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Exposure drafts of the legislation to implement the Carbon Pollution Reduction Scheme

CHAIR —I understand that Senator Pratt is joining us via teleconference from Western Australia.

Senator PRATT —That is right.

CHAIR —I welcome the witnesses from Westpac. Do you wish to make an opening statement?

Mr Rousel —Yes, we do.

CHAIR —Please go ahead.

Mr Rousel —We would like to start by thanking the committee for the opportunity to appear today to discuss the draft CPRS legislation. Westpac’s environmental credentials extend back more than 15 years. Over that time we have reduced our own emissions by over 40 per cent through energy and resource efficiency measures. Last year we committed to a further reduction of 30 per cent under a new five-year climate strategy. Having long accepted the scientific consensus on climate change, Westpac supports the need to implement effective policy frameworks which promote the decarbonisation of the economy in a cost-effective manner. As a financial institution, Westpac’s contribution to the policy debate has been its investment, risk assessment and financial market expertise aimed at ensuring that any legislation promotes a deep, liquid and effective market environment in which Australian business can adapt efficiently to a carbon constrained economy. Accordingly, we have been heavily involved in consultation over the CPRS on multiple fronts.

We strongly support market mechanisms and specifically a cap-and-trade scheme as the most efficient means of achieving greenhouse gas reductions at least cost. Emissions trading and putting a price on carbon is a mechanism which makes all other policy responses affordable and achievable. We do not believe that a carbon tax would support effective emissions reduction across the economy while supporting continued economic growth. A carbon tax would not incentivise Australian industry to innovate and find smarter, cleaner and more cost-effective ways of running their business. We also do not believe that a carbon tax would ensure that Australia meets its legal obligations under the Kyoto protocol in the most cost-effective manner nor provide regulatory certainty for business.

Throughout recent policy debate we have seen that there is a broad industry consensus that a cap-and-trade emissions trading scheme is the most appropriate policy response for Australia. Encouragingly, we note that the debate is now focussed on ironing out specific details of the cap-and-trade model set out in the draft legislation. While there is still some outstanding technical detail to be finalised through the regulations, Westpac supports the vast majority of the detail set out in the government’s CPRS draft legislation.

We do not support delaying the start date of the scheme. Practically speaking, business responds to issues when they need to. If the government delays the introduction of the scheme, business will delay implementing an effective response and Australia’s emissions reductions targets will become more difficult and more expensive to achieve. Implementation at a later date would understandably be met with a heightened sense of scepticism and inactivity. Economic modelling undertaken both domestically and internationally consistently demonstrates that delaying an effective policy response increases the economic costs and provides a significant shock to the economy. Failure to implement an effective and comprehensive policy response at this stage will increase the amount of regulatory uncertainty currently hindering investment and the structural adjustments required to decarbonise the Australian economy.

We see the growth of carbon markets as the preferred policy response, as an inexorable global trend. Last year the covered market globally was worth US$118 billion and is expected to reach $150 billion in 2009. Market expectations are that when North America comes online the global carbon market will be worth more than $1 trillion by 2020. Let there be no doubt that there is already a carbon market and a price on carbon in Australia, and it is growing. Market activity includes forward trading of Australian permits, AEUs, offshore credit trading, predominantly CERs, and, importantly, the incorporation of carbon price considerations into existing markets and investment decisions, which will be correlated to the carbon market.

Prices in the Australian national electricity market already reflect inclusion of the price of carbon from mid-2010. This is a live market in which participants and corporates are today making real, irreversible long-term investment decisions. Regulatory uncertainty around the start date of the scheme exacerbates the volatility of these prices, making such decisions more difficult.

Financial institutions are in a unique position when it comes to climate change and the associated risk to business as we lend to and invest in every other aspect of the economy. We must both take a view on what will make market mechanisms function effectively and understand what cost impost industry, individual companies and the economy can comfortably bear. We believe that the current design of the CPRS has significant price and market-buffering measures in place to respond to current economic conditions. The CPRS is also explicitly designed for a slow start which ramps up over time in response to changing market and regulatory conditions. It also includes a broad range of price-buffering mechanisms and transitional assistance support measures for liable entities.

It is easily forgotten amidst the fear of change and the challenges of the unknown that the financial incentive provided by a cost on carbon will result in innovation and a growth industry for Australia as the world economy stabilises. Westpac has already seen the seeds of such endeavours. In our recent submission we have not sought to respond to or comment on every aspect of the draft exposure legislation. We support the technical detail provided by the Australian Bankers Association and the Australian and Financial Markets Association. Our submission has sought to raise a number of contextual arguments to the legislation which will influence final design, and we would be happy to comment further on anything in our submission.

