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

CHAIR —Thank you for coming in, Dr Burn. Do you wish to make an opening statement?

Dr Burn —I do, thank you, Chair. It is an honour to appear before the committee today. I am here on behalf of the Australian Industry Group. The Australian Industry Group has members across the manufacturing, construction, logistics and services industries. We represent businesses in areas as diverse as metal manufacturing, ICT, defence and aviation. We are a hands-on organisation and we provide direct services to our members in industrial relations, occupational health and safety, environmental management and business development; and, of course, we are also a leading voice in business contributions to policy debates.

I am an associate director of public policy and I have responsibility for climate change at AI group. We regard the carbon pollution reduction scheme as a critical policy area. It is a policy that we need to take action on. It is a policy area that we need to take action on and it is one that we need to get right. AI group supports the adoption of an emissions trading scheme in Australia. We prefer market based approaches because, properly designed, they will deliver relatively inexpensive reductions in greenhouse gas emissions. They provide strong incentives for investment and research and development in areas that will or may deliver reductions in emissions.

Of the market based approaches, we prefer an emissions trading scheme to a carbon tax primarily because it will more readily link to a system of national targets—and this is the sort of system that we face in the international environment. We think that the legislation giving effect to the scheme should be passed this year. This will provide business with a level of certainty that is currently lacking—which is a deterrent to investment, particularly in long-lived assets in emissions intensive industries but not only in those areas.

For the following reasons we support an ETS with as few exemptions as possible. A broad base will ensure that a wide range of abatement opportunities are explored, there will be fewer distortions between activities and the burden will be spread more evenly. We recognise that actions taken in Australia alone will not remove or even have an appreciable impact on the threat of climate change. We nevertheless think that Australia should now put in place a system that will enable us to make our contribution to global efforts to reduce the accumulation of greenhouse gas emissions. We are not naive enough to think that Australia acting will somehow turn the tide in the development of an international agreement but we nevertheless agree that Australia should take some initial steps and indicate its readiness to take further, more decisive steps in an effort to add to the momentum towards genuine global action.

We also recognise that acting before other countries will damage the competitive position of domestic producers in a range of industries, and this will have potential impacts on the level of activity in these industries, the level of employment in these industries, the level of new investment in these industries, and the links between these industries and the regions and communities in which they operate. We are conscious that acting before other countries will not reduce greenhouse gas emissions if activity is simply shifted to those countries which do not impose carbon costs. We agree with Professor Garnaut in this respect—Australia needs to address the diabolical dilemma of carbon leakage.

We need to ensure that we do not place our own businesses, the people they employ and the regions in which they operate at a competitive disadvantage when this does not contribute to the positive environmental benefits that we are all looking for. We therefore advocate the adoption of strong measures for trade exposed industries, along the lines of the emissions intensive trade exposed measures proposed by the government, together with the Climate Change Action Fund initiatives also proposed. We have some suggestions about how those can be improved and ought to be improved, but along those lines.

Finally in my introductory comments, in the past month or so the Australian Industry Group has put the argument that our carbon pollution reduction scheme should not take effect until 2012. There are two reasons for this. One is the administrative rush that is currently evident. It is evidence, for instance, in the narrow window of opportunity that we have to give input on the draft exposure legislation. It is also evident in the very narrow time frames involved in the process for applying for emissions intensive trade exposed assessment that many of our members are involved in. They are having to do a lot of work in a very short time frame and are reporting extreme difficulty in meeting those deadlines—the current deadline is 1 May. It is a very tough deadline. So that is one reason. The other reason is the impact of the global financial crisis on businesses—businesses cash flow and businesses ability to access credit. These are putting obstacles in the way of businesses preparing for a 2010 start date.

CHAIR —Thank you, Dr Burn. Did I understand correctly: that you said the legislation should be passed now but the start date should be 2012?

Dr Burn —That is right.

