carbon price. So it does that heavy lifting early on. The second element that the renewable energy target fulfils is industry development—developing those industries now that we will need into the future, bringing forward that innovation, bringing forward the new technologies and giving investors confidence to take some of those risks today so that we can be in a much better position in 10, 15, 20 years time. It is twofold.

Senator CAMERON: Mr Richards and Ms Ryan, you say that you are now operating in an opportunity space and that you are taking a long-term view in relation to where we are going. Senator Cormann said that we can choose not to go down this path. Why have you chosen to actually invest in the longer term approach on climate change?

Mr Richards : The company is 20 years old. It was around the early 90s that the directors and investors in our company were convinced of the science of climate change, that the science would be further proved and that nations would continue to move down the path of decarbonising their energy supplies. That was 20 years ago, so we have certainly taken a very long-term view in our strategy. More and more what we are seeing are nations particularly starting to move towards decarbonisation of their energy supply. We are in Chile for that reason. We are in Brazil for that reason. Again, we think it is in the long-term economic view that eventually the prudent risk management practices of all these nations and of the companies involved in those economies will be to gradually decarbonise their activities and their economies. So we are looking at a range of solutions within this stationary energy space to take advantage of that. It is very much a long-term view. We are starting to see the outcome of that now with investments in Chile and Brazil and hopefully more and more investments in Australia and other parts of the world. We feel quite vindicated that, as the science continues to be improved, in our view at least, those opportunities will continue to emerge. As much as it is an environmental issue, it is more and more becoming a risk management and financial issue these days.

Senator CAMERON: Are you mainly wind turbine investment?

Mr Richards : In Australia we started life as a small hydro company, run-of-river hydro, and got into wind farms in the early part of 2000. We are also looking at large-scale solar PV. We are looking to build 150 megawatt photovoltaic power station with BP Solar out at Moree. We are also looking at geothermal resources. So do not be fooled by the name Pacific Hydro. We are very much a renewable energy company. In Chile it is all at this stage run-of-river hydro power schemes and in Brazil it is wind farms. It really just depends on what the natural resource provides us.

Senator CAMERON: Do you have any estimate of the employment opportunities that your investment has created around the world?

Ms Ryan : We employ around 330 people globally. There are about 110 in Australia, 100 or so in Chile and the rest in Brazil. In terms of investments in wind projects generally, just to give you an example, our most recent projects in Victoria employed around 400 people in construction. That was for around 56 to 57 megawatt size wind farms. Those jobs are within the project deployment itself and construction. We employ directly in an ongoing capacity about four people ourselves and our contract with REpower, which is the turbine supplier, employs another seven people directly in Portland. That may sound small but in a town the size of Portland the indirect economic benefits created by those people having jobs are fairly significant for them. In Australia, for our company to develop and deploy the projects that we do, we need a lot of engineers and technical staff. So the 110 people who are employed in our company would not be here without these projects being able to go ahead.

Mr Richards : Just on manufacturing, about 200 people are currently fabricating towers at Keppel Prince Engineering in Portland. Pacific Hydro has had a long-term philosophy of maximising local content, so every tower for our wind farms has been fabricated there. About five years ago, there was a blade fabrication facility in Portland. Market demand fluctuated and that closed down. We are building projects in Chile and the number of people on site during construction can range from between three and 4,000. They are major engineering projects. In both a local sense and national sense in Chile, as far as the employment they create, they are equivalent to some of the big mining projects. These projects have been constructed over the last three to four years and we have plans to do more. We think that level of employment in Chile is very important for those regions.

Senator CAMERON: Obviously, models have been done as to where this will lead us in the future. You have spoken about the Treasury modelling. There is also modelling from Frontier Economics. Are you aware of that modelling?

Mr Richards : There is a lot of modelling from Frontier Economics. Is there anything specific?

Senator CAMERON: The modelling that they have done for the New South Wales government.

Ms Ryan : That fed into IPART.

Senator CAMERON: So you are aware of that?

Ms Ryan : Yes.

Senator CAMERON: Did Frontier Economics consult with you in terms of employment growth that may take place in the renewable sector?

Mr Richards : No.

Senator CAMERON: No. Frontier Economics, in their modelling, have not modelled in growth in the renewable sector. Are you aware of that?

Mr Richards : Yes. We have obviously done our own modelling in this area. Organisations such as the Climate Institute have done modelling and so forth. But you can also take a lead from what has happened in Europe. We are probably not going to get the employment growth in manufacturing in Europe. We may not get to the level of manufacturing they have, say, in wind turbines. We probably had the opportunity, back in early 2002-03, to establish more manufacturing in that area. But since then China and, more recently, India have increased manufacturing capacity. That is not to say there will not be a lot of other employment opportunities created. One of the great things, in our view at least, about the carbon pricing and the renewable energy target is that they create opportunity for people to innovate and invest. When the renewable energy target was first put in in 2000 the technology mix assumed then was very different to what actually happened. It was assumed that there was a whole lot of biomass and other sorts of things. No-one really assumed that wind would come through and, clearly, our view was that it would because it was the most cost effective worldwide and it created all these opportunities.