CHAIR —Thank you, Mr Rousel. Just exploring any delay in the proposed start date, are you talking about delaying the legislation or the actual start date of the regulatory system? In other words, would the market conditions be satisfied if the legislation were brought in and then the actual start date were delayed a year?

Mr Rousel —I believe not. Certainty would come from the legislation coming in, but first of all there is the cost. By delaying the start date of the scheme, even if the legislation were passed, the modelling shows that the cost will be increased. Also, there is an underestimation, I believe, of the amount of investment that has already gone into this. There are thousands of people working in companies around the country who have been for quite some time preparing for it. To delay it would be to have all those people sitting idle. There is a significant cost around delaying the start date of the scheme. It is important that the legislation gets passed for certainty so that people can know the framework in which they will be operating. Most of the work and preparation that has been done has been geared towards the start date of the scheme. As I mentioned, there is also potentially a lack of understanding about how much the price of carbon has already been factored into investment decisions made. So if you delay the start date of the scheme by one or two years, those investment decisions will be undermined—the foundations will be removed.

CHAIR —Talking of the price, can you explore for me a little bit more your views on the price cap. I think you are on record as saying that there should be no price cap in the first few years. Can you explain a bit more about that.

Mr Rousel —Yes. If we are talking about the price cap being the permits available at a fixed cost, which is how I believe the legislation refers to it, we are against any market regulatory restricting mechanism. We believe that the price should be able to move freely. We believe that in the design of the scheme, in attempting to get it right, there are several price valve safety mechanisms, if you like, and that the $40 price cap is not necessary. One of the most difficult things in designing a scheme such as this is always the unknown of what goes on in the global economic climate, as we have just witnessed in one direction. There is nothing to say that there could not be a sharp turnaround.

We advocated originally that no price cap be set, and if there were one—if it were deemed necessary to have one for industry—then it should be set high enough that it ensured a low probability of use. We would suggest a slightly higher starting point and that the percentage increase per year was higher such that, as people become familiar with the scheme and operating within it, it gets out of the way, if you like, so that the market continues to move freely. It is too easy to be scared of price volatility. We have seen what happened with commodities volatility over the last five to seven years.

CHAIR —Do those views reflect your views as a financial market person? Do your clients feel another way? Are they comforted by that $40 cap?

Mr Rousel —I think it depends on their position. A liable entity would I am sure be comforted by that. In general, though, I think it is often forgotten, because we take it for granted that we operate in a free market economy, that the price of our commodities, everything, goes up and down—our cars, our milk. It depends on the importance of that to your business. It provides price signals for some groups when they are low and price signals for other groups when they are high. I am sure they would be comforted, but I think sometimes that can be lost in the bigger picture of what we are accustomed to dealing with. When the price of cars are cheap we buy one and when the price—

Ms Herd —Can I add to that. It also adds another complicating factor in trying to predict where pricing is going to go. You end up with a situation where you then have to take into account a number of variables and future price scenarios: if the price goes to this, then we engage X trading strategy. If we know that there is any chance of it hitting $40 then that adds an extra layer of complication over everything.

The other point I would add is the implications in terms of changing everyday trading behaviour. As someone internally noted when we first realised that the $40 price cap was going to be there: ‘Well, it is just going to sit there with a giant bull’s-eye on it. In a practical day-to-day sense, everyone is going to trade around the expectation that at some stage we are going to hit the $40 mark and it is going to be free permits for all for that particular year at a fixed price.’ When you have a likelihood of the price actually interacting on a regular basis with the actual market in the short term, then it does distort and change behaviour for all of the market participants.

CHAIR  —How do you then feel about the five to 15 per cent target? We have had a lot of evidence both ways, but from many groups that it is too low. Do you have any views on that?

Mr Rousel —As a financial intermediary we tend to see both sides of the debate on that front as well. We definitely have an environmental hat on a lot of the time. Ultimately what you are talking about is a compromise. As far as we are concerned, the most important thing is to get a framework in place with which people become comfortable and that over time, depending on what happens—which is very difficult to predict in the global environmental debate—being able to adjust to it.

Ms Herd —We are also seeing a recognition that actually achieving the five per cent target will be no mean feat when you take into account current emissions growth, particularly in the energy sector in Australia. However, when you look at the upper range of the target, what we are finding is that a lot of the companies that we are talking to fairly ambiguous about that upper target because, once you actually get a global framework in place, whether it is 15, 20, 25, it is a lot more achievable because you will actually have an effective global market operating. A lot of companies are focusing on the minimum target in terms of what they need to do by 2020, but in terms of the upper range there is a recognition that that it does need to take into account the science.

CHAIR —Thank you.