Senator JOYCE —Many of the witnesses that come before us say, ‘It’s a great idea but not me; I should be exempt,’ unless they have a part of it. Your position seems to be, in summary: it is a great idea, but not now. You believe in the emission trading scheme. You believe in the CPRS. You believe we should pass the legislation. You think it should be more broad based and encompassing of everybody but you do not want it to happen just yet.

Dr Burn —For the reasons that I just gave.

Senator CAMERON —I have a point of order. I have attended every one of these hearings, and I have not heard that proposition put in the terms that Senator Joyce has just put. If Senator Joyce wants to put propositions and claim that they came from the committee they should be put accurately to the witnesses.

Senator JOYCE —I just put it.

Senator CAMERON —Yes, that is right. You just put it. Put it accurately.

Senator JOYCE —What is your point of order?

Senator CAMERON —That you are misleading the witness.

CHAIR —I am sorry; I did not hear.

Senator JOYCE —Is that the point of order?

Senator CAMERON —Yes.

Senator JOYCE —Do you want to rule on that? Am I misleading the witness?

CHAIR —I want to keep on time. Can we just continue on?

Senator JOYCE —I would say your point of view is overruled, Senator Cameron.

Senator CAMERON —At least the witness now knows the truth.

Dr Burn —We support the introduction of an emissions trading scheme. We believe it should be comprehensive—as broad based as possible. We think that, for the reasons I gave, it ought not start until 2012. That is because of the administrative rush and the impact of the global financial crisis on businesses’ readiness to engage in it.

Senator JOYCE —How many employees does your industry cover?

Dr Burn —Our industries cover something in the order of 700,000 employees.

Senator JOYCE —The feedback that you are getting from all your members is that they are happy about the implications on the price of power and issues such as that?

Dr Burn —No, Senator. That is not the feedback we are getting. Our members are very concerned about the impacts that this will have. We did a survey some time ago, that you will no doubt be aware of. We surveyed our members and they indicated that they were willing to take action to address climate change even though it would impose costs on themselves. This is not to say that they are happy about it, but they recognise that in order to achieve that benefit some costs will need to be borne.

Senator JOYCE —What is the benefit they are going to achieve?

Dr Burn —I will not now speak on their behalf. The benefit we see, as I indicated in my opening comments, is that this can help deliver some momentum towards very much needed global action.

Senator JOYCE —It will deliver momentum.

Dr Burn —It could help to deliver very much needed momentum on global action. I think I made it very clear that we are not naive enough to think that we are going to turn it around by acting, but we think that we can add somewhat to that momentum, and that we ought to put in place a system that illustrates our credentials in that area.

Senator JOYCE —So there is a belief by the group that it will create the momentum that will start changing the views of other people in the world?

Dr Burn —It could.

Senator JOYCE —It could?

Dr Burn —It could; yes.

Senator JOYCE —Why do they think it could?

Dr Burn —Because if Australia acts and that encourages other people to act more then that will build up the momentum.

Senator JOYCE —And if other people do not act where does that leave us?

Dr Burn —It depends very much on how we design the scheme. The critical question is: what is the unconditional offer? At the moment the unconditional offer is a target of five per cent below 2000 levels by 2020. That is what the current proposal is. We think that is a very big ask. That is an ask of stripping one in five emissions out of our economy, relative to business as usual, by 2020. We think that is a very big ask.

I think we could design the scheme so that the unconditional offer included the range of outcomes that could come out of international agreements. Then we would probably go below a less stringent target than a five per cent reduction. It very much comes down to the design of the scheme, and that is the answer to your question: what if an international agreement does not occur? So I think we have got to design a scheme that covers the range of possible outcomes of Copenhagen and other international forums.

Senator JOYCE —So you are aware of the white paper, and the white paper reflects the legislation that is going to come forward. This is a really simple question. Would you be voting for it? If you were in my shoes would you be voting for it or not?

Dr Burn —I am not in your shoes, and it would be foolish for me to reveal my bargaining position, wouldn’t it? We are currently involved in arguing, before the full range of political parties, for changes to the policy and in time changes to the legislation. So I would like to reserve might position.

