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

CHAIR —Good afternoon and welcome. Thank you for coming along. Do you have an opening statement that you wish to make?

Dr MacGill —Yes, we do. Firstly, thank you very much for the opportunity to discuss these very important issues with the committee. In our opening statement there are really three issues we want to pick up. The first one is the policy context. I will speak briefly to that. Paul is that going to speak on the issue of national targets and then Regina is going to speak on some of the specifics of the proposed Carbon Pollution Reduction Scheme, and we will take it from there. Hopefully you have just been given some notes on our introductory statement. Very briefly, the Centre for Energy and Environmental Markets is an interdisciplinary research centre involving the faculties of engineering, business, arts and social sciences, science and law at the University of New South Wales. Researchers in the centre have been looking at emissions trading and other environmental policies with a very specific focus on climate change over the last decade or so.

In terms of the policy context—and no doubt after the days of sittings that you have had you have heard this—we just quickly want to flag that, although the scientific understanding of climate change does continue to evolve and there are significant uncertainties, the case for taking effective action is very clear just in terms of managing the risks that we face. In our view, the most effective role that Australia can play, given the context of very high per capita wealth compared to many other countries in the world and being amongst the world’s highest per capita emissions, in supporting and facilitating the international response required is a leadership role on what can be done to transform an economy such as ours towards a low-carbon economy.

In terms of achieving that, a coherent and comprehensive policy framework will be required and the sorts of issues we see as important in assessing such a policy framework is effectiveness, efficiency and equity in terms of this transition required. Effectiveness is the key criterion in that failure really is not an option given the risks of catastrophic change that we seem to face. What that suggests is high levels of assurance. So we really need a policy framework that delivers an effective response regardless of all of the many uncertainties that we do see out there. That relates to things such as the timing of taking action and also the policy mix.

In terms of efficiency, the first thing to say is that it is actually a second order objective in some key regards in that, even if it costs us a little more to avoid dangerous warming than it might have if we had done something a bit differently, the science suggests that is still a price worth paying. Effectiveness is actually the key criterion. The other key point on efficiency is that it is actually dynamic efficiency or longer term innovation which is actually the key efficiency we need to focus on. That is the sort of efficiency that drives the transformation of our economy that we need to see.

In terms of equity, the sort of transition that we are looking to have to make will be quite wrenching. There is no doubt about that. So high levels of social consensus will be required and perceived views on equity will be a key part of building and maintaining that consensus.

Building such a policy framework is almost certain to require significant carbon prices across the economy and seen by all the key stakeholders. However, it is important to note that governments world wide have really struggled to date to introduce those widespread, economy wide or significant carbon prices across the economy. It is proving, whether you look at emissions trading or carbon taxes, to be a really challenging policy to get in place in terms of effective, efficient and equitable change.

So there is no doubt that we need other policies. There are many things these other policies have to do. There are a lot of market areas or potential market areas that we have to correct. We have to provide assurance against the possibility that some of our preferred policies might prove less effective than we hoped in practice. We need to facilitate social consensus towards behavioural change, we need to deal with equity and we need to drive innovation. Thank you. I will now hand over to Paul.

Dr Twomey —Turning to the topic of national targets—which must be a topic you are quite weary of now after five or six days of hearings—I would like to make a brief comment on the ways of comparing the burden sharing and particularly some of the recent literature that you might not be so familiar with. As we know, the Bali road map called for deep cuts in global emissions but avoided stating specific targets. We do not know how Copenhagen is going to turn out at this point of our negotiations. However, there is also this important figure of minus 25 to 40 per cent emission reductions of the working group of the Kyoto protocol and there is the 30 per cent reduction out there of the EU for a global deal for developed countries as a whole.

The Bali road map also stated that, in reaching these deep cuts in emissions, we need to ensure comparability of effort. Determining this comparable effort among developed countries is clearly one of the major issues of current negotiations. On the international stage, there are many factors that may be and indeed are considered in working out this comparable effort. These include things like GDP, recognising the ability to pay, emissions intensity, recognising the potential to reduce reductions, cumulative emissions, recognising historical responsibility for the stock of atmospheric CO2, population growth, recognising that increased populations involve increased emissions, and population level in terms of setting some sort of targets per capita and end point targets per capita. There are baselines. These are ways of estimating business as usual and projections in comparing reductions against that. There is credit for early action, recognising that some countries have already taken serious efforts and that those should be taken into account. There are different methods of calculating the marginal cost of reductions, such as what the carbon tax or carbon permit rate of a country is. And there are different ways of calculating the total cost of reduction using macroeconomic models or calculating the total costs within a marginal abatement curve.