Senator XENOPHON —Can I ask a supplementary question in relation to that. You mentioned the upper bands of the target. The evidence the committee heard on Wednesday from Richard Denniss from the Australia Institute was that, if we lock ourselves into five to 15 per cent and Copenhagen in a few months time has a higher target, there is a risk to taxpayers in terms of that differential between the high target of Copenhagen and locking ourselves into, say, a maximum of 15 per cent. Is that something you have considered?

Ms Herd —We are not really in a position to comment on the permutations of the international negotiations, but in terms of the practical aspects of the market, it is the five per cent target that people are actually more focused on. We have not seen anything specifically that looks at what the short-term economic impacts would be of locking in at the international level—a potentially higher target.

Senator XENOPHON —What if Copenhagen were higher than our highest target?

Ms Herd —Like I said, we are not actively engaged in international negotiations, so we are probably not in a position to comment on what the likely outcome of those negotiations is going to be.

Senator XENOPHON —Okay. Thank you.

Senator BUSHBY —Thank you, Westpac, for coming along today. Just a threshold question: have you had the opportunity to go through the exposure draft legislation in detail?

Mr Rousel —Yes.

Senator BUSHBY —That is good. It is a fairly short time line and it is thick legislation, so not everybody has.

Ms Herd —We have got very good at reading 600 page reports in a short period of time.

Senator BUSHBY —That is good to hear. Yesterday it was revealed that there was some modelling undertaken by the New South Wales government through Frontier Economics which indicated that the proposal was going to have a disproportionate impact on regional areas and that ultimately—and I think this is interesting in the context of your statement that there could be a $1 trillion global economy by 2020 in trading in carbon units—that the cost to the Australian economy, according to Frontier Economics, could be $2 trillion. That is just the Australian economy.

Senator XENOPHON —Over 40 years.

Senator BUSHBY —Yes, over 40 years. We are talking about $1 trillion global economy in trading by 2020. That is the whole world. In Australia, according to this report, there would be a $2 trillion cost to the economy over 40 years. Have you had a chance to consider that at all?

Mr Rousel —I have not seen that report at all. That sounds very surprising to me. You would need to see the premises behind it—$2 trillion over 40 years? I would even need to work out what the inflation impact of that was, but it would be significantly less than it sounds. My experience—

Senator BUSHBY —I have not read it. I am going on reports. I am not sure whether that is $2 trillion in real terms or adjusted.

Mr Rousel —As I say, I think you would really need to see it before you could comment on it.

Senator BUSHBY —But what also says is that areas like the Hunter Valley, central west Queensland, Gippsland, central Western Australia and the Kimberley are looking at—not over 40 years, earlier than that—a 20 per cent reduction in their regional economies as a direct impact of the proposal. Is that something that the bank has looked at in terms of what impact it might have in the regions? You are operating in all of those regions, I am sure.

Ms Herd —It is difficult to comment on cost impacts without actually looking at what they have taken into account and in particular whether or not they have taken into account the ability of the companies or organisations operating within those regions to mitigate those cost impacts. As a financial institution we are talking to a broad range of companies in different industry sectors. What we are finding is that a lot of them are focused on not just looking at the cost aspect of the equation but actually looking at strategies for mitigating those costs—and, in particular, in the lead-up to the start of the scheme, actually implementing a number of different trading and internal investment and external investment strategies over time, as the price of carbon is expected to rise, to mitigate changing cost impacts in different markets scenarios. So we cannot comment specifically on the report itself or what those projected regional impacts, but we are seeing that the ability of Australian businesses to mitigate cost impacts over the long term is very much driven by having a strong understanding of what the regulatory framework is and then being able to look at forward pricing and put in place planning scenarios and actually look to mitigate those cost impacts over time.

Mr Rousel —Because we speak to a broad range of people, that is our best litmus test. We obviously need to look at the risks of individual companies and sectors and we do that. But if you talk to all of these companies, no-one has yet indicated to us that they are going to be closing down or putting off a whole bunch of people. I think sometimes the public voice could be suggested to be positioning themselves within a scheme that they believe will go ahead—so for a desirable outcome within that—as opposed to actually assuming that they want them to stop.

Almost universally our customer base is saying: ‘We want it to proceed. We want the framework to be right. We want to get started so that we know the environment we are operating in.’ The work that has been done to date is significant. There will always be some companies that are more advanced than others. There will always be some people who leave it to the last minute. But on the whole there has been a surprisingly, even to us, fairly universal message that we just need to get it done and started and get the framework right.

Senator BUSHBY —Business right across the country is giving us the message that they want certainty.

Senator CAMERON —Some want some more money.