Senator JOYCE —I find it all interesting, Dr Burn. If this scheme goes forward or it does not, I will still have a job if I am working on this side of the table but a lot of your members will not.

CHAIR —What is the question, Senator Joyce?

Senator JOYCE —Why would they be encouraging a scheme that is obviously going to put their members at a competitive disadvantage to people overseas? The only logical thing to do is to move your industry there.

Dr Burn —I think that is a very important question, and I will take a minute or so to answer it. One of the main factors in businesses’ support for an emissions trading scheme is the threat of alternative regulatory approaches. Let us cast our minds back to 2007 when the former government announced its intention to move on the emissions trading scheme. Incidentally, it was in a form very similar to what is currently in the draft legislation. At that time we were faced with the prospect of each state putting in place an emissions trading scheme and trying to stitch them together. We were facing the prospect of each state acting in a large number of ways on ad hoc basis to reduce emissions by other forms.

The costs of those forms of regulation are potentially very high. I think businesses came to the realisation—and certainly our members did—that we needed to get sensible about this. We needed to have a national scheme, a scheme that was capable of displacing all the other schemes and methods of regulating greenhouse gas emissions that we were, and prospectively will be, confronted with. So it is a choice in that sense of regulatory efficiency. It is much better to go down this route, which is the view of our members, than the alternative route that we are facing.

Senator JOYCE —I refer to the membership of your association and the fact that we have alternative views. How do people become a member of your association? There would be about 700,000 employees who would be under the umbrella of and covered by your organisation. Do people pay their membership? How does it work?

Dr Burn —We are a membership organisation. People join us voluntarily because they want to be members.

Senator JOYCE —Do they pay membership?

Dr Burn —They pay membership.

Senator JOYCE —You might not have this information. How many export dollars come from within your organisation?

Dr Burn —I cannot answer that question. I can undertake to get back to you with some data about that.

Senator JOYCE —Is it predominantly export dollars? Is it predominantly an export industry or predominantly a domestic industry?

Dr Burn —Like the Australian economy generally, it is more about domestic sales and export sales. But our members include very big exporting industries in metals, in a range of manufactured goods and in a range of service industries, so there are considerable export dollars. I think the export to total GDP ratio in Australia is something like 20 per cent. I would be surprised if we were very different from that. With import competing, it would be even more so. I dare say your question relates as much to import competing issues as it does to exports.

Senator JOYCE —What I am leading to is the baseline requirements that are affected, things like the foodstuff of industry, one of the most fundamental being electricity. How does your industry see that panning out if, as everybody suggests, over a term we move to geosequestration, which means currently—because it is not commercially viable—a high carbon permit price to make it viable and geosequestration is not evident in a large-scale commercial form at the moment. All these things start saying that what we are going to have is probably—because we still have to deal with fugitive emissions and we are moving away from coal, so it all points to this—a very expensive price for power. How does your group feel that it is going to survive in that sort of economic environment?

Dr Burn —We think that power prices in Australia will rise quite a lot—and that is straight out of the Treasury modelling. I think that power prices are anticipated to roughly double by 2020 at wholesale level—that being household electricity prices across the NEM. Our members regard that very seriously. They regard the need for them to take action to improve energy efficiency, and to seek other efficiencies in their organisation to offset those costs, very seriously indeed. It is a very big challenge.

Senator JOYCE —So if they could offset those costs wouldn’t they just offset them now before it? What is going to happen in the future that is going to make it a worthwhile proposition to offset costs that you have not already offset?

Dr Burn —I was discussing this with a member a year or so ago. He had gone through a period in which he had made a hell of a lot of changes in his business to reduce his energy bills and energy usage. I said, ‘Why did you do that? What motivated you to do that? Was it a change in the price?’ He said, ‘No, it was just the next thing to do.’ So I think there is a fair bit of action. Businesses are generally fairly busy and the next thing to do will now be to become much more focused on energy efficiency and on reducing emissions than it has been previously. Not everything is done in the real world like the timeless economic models suggest.