As you have probably been told many times in these hearings already, for some people the reductions of five to 15 per cent framed in population growth seem quite reasonable against the European targets. However, against most of these other criteria that I have mentioned, Australia’s effort does not look so strong. For example, a couple of months ago the European Commission’s major document as we approach Copenhagen, called Towards a Comprehensive Climate Change Agreement in Copenhagen, analysed four metrics: GDP per capita, the emissions per GDP, early actions and population growth. They applied these to all developed countries across the world. So for the overall 30 per cent reductions of developed countries which is the global deal that Europe is aiming for, the reductions of Australia—which was combined with New Zealand in the statistics and calculations—by these four indicators that I mentioned would have been 34 per cent, 37 per cent, 48 per cent and six per cent—the last being the population growth adjustment. Evenly weighted on these four metrics, Australia and New Zealand would come out at minus 38. This is compared to the minus 15 which is the maximum that we would be going for.

Another report by Ecofys called Factors underpinning future action examined another different set of metrics, including the famous contracting and convergence of aiming for a per capita convergence and a number of other criteria. In their findings, looking for a 30 per cent reduction by 2020, on these various indicators Australia, again, would be looking at approximately a 22 to 28 per cent reduction on the different metrics they consider. These are indicative because there are a number of assumptions in a lot of these metrics that need to be taken into account. For example, the EU did not take into account land use change. But they are indicative of a number of these studies.

So there is no obvious best choice of what is right. It clearly involves the difficult task of weighing up values and ethical principles. In practice, what we are likely to find and do find is that countries tend to focus on those indicators that favour them requiring less reductions. For this reason, it may be expected that some sort of averaging of these many measures would be used in the negotiation process, like in the EU paper. As I say, in such an averaging process, on balance, Australia’s targets are unlikely to seem particularly strong. So it appears somewhat inconsistent that the draft legislation states that the global 450 parts per million stabilisation would be in the interests of Australia, yet there is no option of an Australian 2020 target consistent with achieving this, such as gaining 25 per cent reductions on the table for Copenhagen. Thank you. 

Dr Betz —I am going to focus on the Carbon Pollution Reduction Scheme design. I want to flag four topics: coverage, unlimited use of CDM and JI credits, free allocation in the price cap, and I will then go into a small discussion of what could be a possible solution. Coverage plays a role not only with regard to what can be covered; the question is also the relation between: what do I cover and what is the target? By covering sources, there are transaction costs incurred to these companies or emitters. If you go for very small targets they will have these costs, although they might not actually have to contribute to the reductions and so there is actually no benefit. So the efficiency of the scheme is not going to increase but they will have the costs. That is something which needs to be kept in mind and which needs to be balanced. We have seen in Europe that they have actually excluded some of the small ones because they saw that there is an imbalance. Going for a minus five per cent target and such a broad coverage, there is a misbalance. So I would propose that there needs to be a change. An emissions trading scheme with a broad coverage is only really efficient if you go for a more stringent target. This is research which we have done. We have numbers behind that.

The second point, looking at the unlimited use of Kyoto units in the scheme that is proposed, appears to be inconsistent with the principle of supplementality within the Kyoto protocol. In the Marrakesh Accords, for example, it states that domestic action shall thus constitute a significant element of the effort made by each party. So my question is: when Australia is allowing unlimited use of CDM and JI credits in their scheme, which is covering about 70 per cent of emissions, how can they demonstrate that they do something domestically? It might be interpreted by other countries that there is a lack of willingness by Australia to do its fair share of emissions reductions domestically.

The other thing is that the CDM will not be the appropriate mechanism in the long term, as key developing countries will also move beyond project based mechanisms in getting emissions caps, or no loose targets—something like that. So it puts the Carbon Pollution Reduction Scheme at a risk of being very dependent on the future developments of these Kyoto mechanisms. In the proposed change—and this is something to be included in the draft legislation—there is already restriction of types of units over time. Why should there not also be a  quantity limit of the use of these credits, which is in line with what the European Union has?