Senator BUSHBY —There is a fairly consistent view about certainty which I have picked up on as well. From a business perspective I can understand that looking forward they like to make employment and investment decisions based on knowing the regulatory framework they will be working within. Whether it is the implementation date or the legislation date varies as to what people want certainty on. Obviously there are many businesses that would like a little more time to prepare before it actually hits, even if they do want to know what they will face now—

Mr Rousel —We think it is both. As I said before, if you have certainty but a delayed start date then there are two parts: firstly, there is the cost of increase. We have an international legal obligation and we need to get there. The later we start having everybody pointing in the same direction to achieve that the greater the cost will be, because it is a steeper trajectory. Secondly, because of the preparation work that has been done and the investment decisions that have been made we are better off saying: ‘That’s the legislation. It’s done. It starts here. That’s what we have been preparing for and that is what we should go with.’ There will always be people who are not as ready as others and there are some people who are absolutely 100 per cent geared up and running test scenarios now.

Senator BUSHBY —I think Ms Herd made the comment, and like you I have a strong belief that Australian industry and businesses have the ability to adapt to the challenges placed in front of them. In my view, I see this as a challenge for business, but I think business largely has the ability to rise to it. But that does not change the fact that there will be a consequence—and it is an intended consequence but I guess the issue we are looking at today is how you adjust for it—in that there will be structural changes within the Australian economy and that there will be winners and losers within that. This report that came out yesterday suggests that certain parts of regional Australia will be big losers as a part of that structural change. Those areas that I read out before are coal-producing areas. They are energy intensive areas that are based on stuff you dig out of the ground and burn to make electricity, basically. They will be big losers. I am interested in your view. It is one thing for a business to rise to a challenge and adjust, but it is a different thing where you have whole communities based around industries that will basically be wiped out. What effect will that have on those communities and on business in general? Should the CPR Scheme, as proposed, better address the impact it will have on those areas?

Ms Herd —There are a couple of answers to your question. The first is that this is a policy signal that has been a long time coming. The engaged policy debate around the introduction of an emissions trading scheme is more than 10 years old and it has occurred on a number of different levels. As a result, a large number of companies within the most impacted sectors have been explicitly positioning for the introduction of carbon price signals. I hesitate to use the words winners and losers, but when you talk about companies that have been planning for the arrival of this policy mechanism they will benefit because they have been planning ahead for the introduction of this scheme.

Senator BUSHBY —That is fine for the companies.

Ms Herd —Secondly, I would say that there are a significant number of transitional assistance measures built into the scheme design, both in addressing the fact that we are at an early stage in the organic growth of the carbon market—and I believe that it will take a lot less time than people think—and in the momentum we are seeing in policy frameworks internationally, and also through other assistance funds built into the scheme, through the electricity sector adjustment fund and various other government funds built into the scheme. The question of whether particular companies in particular regions have sufficiently addressed these regulatory impacts in their business and how efficiently they are able to access these transitional assistance funds is probably one that is more suited to them.

Thirdly, I note that, in the forward trading that is already occurring in permits in the Australian market, it is energy companies and brokers that are doing all the forward trading. The companies that are the most impacted are often the ones that are most ahead of the game in these particular issues. If they know it is going to be a significant business risk for them they are unlikely to sit back and just let it wash over them. Without looking at the report I am not able to comment on the specifics.

Senator BUSHBY —I know.

Mr Rousel —Or, might I add, they are unlikely to invest the time, energy, expenses and resources to do that if they thought that their company was going to go under and therefore impact the communities.

Senator BUSHBY —You are talking a lot about companies and businesses. I guess that it is probably appropriate for you to talk about as witnesses, but it is a bigger issue. If you were a company operating in Gippsland and you were forward thinking, if you were making all the right decisions, that might well involve you leaving Gippsland. That does not help the community, the people who live there and the people who work for the company.

I will move on from there. What levels of activity does a company like Westpac anticipate having in the proposed scheme in terms of trading? I noted that you participated in the first trade in AEUs. What do you anticipate your involvement will be once this is up and running?

Mr Rousel —Basically, we are a financial services company, and this scheme is about creating something which is going to be designated as a financial product. For us, it really is standard banking, so we will lend our balance sheet to people who want to do capital works and internal abatement and to the renewable energy sector. Price certainty is the other element for our customer base in making their business decisions. To draw a parallel with the price of aluminium, when you are starting an aluminium mine they need to have a price expectation to do their business metrics. The same will apply for this. We will facilitate the price risk certainty of carbon permits at forward dates at the request of our customers. So really we are just a financial intermediary. The way the scheme is set up, for example, there will be designated auction dates once a month—at least that is the forecast for the regulations; it is not all finished yet. That does not necessarily fit in with the schedules of companies; it does not fit in with board approvals; it does not fit in with when they believe the price is right for them. As financial intermediaries, our job is to help provide them with those prices as and when they request them, give them that certainty and then manage the risk until such time as—

Senator BUSHBY —So effectively the scheme that is being proposed presents to Westpac as a new opportunity to expand business, to potentially add an additional income stream for your overall business?