Senator JOYCE —My final question is this. In the current financial crisis the people within your industry group are going to have to go out and hold permits. They are going to have to borrow money to hold assets. If they all start doing this, this is going to have huge ramifications for the economy. If they do not have the capacity to do this, that is going to have huge ramifications for their business. Do you think it is a wise move to foist that on people in the middle of what is regarded as a recession, a financial crisis, in which you cannot get access to credit?

Dr Burn —I agree totally with that. That is one of the motivating forces behind our call for the scheme to start in 2012. As it is, the scheme will impose liabilities that will be due at the end of 2011. A two-year delay will mean that those liabilities will be due at the end of 2013—much more manageable given the crisis, as we anticipate and we all hope of course.

Senator CAMERON —Obviously, Dr Burn, you have had a look at the white paper and have studied it and the economic modelling that underpins it.

Dr Burn —Yes.

Senator CAMERON —Do you agree that economic activity will continue to increase in Australia even with a CPRS?

Dr Burn —Yes, we think that, other things being equal, economic activity will continue to rise in Australia notwithstanding the introduction of a CPRS.

Senator CAMERON —And Australia will not be the only country around the world facing increased electricity prices?

Dr Burn —I would expect that to be true too.

Senator CAMERON —The ACTU gave some evidence here to say that they were conducting analysis of the skills required in an emerging economy that was carbon constrained. Has AiG done anything like that?

Dr Burn —We have not commissioned any work on that but we are very conscious of the need to develop skills, particularly in the transition to an economy. We face demands from our businesses, about ways they can reduce their energy intensity right now, that we cannot meet. We suspect that there is going to be a hell of a lot more such demands in the near future for that. The longer term changes to labour markets and training also need to be factored in, and I think that is probably more what you are talking about. As part of a more general look at the way we train our emerging workforce, and the existing workforce for that matter, we need to incorporate very closely the demands of industry—and this ought to be a dimension of that as well.

Senator CAMERON —Would AIG take a positive approach on that and actually develop training, work with your members and analyse the training needs and the skills requirements?

Dr Burn —Yes.

Senator CAMERON —Would you be seeking support for that proposal?

Dr Burn —We do not have plans to seek support for that at the moment. But we understand that the Climate Change Action Fund, for example, may well fund this sort of thing. We are not too sure. If it did, we would either seek support or guide our members in the direction that they could receive support.

Senator CAMERON —How many AI Group businesses will be directly liable for permits under CPRS?

Dr Burn —We do not have a number for that. In fact, we do not even have an estimate for that. Interestingly, we are currently doing a survey of our members and a very large proportion of them—much larger than we would expect—have an expectation that they will have a direct liability. We think a lot of businesses think they will have a direct liability when they will not. Our industries are very emissions intensive relative to the rest of the economy—that is, agriculture apart, but agriculture is not in it yet. We would expect to have a much greater proportion than the ratio of 1,000 to whatever the number of businesses is.

Senator CAMERON —But there would be AIG members who would be eligible for assistance under the government’s scheme?

Dr Burn —We would anticipate that, yes. We have members in metals manufacturing, plastics, chemicals and all of those industries, for example, and many of those industries seem to be likely—and I would be very guarded about this because the process is very uncertain at the moment—to get some form of allocation of permits under the emissions intensive trade exposed measures.

Senator CAMERON —A number of submissions to the committee have said that delay equals cost and that a delay means that achieving the target of reducing emissions will be even harder. Does the AIG believe in that approach?

Dr Burn —Not appreciably, particularly relative to where we were, say, a year ago because of the impact of the global financial crisis on the emissions trajectory. We would say that the delay and the slower pace of the economy may well be offsetting each other. The additional thing, and the most important element here, is that, if the legislation were passed this year, businesses would start immediately investing with the knowledge that the scheme will start. We think that they will take action from that point—that is, from the point when legislation is passed—and that will be reflected in their investment decisions regardless of whether the scheme starts in 2010 or 2012.