The next point relates to free allocation. Emissions trading is giving a right to pollute. From an equity perspective there should be a principle of polluter pays. The revenue to be raised should be used to achieve equity objectives and also to support the economic transition. We have seen in the European Union that all free allocation rules—and we had more than 27 different allocation plans and rules—will create distortions. For example—and this is what is proposed for the trade exposed energy intensive industries—if you use a benchmark which is multiplied by an output which is updated over time, you are weakening the incentive to reduce your output. It is a subsidy for output, basically. On the other hand, we have seen that if you give free permits to companies which are sufficient, some of them are reluctant to trade. They become very passive. Although they might have very cheap abatement options, they are not implementing those and that will reduce the efficiency of the scheme. So there the proposed change would be: cap the free allocation, because there is no other scheme I know where the share of free allocation might actually increase over time. The other question is: why do we have a windfall profit test for the coal generators and why do we not have the same windfall profit test for the trade exposed energy intensive industries?

Going to the issue of the price cap, a price cap risks environmental integrity, and maybe also the physical cap. It shifts the risk to the taxpayer because there is still the Kyoto commitment, or another post-2012 international commitment, that needs to be fulfilled. So the government would go out and buy international credits most likely. So it is a shift of the risk from the private sector to the public sector. The risk might be even greater if the potential is there that you can indirectly bank those credits into the future—what is currently allowed under the scheme and which cannot really be prevented. So you will have the circumstance of not having achieved your cap being imported into future periods.

The proposed $40 in the draft legislation, which is growing slightly, might also be too low because we have seen international carbon prices at around $60 and we have seen high volatility. So having a price above $40 internationally is not unlikely. Although we have a recession at the moment, this is long term—we are talking about 2015 as well.

The proposed level of risk also includes the fact that we might not see appropriate abatement options implemented because they will be just capped by that price level. And we may prevent linking with other schemes that do not have this price cap.

So in our view the proposed change would be to at least go for higher increases over time—you would go out of the $40 range more quickly. You might also consider how you would actually provide some level of investment assurance and reduced risk to the ones investing in low-abatement technologies—prices floors in auctions and things like that.

I will now move to one of the things we have stated to think about, which is called the additional action reserve. We have seen all this debate about voluntary action and that we cannot do anything beyond the cap. It is not the first best option; it will be the second best option. The first best option is still a much more stringent cap. But if we are not able to achieve that there could be an option to introduce an additional action reserve, which would mean that we are setting aside part of the allocation that would otherwise go to industry into a reserve and we would allow units in the reserve to be cancelled based on specific actions that are part of a positive list. The aim would be that we achieve additional reductions to the atmosphere from actions which are not purely driven by the Carbon Pollution Reduction Scheme.

The proposal for the reserve will have potential advantages. It will give the opportunity to achieve a more stringent target not only by retiring units. This is foreseen right now. You can voluntarily go into the market to buy them and retire them. But Australians might want to see something. They do not want to just have the electronic transfer and cancelling of units. This would be one of the potential advantages if we are to have tangible emissions reductions in Australia. It would be a bit similar to a no-lose type, which has been discussed for developing countries, because Australia would not lose if they would not achieve these additional emissions reductions—but they could achieve them. But there would be no punishment because the international target would not include them.

The form of a reserve would give certainty to the industry that that would be the maximum amount which would be taken out. It would also give some certainty about or an upper limit on the cost to the government in retiring those units. Most importantly, this reserve approach would give room for complementary measures. It would provide incentive to state governments and to individuals to do more through voluntary action. If it is very transparent, it might be that people would be very motivated psychologically to make sure that this reserve is emptied over time.

CHAIR —You have described a very good long-term scheme, but the Australian government is taking a significant step in proposing this emission trading scheme. There is quite understandable nervousness from industry, because there are a number of assumptions about the underlying prerequisites to changing our economy from being emissions intensive to something else. Things like solar thermal, geothermal and carbon capture and storage systems are simply not proved at this stage. The argument is that we should start it now at a lower level firstly so that it gets through parliament and secondly so that industry will support it and get behind it. Then we can get some confidence that they are able to achieve these levels and then go on to improve them. What is your response to that?

Dr MacGill —There is certainly a complex set of political judgments which we do not claim to have the expertise in. Perhaps the role that we see ourselves as playing is in making sure that those decisions are as well-informed as possible by the underlying understandings that we have of policy frame works. One of the challenges that we potentially face with a carbon pollution reduction scheme approach and the national targets associated with it is that it is not necessarily just initial small steps. By locking in targets perhaps a decade out or so, in some ways these schemes can represent a locking in of small steps. That is very different from taking early small steps.