Ms Herd —We have been trading the EU scheme for a couple of years now.

Senator BUSHBY —But this will actually ramp that up significantly?

Ms Herd —Yes. We trade the EU scheme on behalf of Australian and New Zealand customers operating in European markets and in correlation with European power markets at the moment. This allows us to bring that service back into our home jurisdiction, and we will be looking to trade the Australian and New Zealand schemes explicitly for the purpose of helping customers with price risk management.

Mr Rousel —We will expand our standard business operations to the extent that our customer base has to engage in further activity and requires further price certainty in carbon permits or cash flow issues. So it is not a substantial—

Senator BUSHBY —So it creates a market opportunity for Westpac to be involved in. It is a new area. You are already in it to some extent, but it will actually expand the market for you to be involved in and make money on, basically, as a company. I have no problems with that.

Ms Herd —I think it is also consolidation of the broader sustainability position Westpac has taken for a number of years, where we have been explicitly looking to make the argument that companies that do good will do well. This is a classic example of where you can combine environmental social governance and business as usual to achieve that broader aim as well.

Senator BUSHBY —But it will not be business as usual; it will be new business, effectively. All businesses like to grow, and this is an opportunity for you to grow into a new area.

Ms Herd —Yes. The other side of this equation, in addition to the financial markets business, is investment in renewable energy opportunities. This is through both the CPRS and the renewable energy target, which is actually promoting greater investment opportunities in new forms of infrastructure investment as well. We will also be pursuing that.

Mr Rousel —I am a little cautious about saying that it is a growth area because that could be interpreted by some as being a motive for us to be involved. As we said, we have been doing environmental stuff for over 15 years with no profit motive. The Carbon Pollution Reduction Scheme and putting a price on carbon is about behavioural change and a reallocation of capital from one type to the other. It is not an increase in capital, therefore, we probably would have been involved in it in some form anyway. The fact that it is, as Emma said, lining up with that capital and now heading towards something which is also in parallel with our environmental is beneficial, but it is not really necessarily a growth in the business, per se, it is a shift.

Senator BUSHBY —I understand motive-wise you are saying that it is not the reason you are supportive of it. Nonetheless it will have, as I think you just said, from a business perspective, have business benefits.

Mr Rousel —True, but it is likely to detract from another area of business as well.

Senator BUSHBY —Which area is that?

Mr Rousel —For example, if you are financing an area which is not potentially as prepared and you view that as more of a risk than another—

Senator BUSHBY —So some other clients maybe affected but hopefully there will be new clients that will—

Ms Herd —It is more than just one client to another. It is one client shifting their investment from one part of their business to another.

Senator BUSHBY —Apart from that, are there any other significant costs that are likely to be imposed on Westpac as a result of the CPRS? Is there any downside, apart from what you just mentioned?

Ms Herd —One of the issues that we are commenting on from a technical perspective—and this is still being resolved through the regulations and through further commentary with industry associations—is the treatment of permits as a financial product. In particular, the regulatory framework around that and the compliance obligations. We are working with both the Australian Bankers Association and the Australian Financial Markets Association to work out what the implications of that are from a regulatory compliance cost implication. That is something that we will be looking to provide further comment on.

Senator BUSHBY —That is a cost of dealing with how you actually go about work participation rather than a cost that is imposed on you, like some of your clients will have in terms of carbon costs.

Mr Rousel —That is right, yes. There are other things like that which impact on us. The application of GST to carbon permits is something we are opposed to. That certainly has extra infrastructure implications for us.

Senator BUSHBY —I have one final question on a different subject. Have you had any feedback on the effect on the competitiveness of Australian business compared with other nations that do not have a similar scheme or are not mooting a similar scheme at this point?

Mr Rousel —We have seen comment on it. Interestingly enough, as I mentioned before, it is not necessarily the upper side of the band that is the problem as long as all our competitors are in the same boat.

Senator BUSHBY —And if they are not?

Mr Rousel —If they are not then we are not going to be in the upper side of the band anyway because that would imply there has been no global agreement as such and we are still way back down at the bottom of our band. There is certainly discussion about it. As I mentioned before, almost universally all of our customers are saying that they want the scheme to go ahead. So the fact that you hear some more vocal opposition could suggest that that is posturing for a desirable outcome within an assumption that the scheme will go ahead. It is a valid part of the debate but it needs to be recognised for what it is.