Senator CAMERON: Are you aware that David Cameron, the Conservative UK Prime Minister, has invested hundreds of millions of dollars in refurbishing old shipyards in the north-east of England so they can now produce wind turbines. Are they playing a bit of catch-up football?

Mr Richards : Compared to the rest of Europe, they probably are. For many years the Germans and the Danes have clearly been dominating that area and, more recently, so have the Spaniards. The growth we are seeing in manufacturing capacity and deployment of renewables in China and India is just enormous. We saw another example of that yesterday. Suzlon Power are looking to build a 600 megawatt wind farm in South Australia—$1.3 billion worth of investment, new undersea cables and those sorts of things. They are really right out the front.

Senator CAMERON: I have been involved in hearings in Spain, and there have been arguments that the reason that Spain is in such a bad financial position is its investment in renewable energy. Given that you are an investor in renewable energy, what is your view on that argument?

Mr Richards : This issue has been brought up a number of times before. I believe a report was done by a university professor. When you look at the statistics of employment in Spain, you will see that unemployment has fallen since that policy was put in place. That is not to say that the renewable energy policy has been the sole reason for that, but the argument that it has increased unemployment is actually not borne out in the employment statistics.

Senator MADIGAN: What is the predominant country of origin of your shareholders and your directors?

Ms Ryan : The shareholders are primarily Australian superannuants through industry funds management. We are wholly owned.

Senator MADIGAN: Are you 100 per cent owned?

Ms Ryan : Yes, 100 per cent.

Senator MADIGAN: Earlier you spoke about a free market and about market forces. You mentioned that having a price per tonne on carbon was a less chaotic approach. You mentioned the Productivity Commission and that there was no support for industry to transition but that you are in favour of that.

Ms Ryan : We do support that, yes.

Senator MADIGAN: You support that. However, quite often we hear about the so-called level playing field, but there is no level playing field. We are told we cannot support industry, but your industry wants support. As I see it, there is a major contradiction here. It is not a free market, is it? The market forces are not driving this. We have to impose a tax on people to create this market.

Ms Ryan : There is bipartisan support for the renewable energy target, as we understand it. The clear objective is to bring forward the deployment of renewable energy technologies into the energy market in Australia. In terms of subsidies or support to industry, there are many other industries in Australia that the government supports—for example, through some form of direct subsidy. In the energy sector the renewable energy target is different because it is very much a market based mechanism. There is a target, but how that target is delivered is left up to the market, whereas the car industry and indeed agriculture in Australia have a very long history of financial support for various reasons. Looking at particular elements within those sectors, the Green Car Innovation Fund—which supports jobs in this region—is another form of industry assistance.

Mr Richards : Senator, I think I understand what you are getting at. Governments, no matter who they are, are faced with this quandary in most developed economies. There is such a mix of cross-subsidies and history in industries that a pure market approach would require you to first unwind probably 120 years of economic development, unwind previous government owned entities and unwind all the cross-subsidies and things that were done. These things were done in the public good, because people needed power, they needed it now and they needed it reliably. The cost of energy being sent to a place like Mildura from the Latrobe Valley is probably two to three times what people actually pay. But we have a thing called postage stamp pricing so that everyone pays a similar rate.

If you want a pure market system from an energy point of view then you need to unwind all of that and have true reflective locational pricing. That would disadvantage whole swathes of the state and others. That is one option. The other option is to try to continually move those chess pieces around the board to try to get the best economic outcome within the constraints you currently have. That is where things like the renewable energy target come in. It is not a fixed price subsidy but a market that has been created by government to try to encourage renewable energy or cleaner technologies into the market, which otherwise would not be occurring. It is a real quandary for governments, particularly in the stationary energy space, which has such a history of cross-subsidisation because governments wanted to provide people with electricity. So it is difficult.

Senator BUSHBY: I note that in your opening statement you talked about Chile being an easier place, essentially, to invest than Australia. You noted the reason of certainty, among others. You later mentioned that most of the investment in Chile is in dams. The political reality is that dams in Australia are not really an option for renewable energy these days, are they?

Mr Richards : To clarify, our hydro projects in Chile do not use dams. They are classified as run of river hydro power stations.

Senator BUSHBY: Explain how that works.

Mr Richards : Under the Kyoto protocol you can build what is called a retaining weir, which can hold about eight hours of water, so it is a pondage effectively, not a large dam. Basically, we are taking the natural run of water through rivers, in many cases drilling through mountains to divert some of that water into a race—into a holding dam—which is then run through the power station and put back into that same river further downstream. From an ecology point of view, there is no large dam and no major flooding and the water flow for downstream users and for the ecology is maintained.

Senator BUSHBY: How does that compare in terms of cost per kilowatt of energy with other renewable forms of energy? Is it a more cost effective way of doing it or is it similarly expensive?

Mr Richards : The thing with all hydro is that the upfront capital cost is quite large, but because they last for 100 years the centre energy price for hydro is probably the cheapest renewable energy you can get in the world, whether it is a dammed project or a run of river project. Beyond that is wind.