So many industries and people are nervous about what all this means. We should be. We are entering uncharted territories. The real challenge we face is that what the climate science tells is that we have a fairly small window of opportunity to turn this around. Perhaps small steps are all that we are able to achieve, but, given that context, it is very important that the politicians, the industry and the public realise that we are not putting effective action on the table. Then we can revisit the question of just how serious we are about taking the types of actions that look to be required.

Dr Betz —From a European perspective, they had a pilot phase of three years. Then they made some changes. Now they have a five-year first phase of trading. They were not locking in things for 10 years. When I compare those small steps, you can have them for a shorter period. But there is no time to do it over a 10-year period. I am very much a fan of having pilot phases and starting small. But the period which we are looking at needs to be much shorter.

Senator BUSHBY —Thank you for coming along today and contributing to the inquiry. You mentioned the small targets that the CPRS currently contains—the five per cent—and talked about the fact that you are still imposing the structure of a CPRS but with the aim of a small gain. You said something like, ‘The efficiency is not high, but the cost still exists.’ I would not mind hearing a little bit more about that. If my summation there is right, basically the economy, business and industry still has to wear all the costs—it has to, as we heard this morning, get legal advice on how it applies; it has to buy the permits if it does not get them free; and all those sorts of things—and yet what you get in the end is not what you could get given the pain that you are causing.

Dr Betz —Exactly, and I think it goes a little further. Emissions trading is an instrument where you give flexibility. Through trading, where those with cheap abatement costs reduce emissions and those with high abatement costs buy the permit, you achieve efficiency. But if you go for a very small target you will only need very few companies to achieve that, and all the others will just be covered without really contributing to that efficiency. So we compared the efficiency gains with the scheme and the costs of such a scheme and we varied the target. We saw that it is only worthwhile having a very broad coverage when you actually go for more stringent targets; otherwise the costs are higher than the benefits.

Senator BUSHBY —So another way of putting that would be that the benefits to be gained by ramping up the target to a higher level—a more stringent level, as you describe it—would not come with a commensurate increase in pain, effectively. The pain is already there; you could double the target without doubling the pain, to use an analogy.

Dr Betz —Yes.

Dr MacGill —The principle behind a broad based emissions trading scheme, of course, is that everyone sees a price signal. There is a lot of effort—transactions, monitoring and so on—to make sure that everyone does see this price signal. If you are not really requiring them to do much, then you are requiring participants to make a great deal of effort to not actually perhaps drive much change.

Senator BUSHBY —Yes, if you are going to put them through the pain, you want at least to get a decent result. We have heard some evidence today, from Professor Flannery and others, about other tools. A lot of people have come in and said that you need to throw everything at this that you can. I am a coalition senator and the Leader of the Opposition has put forward the idea of biochar and other ways of reducing carbon in the atmosphere. Do you see that other tools have a role to play in the overall structure of how this works? Professor Flannery talked about nuclear energy as a way of reducing carbon emissions.

Dr MacGill —The sort of transition we need to see is unprecedented. They are uncharted waters, so as to knowing that there are particular technologies that are the answer—well, maybe. But there is a considerable amount of uncertainty. With regard to biochar—and I believe the Leader of the Opposition also talked about carbon capture and storage—I think we would classify those as promising but still unproven opportunities to reduce emissions, firstly, and likely to be only able to play a limited role in the short term. So there are both of those issues: uncertainty and timing.

Senator BUSHBY —Professor Flannery was also saying that the ETS may prove to be of limited use in the long run compared to other measures. It is not clear yet what will work.

Dr MacGill —I would agree, and there are some interesting parallels between the idea of very promising but unproven technologies and promising but unproven policy measures. No doubt you are getting all sorts of advice that you need this policy and that policy. We would say that to put together the sort of comprehensive and coherent policy framework required is not something that comes out of a grab bag of this and that. It actually requires a very structured and thoughtful process of government saying, ‘How exactly do we find a set of policies which provide a high level of assurance that we can reduce emissions and transition the economy?’