Senator CAMERON —It is rent seeking.

Ms Herd —It is legitimate positioning, you could argue.

Senator FURNER —I was interested in your preliminary comments about thousands of climate change jobs being idle. What are we talking about in terms of thousands of jobs?

Ms Herd —One thousand companies covered by this scheme have all hired a climate change person.

Senator FURNER —Are we talking about five or 10 thousand; what sort of figure?

Mr Rousel —Potentially on that basis more than that. I would say that companies that have been affected have a team in place. We, for example, are not an affected entity and are not liable under the scheme, but we probably have an additional team of four to five people focused purely on this. If you extrapolate that out to all the other companies, other financial services, lawyers and tax, there would be a pretty significant number of people dedicated to it. Even if you had legislation passed and had certainty, if the scheme does not start for two years, you have just put a big hole in activity.

Senator FURNER —My experience in employment is that people would not be sitting around idle; they would be made redundant. I would be interested to hear your feedback on that.

Ms Herd —Can I just quickly argue that as well. We have been talking to our customers specifically on this issue in a dedicated program for the last 18 months. The first meeting that we had 18 months ago would have been with, say, an operations person whose job was to work out what their emissions profile was going to be. A few months after that it would have been the operations person and probably a newly-promoted, newly-appointed head of climate change strategy for the particular company.

The third meeting throughout the course of late last year and the beginning of this year would have been with three people. It would have been with the operations person responsible for emissions, with the head of climate change responsible for determining the strategy and with the group treasury people responsible for executing the strategy. So I think that kind of ramp-up in terms of the engagement and expenditure within corporations in preparation for the scheme is quite important to acknowledge because, when people talk about the costs of implementing the scheme, it has to be recognised that a fair amount of those costs have already been borne by companies in preparation for the actual implementation of the scheme. It is also important to recognise that.

Mr Rousel —It is important to reiterate that you need to make a clear distinction between the start of the scheme, being the first date at which people are required to record and report their emissions, and when they will actually start approaching the risk that they have already analysed. We have already seen trading in Australian emissions units and the legislation has not even been passed. We undertook the first trade with AGL and there have been subsequent trades since that. There are already people making firm decisions about what they are going to do.

If the legislation is passed—and that could be as early as June, for example—it is not like everyone will be waiting until June 2010 to act. That just means that they will know they have a liability that is now firm and concrete, and risk management and activity around what they are going to do about it starts instantly. If you assume, therefore, that potentially their activity will start in June 2009, then they are already well prepared, and to put a delay on that will have a significant impact.

Senator FURNER —That leads me to my next question. Earlier this week we heard from an asset management company, Colonial First State. Their position was that, without emissions trading in place, there is a line missing in the spreadsheets for companies they want to invest in, so they do not invest in those companies. How do you take into account the carbon profile of the companies that you invest in? Also, how well informed are Australian companies about their carbon emissions?

Ms Herd —We have explicitly gone through a process of establishing a carbon risk committee within our credit risk department. This has gone through the process of training up all the analysts, the relationship managers and the credit officers. We had about 400 or 450 people trained in carbon credit risk throughout 2008. We have explicitly incorporated carbon into our credit manual and we are now going through an explicit client engagement process around the carbon risk implications for their business. This is still at a preliminary stage around a basic set of questions. Do you know what your liability is? What is your strategy for managing it? What stage are you at in terms of implementing your response? That will increase in sophistication as you get that quantifiable liability and you are able to examine the veracity of the trading strategies they have in place for mitigating that risk and also in terms of having a more sophisticated understanding and model for assessing how well companies are mitigating that risk. So it is like a gradual ramp-up process, but we are already a fair way into it—it is already in our credit manual, you could say. Regarding long-term investment decisions, they take a pretty wide view of what that carbon risk liability is going to be, but that has already been in there for a number of years as well.

Mr Rousel —There are also the new ventures. We field a lot of inquiries from people who, whilst they need to hold back until they have the certainty of scheme design, are looking at growth industries that will benefit from the implementation of the scheme. Obviously we look at those from the point of view, as we said, that it is a re-vectoring of capital—their financing opportunities that are associated on the other side. All of that is just assessing management skill levels and understanding, as part of assessing the worthiness of a company in the new environment.

Senator FURNER —What kind of firms, in your opinion, will do best in a carbon constrained world?

Ms Herd —The ones that have been planning for it.

Senator FURNER —Like the ones you have just been mentioning?

Ms Herd —Yes. It is also a question of the ones that are investing the time, the effort and the capital into managing this as a mainstream business risk.