Senator CAMERON —That goes to my next point. Westpac were here and they said that they were advising many business clients in relation to the scheme and that there is a willingness amongst their clients to actually get in and get things moving because business certainty is the fundamental for them. Is what you are getting back from your people as well?

Dr Burn —Our members want the certainty as well.

Senator CAMERON —Thanks.

Senator FURNER —Just on the subject of timing and delay, we heard in Perth from a Dr Ottaviano. He is the CEO of Carnegie Energy. That organisation has put $25 million into the economy over the last two years. I do not know whether he is a member of your organisation. His comment on delay was that one thing that kills investor confidence—and we are seeing this at the moment in the global financial crisis—is uncertainty. Almost more important than the desire and almost more important than the cost of carbon is the certainty that it is going to happen and moving to it as soon as possible; the more delay the more uncertainty is built into the minds of investors. Surely someone that has developed and put so much money into the economy, as this gentleman has, demonstrates that investors out there—particularly in renewable industries—should not be delayed by this legislation not being in place as soon as practicable in 2010. Would you agree with that?

Dr Burn —With everything other than your very last comment. We totally agree that the certainty is required. We totally agree that the passage of the legislation would give that certainty. But the certainty would apply whether the start date was 2010 or 2012 because people would then be certain about the start date. So the certainty will be achieved when the legislation is passed regardless of the start date.

Senator FURNER —But, as Senator Cameron indicated, we have heard from not only businesses but also financials out there that certainty is imperative. It is the case that we need to make sure people know where their businesses are heading for the future.

Dr Burn —I totally agree. That is why we want the legislation passed this year. Passage this year would provide the certainty. People would be certain that it was going to start in 2012.

Senator CAMERON —Just on that point, if your members do not have that certainty, what are the implications for them?

Dr Burn —The implications are that they will remain unsure and they will be investing less than otherwise.

Senator JOYCE —What difference does it make? Just work on the premise that it is going to go forward and if it does not then it is a bonus to you.

Senator BUSHBY —Just following up on that point, Dr Burn, does the Industry Group believe—Senator Cameron asked the question, but I do not know that you fully answered it—that cost would be higher if implementation was delayed even if the terms of the regulation were finalised early?

Dr Burn —I do not think he asked that question, but I think it would be very hard to establish that case because, even if the targets remained as they currently are anticipated to be, reaching those targets would require a steeper rate of decline but we would face costs for too fewer years in that period. I think it would be very hard to show that overall costs would be greater were we to start earlier, given that people will have—

Senator BUSHBY —Were you to start later, you mean?

Dr Burn —It would be very hard to show that if you started earlier the cost would be less, yes. I think it would be very hard to show that, because you would have two years fewer costs involved. You would have a steeper rate of decline in emissions. That might be harder in some ways to achieve but I doubt very strongly that you could show what effect on costs—

Senator BUSHBY —On the steeper rate of decline of emissions, would you agree that, as unfortunate as it is, the current financial or economic situation—which, according to Professor Garnaut, may actually result in a decrease in world emissions this year—gives us a small window in which to actually make sure we get our measures right to tackle it because the trajectory is not going to be as deep as it would have been if we did not have the current economic problems?

Dr Burn —We agree with that, yes.

Senator BUSHBY —Moving on from there, you have raised a lot of issues about the scheme and things you would like to see in. To some extent they are and are not in the current scheme that we are looking at as part of the exposure draft. Is it more important to get the scheme right, address those issues, like making sure the EITEIs are appropriately dealt with, and allow the time to meet those requirements, or is it more important to get it passed and active even if it will include insufficient measures, from your perspective?

Dr Burn —It is a question of level of detail. Never do you get the legislation perfect before passing it, but we would like to see the legislation passed and developed as fully as possible in the time available. We think that the time available if the passage is this year would be greater if the scheme were not to start in the middle of next year. At the moment we face a rush of having it passed by basically the middle of this year—I think June is the timetable. It is a very big ask to get everything done. Were we to give ourselves a couple more months this year, I think that the scheme design would be fundamentally better. It is very hard to see how that can happen with a 2010 start date.