Senator BUSHBY: But the reality is that they are not simple projects. I am from Tasmania and we have had plenty of hydro dams down there. As a uni student I was right in the thick of the issues around the Franklin dam. I actually liked the idea of it and a lot of my contemporaries did not. There is certainly scope for renewable energy to be generated in Australia through hydro projects in the broader sense.

Ms Ryan : But it is limited due to the amount of water that we have in Australia—yes, you are right.

Senator BUSHBY: Certainly in most parts of Australia, yes.

Ms Ryan : Yes.

Mr Richards : We do not have the Andes mountains here, which have 100 years of stored water in glaciers and things like that.

Senator BUSHBY: That in itself is one reason I would imagine Chile is different to Australia.

Mr Richards : Absolutely. They also have very limited indigenous resources as far as coal, oil and gas are concerned. So for them to develop these projects or for us to be there is as much about Chile's energy security as it is about the climate change aspect.

Senator BUSHBY: Senator Cormann went through how the whole concept of putting a price on carbon based forms of energy is to make it more expensive so that alternative forms of energy can better compete. I do not ask you to divulge anything that is commercial-in-confidence, but how much more expensive is your power than, say, brown coal in Victoria? Is it substantially more expensive to produce?

Mr Richards : When you are comparing costs of energy it is important not to compare against the current generators that have been sitting there for 30 or 40 years and have a sunk cost and all those sorts of things. When we look at the cost of energy we look at the new entrant price—that is what we are competing against because we are a new entrant. The new entrant price for brown coal is around $45 per megawatt hour; gas is about $60; and wind at the moment varies, depending on the wind resource, from $90 to $105 or $110. So it is approximately twice the price.

Senator BUSHBY: So substantial additional costs will need to be placed on the price of carbon based forms of energy in order for wind to become competitive in the current cost climate.

Mr Richards : Or any renewable—correct.

Senator BUSHBY: Yes, except maybe hydro, but for other reasons that is an issue.

Mr Richards : That is right.

Senator BUSHBY: Ms Ryan mentioned, I think in answer to a question, subsidy on carbon based fuels. What do you mean by an existing subsidy on carbon based fuels?

Ms Ryan : That was in relation to subsidies to fossil fuels. As an example, in Victoria I think the contract for the aluminium smelter gets a subsidy in effect given its contract with the Latrobe Valley, so it is supported by—

Senator BUSHBY: That is more a form of industry assistance for particular political outcomes that they are seeking to achieve rather than a subsidy on production.

Ms Ryan : And the other subsidy was, I guess, IEA referring to subsidies, particularly around transport fuel.

Mr Richards : The most recent example I can point you to is in New South Wales, when the previous government sold a number of the contracts there. As part of the sale process they guaranteed a coal input cost for those contracts which is substantially below what the other generators and other market—

Senator BUSHBY: Yes.

Mr Richards : That was something that was done, I guess, to get the sale through, or whatever the reason was, but that would also be classified, clearly, as a subsidy, because the input cost is not open to what you would classify as normal market forces. We are also of the view that fossil fuel power stations pump out carbon dioxide and other greenhouse gas emissions for free and that they need to—

Senator BUSHBY: That is what I thought you might have been referring to.

Mr Richards : And, rather than just being a subsidy for renewables, it is starting to get those participants to pay for what would be classified as being a carbon pollutant into the atmosphere.

Senator BUSHBY: That is what I thought you were getting at, so I am interested. I did not want to put those words into your mouth; I just wanted to get that clear. There are a number of environmental issues that people raise about just about any form of energy generation, when it comes down to it. Hydro was discussed to some extent. For wind a lot of issues are raised, even up to and including the health of people in the vicinity. Geothermal obviously has potential issues with fracking and what that might do to water tables and so on. Nuclear clearly has potential environmental issues as an alternative form of energy production. In a government looking at how they regulate the production of those forms of energy, should they also look at the potential environmental damage that they could deliver as something that is a subsidy unless they also put a price on those particular environmental issues?

Ms Ryan : When you are talking about environmental issues, do you mean just—

Senator BUSHBY: If you are saying that allowing producers of energy using fossil fuels to emit carbon dioxide and equivalent gases for free is a subsidy, then is allowing somebody to build a wind turbine and not also putting a cost on them for the potential environmental issues that that would raise also a subsidy?

Mr Richards : I think it would be hypocritical for us to disagree with you. Clearly, if there is an impact that is clearly demonstratable that has a cost associated with it, then, yes, you should pay for that cost.

Senator THISTLETHWAITE: Modelling that has been conducted by Treasury assumes that there will be an international price for carbon developed in coming years. Some people have criticised that assumption. I just want to know, given that you are currently participating in the international market with renewable energy, whether you believe that that is a reasonable assumption for Treasury to make.

Mr Richards : We think it is a reasonable assumption. In our view, there is already an international price on carbon. It is dominated by the European Union at the moment, but certainly many other countries, while they may not be signed up to that, are using that as a benchmark price when they start to make decisions in their own economies.

CHAIR: Thank you very much for your contribution to the committee.

Mr Richards : Thank you, senators.

Ms Ryan : Thank you.