Mr Rousel —It is a very good point, actually, when you consider the fact that it is the way it works in business currently. Those who are best prepared, most on top of the issues and work out the best way to respond are the ones who benefit and ultimately thrive.

Ms Herd —And it is not always who you think it is.

Mr Rousel —A delay in the scheme would punish them.

Senator FURNER —What do you say to the sceptics out there who claim the scheme is radical and will cost jobs?

Ms Herd —I think they are two separate issues. I think the scheme itself and its design is sound and is in line with the scheme design we are seeing everywhere else around the world. In terms of the specific question of coverage and the level of free allocation, all the specific design elements are not radical. They are very much in line with policy decisions being made in a number of jurisdictions. In terms of the question about costing jobs, as we said before, we have talked to a fairly broad range of companies across different industries and, when companies talk about what they are doing to manage carbon risk, it is not the first thing that they tell us or in fact tell us at all.

Senator FURNER —Are you getting indications from your investors on what sort of jobs will be created out of the scheme?

Mr Rousel —There are certainly, as we mentioned before, investment ideas, ideas for growth industries in and things that will benefit from the scheme. We do not see the job numbers. You can only surmise from normal business operations want they might be. I would be reluctant to comment on a number but, yes, certainly there will be jobs. There is certainly a concentration or a focus in the media on the potential dangers for us being one of the earlier countries in the globe to adopt this and very little focus on the potential benefits. Business adapts and innovates when it needs to, as we said before. The fact that we could be pushed into that if the framework is right is an incentive. You will see growth industries and innovation and in particular with some industries, like carbon capture and storage, to be a leader in that space would be a major international advantage.

Ms Herd —Someone did make the comment to me the other day from a large manufacturing company that if you are a graduate exiting university right now with a combined engineering and commerce degree than your entire life career is now set.

Senator XENOPHON —At the beginning of your presentation you said that Westpac has reduced its energy use by 40 per cent. Over how many years?

Ms Herd —We first began measuring our missions in 1996. From 1996 to 2007-2008 we have reduced our emissions by 40 per cent, which is predominantly energy consumption.

Senator XENOPHON —It is another 30 per cent that you will be looking at in the next five years, so overall since 1996 it will be about a 55 per cent drop.

Ms Herd —The baseline has changed from last year for the next five-year period because we recalibrated our emissions reporting for the National Greenhouse and Energy Reporting framework.

Senator XENOPHON —But in broad terms you have had a significant drop, and that it is in the absence of an ETS. That is something you have done voluntarily, so that is something that if others did could lead to significant savings for them.

Ms Herd —Yes. Can I also add that that 40 per cent reduction in emissions was at zero cost. Everything that we did we recouped the investment. It did not cost us anything additional to reduce our emissions by 40 per cent.

Senator XENOPHON —Professor Ross Garnaut in Perth on Monday restated his view that there should be a low fixed price of carbon for the first few years to allow the implementation of the scheme to iron itself out. I am not saying that I agree with that position, but that is contrary to the position you have taken, isn’t it? Can you comment on what Professor Garnaut asserting?

Mr Rousel —We have advocated that if you have a fixed price for a short period that is really the same as saying, ‘We will have a tax for two years and then we will start a cap-and-trade scheme.’ The assumption when that was debated a year or 18 months ago was that the forward markets would develop despite that. In actual fact, you would just be delaying the entire cap-and-trade system and delaying that forward market which gives companies certainty of price so that they can make decisions about what to invest.

Senator XENOPHON —So you are saying you would rather have a market mechanism front up?

Mr Rousel —Yes. What was important to us all along—and you cannot underestimate how many hours we and other companies have spent doing this, thousands of man hours, analysing the structure so that it would be right—was that there be sufficient price safety valve mechanisms built into the scheme such that companies be allowed freedom to operate, make small errors et cetera. As we said before, it is a slow start that will ramp up. We believe the slow start negates the need to have any form of fixed price in the short term, which would only delay what the scheme is ultimately trying to implement.

Senator XENOPHON —Further to that, you have been trading on the European ETS for a while and we have seen the price of permits there go up and down like a yo-yo, from as little as A$7 and up to $25 now. There has been quite a lot of volatility. What has Westpac learnt from their trade on that and how can we avoid that volatility that lot of environmentalists say does not give a clear incentive or price signal for renewables?

Mr Rousel —To say it went down to $7 is not quite right—I can only assume you might be referring to the first stage of the scheme, which was a trial phase.

Senator XENOPHON —Okay, what was the price? I am talking about the collapse in recent months.