Senator BUSHBY —You have raised a number of matters that are not necessarily reflected in the current exposure draft. The reason we are here is that we do have an exposure draft, and hopefully the government will listen to the evidence that comes before it, take that into account and present some improved legislation for final consideration. The question I have is: how important is it to get the legislation right so that the scheme is the best it possibly can be? If there are still issues outstanding, should we take an extra few months to make sure that we get things right now or should we just get it up and then try and fix it?

Dr MacGill —There is almost no chance we will get it right.

Senator BUSHBY —Yes.

Dr MacGill —So a process for implementing improvement is a really key part of getting it right now. We need to say, ‘We can’t get it right; we need to be able to change it.’ It strikes us that that does not appear to have received enough attention in the proposed scheme. If we look at another designer market—the national electricity market is another example of a designer market in Australia—we find that there are very formal processes by which we can change the rules as we go, because there is an acknowledgement that things change, problems emerge and so on. We need a process for being able to change the rules. The challenge here, of course, is this issue of investor certainty. But a balance does have to be struck between that and the ability to improve the scheme over time.

Senator BUSHBY —If you had a process built in as to how changes would be made, rather than waiting for ad hoc changes that are thrown at parliament from time to time, it would provide some degree of certainty.

Dr MacGill —A certainty of process rather than a certainty of outcome.

Senator BUSHBY —Yes, that is right.

Dr MacGill —That is what people see in the national electricity market.

Dr Betz —I would like to support what Iain said before, but also flag that there are things you have never thought of before, which can only be learned when the scheme is up and running. That is what the European Union found as well, and they had to make amendments.

Senator BUSHBY —That comes back to your comments earlier about small steps and pilot projects, on shorter terms rather than—

Dr Betz —Yes.

Senator BUSHBY —That is interesting. You also made comments about free allocation in terms of permits to emissions intensive trade exposed industry. What do you think of Professor Garnaut’s principled approach to assisting EITEIs in those circumstances?

Dr Betz —Professor Garnaut has a very different formula for allocating free permits or cash to these industry by which we would look at what would have been the price if no country had a carbon price compared to everybody having a carbon price, and finding the difference. This is a very different approach. It would mostly likely have many fewer permits and less cash transferred.

Senator BUSHBY —But it would still be reasonably equitable, it seems.

Dr Betz —Yes. The difficulty of this approach is in modelling that. This is based on modelling of what would be the price. Being an economist and knowing some of these models I know that they are all based on an assumption. So the difficulty is in practically implementing it. The idea would be good. It would be a good approach but the implementation is a bit questionable.

Dr MacGill —I might make one more comment. I think there is a difference of principle in the Garnaut approach, which is very much that this is not an issue of compensation but an issue of transition and supporting transition. That is an important principled difference.

With regards to the current draft legislation there is considerable discussion, as there has been in the white and green papers, about the idea of carbon leakage. But I do not think there has been enough attention paid to what we mean by that. Is it the idea that industry goes to places which do not have a carbon price? Or is it the idea that they go to places that do not have a carbon price and we see increased emissions? You may see very different outcomes depending on how you test this. The example we heard discussed before was the aluminium smelter. Aluminium smelting around the world is currently heading, for a range of reasons, to places with low emission, low cost, gas fired electricity, with significantly less associated emissions than aluminium production in Australia, and to other places with hydro and renewables and so on.

Regardless of whether they have a carbon price in the Middle East or Africa, aluminium made there will have far lower emissions associated with it than making it in most places here. So in terms of supporting effective international action, if you bring in a policy which says, ‘We’re not only going to protect existing trade exposed emissions intensive industry here, but put in provisions to invite them to come,’ it sends a terrible message for effective international action, because in a carbon constrained world you probably do not make aluminium from conventional coal fired generation in Australia.

Senator BUSHBY —They could always come down and add to the aluminium refinery in Tasmania, which largely runs on hydro.

Dr MacGill —Absolutely.

Senator CAMERON —I am not sure who will want to answer these questions. I have read that dealing with climate change covers the full spectrum of the scientific, economic, social and political disciplines. You have gone to some of the social areas and have raised the question of achieving high levels of social consensus. I think it was Dr Twomey who was dealing with this area.

Dr Twomey —No.

Senator CAMERON —How do you get a social consensus in the country if you cannot achieve a political consensus at the leadership level to get this legislation through? Forget all the economic arguments and all the other arguments about the design of the scheme; if you cannot get a social consensus, how do we deal with this? Have you thought about that?