Senator BUSHBY —Correct me if I misstate you, but just then you said that you would prefer a few extra months now just to shake the details out and that your 2012 proposed start date would give you an opportunity to have an extra couple of months to make sure everything is right before it is actually passed—is that correct?

Dr Burn —That is right.

Senator BUSHBY —That is good. And you would prefer to see a little bit of extra time now and get things right rather than pass something which certainly will provide you certainty but might also provide you certainty of things that are not particularly good for the economy?

Dr Burn —Yes.

Senator JOYCE —I have a question about certainty. This certainty thing has me perplexed. Does that mean that if we do not go forward with it there are a cost savings that your industry will have because they do not have to implement costs and that is good, or if we do go forward to certainty there are cost savings? Why is the certainty an issue? For me, to use an analogy, it sounds like certainty that you are going to get belted. If you do not get belted, surely that is an advantage? Why do you need to be certain about it?

Dr Burn —I will go back to my previous answer. I think that businesses are pretty sure they are going to get belted, if you like, one way or another. We think that the design of the scheme will ameliorate some of those impacts and that going ahead with this scheme is better than the alternatives. I think that certainty has a disproportionate impact. People are worried about the extreme things that could happen. We do not expect extreme things to happen, but people are worried that they may and that is affecting their behaviour. The realistic situation is that when the scheme is in people will be able to assess it rationally and coolly without a lot of the claims that are around and that will help inform business decisions. At the moment people are factoring in a much wider range of possibilities because of the legislative uncertainty, and that is a deterrent to investment. People have to try to take this to boards and convince boards, ‘You ought to be making such and such an investment, but we do not know whether Australia will have a carbon pollution reduction scheme.’ Boards, in those circumstances, are saying, ‘Bring it back to us once we know what is going to happen.’ That is the deterrent to investment.

Senator BUSHBY —You mentioned carbon leakage in your opening statement and that the AiG considers acting before other countries will damage competitiveness and have an effect on employment. Does the CPRS as it is currently designed and as it is presented in the draft legislation adequately address this and avert that risk?

Dr Burn —It certainly does not affect avert the risk, mainly because the details of the emissions intensive trade exposed measures and the climate change action fund are not there. Those two schemes are critical in addressing the whole issue of carbon leakage. At present, the draft exposure legislation—

Senator BUSHBY —So passing the legislation in its current form would not provide the certainty that you need in those areas—

Dr Burn —That is right.

Senator BUSHBY —and certainty for future investment?

Dr Burn —Without the regulations that would give effect to the emissions intensive trade exposed measures and the climate change action fund measures in the legislation, that is right.

Senator CAMERON —But you are in discussions with government now on that detail, aren’t you?

Dr Burn —Yes, we certainly are.

Senator BUSHBY —I wish you luck with the discussions. I hope that we get something that is going to work. I have one final question for you. Professor Garnaut has also suggested that the scheme should be introduced with a low fixed initial price to allow the wrinkles to be ironed out before imposing a significant burden on the economy and industry. What is the AiG’s view on that?

Dr Burn —We had discussions with the financial sector about that, and they were very wary about the ability to essentially start off with a carbon tax and transition to an emissions trading scheme, which is essentially what that is. They were very sceptical about the ability to develop the sort of financial products that would help smooth the introduction if that was the case. We took their advice on that and opted for support for a lower cap, if you like, for the emissions trading scheme rather than a carbon tax to start off with.

Senator XENOPHON —You raised concerns in the AiG’s submission on the government’s green paper about the implications a CPRS might have for existing contracts and the ability to pass on liabilities with fixed-price contracts. Have those concerns been addressed in the draft legislation? You might want to take that on notice.

Dr Burn —I will take it on notice.

Senator CAMERON —Could you also take on notice the question I asked you about how many of your members would be affected by the scheme?

Dr Burn —I will take on notice that as well.

CHAIR —Thank you, Dr Burn, and thank you for coming in this afternoon.

Proceedings suspended from 2.51 pm to 3.02 pm