Mr Rousel —In the collapse in recent months it got down to about €8, which is roughly A$16. So it has been as high as $40 and down to $16. Our argument is that we are making this into a market based mechanism and a market based price unit. If I showed you a graph of oil prices then you would see exactly the same thing—and the same for coal, aluminium or copper; all of these are inputs or outputs of industry and business and their prices all move. For somebody talking about renewable energy, yes, a low price removes an incentive to invest for a short time. It potentially might also be the opportunity for somebody who wants to undertake capital expenditure to implement abatement equipment or technology, knows it will take a certain number of years and needs to ensure that they lock in a low price for carbon while they do that with an expectation that over time it will rise and they will benefit. So they would be able to say that now is their opportunity to lock in low-cost materials to actually build what is required to reduce their emissions liability because they expect the price to increase over time, and the scheme is designed to have an increasing price of carbon over time.

Ms Herd —Can I just add quickly that the price decrease that we have seen in the last few months is also a direct outcome of the global financial crisis in the sense that production levels fell sharply therefore emission levels will fall sharply therefore the amount of permits that the companies covered by the scheme will need is less. This was compounded by the fact that they were explicitly accessing the carbon markets to sell permits to meet short-term capital requirements. What we are seeing now is that the price is gradually going back up again because these same companies are still liable—they still have to meet their compliance obligations in December. So they are now going into the market and buying those permits back again because they still need to actually meet their compliance obligations in December. So even though the price is starting from a lower base the fundamentals of the market are still working.

Mr Rousel —Just for the purposes of reiteration, neither a tax nor a fixed price for a short term would have responded in a similar fashion.

Senator XENOPHON —I would like to move to a slightly different topic. To what extent will Westpac and other financial institutions and lenders take into account the additional costs involved with the obligations of the CPRS—in other words, how do you take that into account in the context of credit applications given that there has been a credit squeeze or the global financial crisis?

Mr Rousel —I will not purport to be a credit analyst or I will get shot when I get back to work!

Senator CAMERON —You have demarcations, do you?

Mr Rousel —Yes, they are the police. Basically they would incorporate it in the same way that we assess all other risks. So basically they would analyse their understanding of it, whether they have a price-risk management policy in place, how they are going to implement it and how effective it will be.

Senator XENOPHON —So it is another risk to take into account?

Mr Rousel —Yes, it is.

Senator PRATT —I want to return to some evidence that was given earlier this morning regarding the readiness of business to participate in the scheme. I suppose you would recognise that the government is having to decide how ready the Australian economy is—and that is clearly a decision that you have had to reach as a company as well. You mentioned a bit about how certain companies are positioning themselves in the public debate according to their interests. Behind the scenes you would be talking to them about their own readiness. Are they doing one thing and saying another? Could you just flesh out a bit for us the difference between what they are saying publicly versus how they need to be assessed financially in terms of their readiness?

Ms Herd —What we have witnessed in the public debate is that a lot of it has now moved on to very specific aspects of scheme design, whereas 12 or 18 months ago you would have had a much higher level of public engagement by companies in the policy debate. Two or three years ago it was even higher; five years ago it was even higher; and so on. It is very encouraging in the public debate that we are now seeing companies discussing very specific aspects of scheme design in relation to how it is going to impact their company. That is a perfectly legitimate form of public policy engagement.

What we are seeing is that companies have a very strong expectation that the scheme will come in. They are positioning themselves and responding to the specific requirements of both the national greenhouse and energy reporting legislation, which is already in place and has been for a while, and the forthcoming CPRS legislation. It is very significant that for companies the debate has moved. Five years ago, this was an issue for the environmental or sustainability department; today, it is an issue for group treasury. That is a very strong indication of company readiness.

Senator PRATT —In that case, does government need to, in the process of finalising the legislation, balance various interests and make changes that seem appropriate without messing with the overall frame work and then get on with it, despite the fact that we will still have people, I suppose, biting at our heels for further changes and bigger reform—that kind of positioning that they are doing?

Ms Herd —There is a very strong consensus on the part of industry that regulatory certainty is the issue. That is the issue that everybody agrees on. We need to have the frame work in place so that companies can begin to explicitly incorporate this in their decision-making processes. One thing that I would add is that a lot of people talk about the fact that the lack of regulatory certainty is hindering investment in new forms of clean technology or renewable energy. Of more significance is the fact that it is also holding up investment in existing assets and in existing traditional forms of, say, fossil fuel based energy or traditional industries, because no-one knows what the price is going to be. There is a very strong sense of: ‘Let’s get the scheme in and bedded down; let’s work through the specific issues and get it in place.’

CHAIR —That is all the time that we have. Thank you, Westpac, for coming in; thank you, Mr Rousel and Ms Herd.

[11.08 am]