Dr MacGill —I think that is the key question. It is not a question that we have an answer to but it is one that we desperately need to have answered. Our centre does work with the social sciences, and one of the experiences that we in engineering and economics have in trying to understand these issues of social consensus and political science is that a lot of it does not look very scientific. I think it is very important that we face that quite directly, because one can imagine all sorts of reasons put forward as to why we cannot get effective action here or in many other parts of the world: is it the large polluters that run Canberra? Is it the fact that the public is not really ready to make the changes that might be required in their own lifestyles? I do not know what the answer is, but I would certainly agree that that is the key question.

Dr Betz —I think the emissions trading scheme could be designed in a way that could at least try to get more consensus from all the different societal groups. For me the major issue there would be that the polluter pays—raising revenue and using the revenue by, for example, giving it to energy efficiency measures in low-income households. Then you could get a picture that this instrument makes the big polluters pay and that the ones who are vulnerable to higher emission prices are being helped but also are contributing to emission reductions. It would be easier to achieve societal consensus for such an instrument than for an instrument that is seen to be giving free permits to big polluters but at the same time passing on the costs to poor households.

Dr MacGill —I would like to add to that. One thing that did strike us in the green paper for the CPRS was its very strong focus on the issue of households. It was very welcome and it has been missing in some of the other schemes we have seen around the world. Unfortunately, I think the process of getting between the green paper and the white paper and beyond has raised more of these equity issues as a perception has emerged—and I think it is a reasonable perception—that some large, key stakeholders are really starting to drive the agenda in Canberra. I think that is a very significant issue for public support.

Senator CAMERON —As to some key stakeholders driving the agenda I must say that I have not met a happy key stakeholder yet. We have had the mining industry and the coal industry come to us and say: ‘This is terrible. You can’t put these imposts on us. It’s going to cost jobs.’ We have had senators here running a parochial agenda and saying, ‘This is going to cost jobs in the mining industry,’ and then a political agenda starts to run. And you are saying, ‘Well, make the polluters pay.’

The government in their approach have tried to spread the pain. The government have said, ‘Okay, we’re all in this together. It is an international issue. It’s a national issue. We will take steps and will design the scheme to try to make sure that no one group, no one industry, is absolutely carrying the whole cost of the international quest to reduce carbon.’ But if you reduce it to ‘polluter pays’, there will be some who will carry the cost. There will be bigger implications for some regions and some industries. Isn’t better for us to try to deal with it nationally, jointly, not just in a purely market based polluter-pays approach?

Dr Betz —Can I come at it again from a European perspective. You can go for strong targets and have a balanced approach, and that might be okay, but look at what happened in Europe—and I think that is what needs to be avoided. Europe went for very small targets in the first three years, but still had a lot of free permit allocation. So the costs were on the consumer, the windfall profits were with industry and there was no benefit for the atmosphere. That was really the worst outcome, and that needs to be avoided. I can understand that there needs to be a balance at the beginning and you need to buy industry support for the scheme by lowering the burden on them. But over time these things need to be phased out and the polluter-pays principle would need to be in place. Although there is money foreseen for households—and I think they wanted it 50-50; 50 per cent goes for household from the revenue and 50 per cent for industry—how will it be used for households? It will be used through social security schemes which exist and will not be used to improve their energy efficiency. I think there could have been a better approach that would make households contribute to emissions reduction.

Senator CAMERON —The government has made a big investment in providing insulation for houses. Is that not a practical way to try and deal with the problem?

Dr Betz —Yes.

Senator CAMERON —I am not saying that it is all the government will ever do, but it is an example of what you are talking about.

Dr Betz —Exactly, that is what I am talking about. If I am a low-income household, I could get more money based on social security assistance, but I could also get a lower electricity bill where there would be savings. One saving would not have an impact on the atmosphere and the other would. It might depend on the reserve and the approach taken there.

Senator CAMERON —I want to come back to the polluter-pays issue because it is an important part of your submission. I am not arguing that the polluter should not pay; I am trying to be a devil’s advocate in terms of how this would work. I used to work in the electricity industry in a power station. I have worked in coal communities and power communities and I know what happens there and how important they were the social infrastructure. I am also aware of the pollution that is now starting to have a huge impact. You say the polluter pays and the power industry has to shoulder the total burden of its pollution. They have said to me, ‘We designed our stations 30 years ago, this is what we have and there is no alternative to these stations in a short period of time.’ If you say the polluter pays, that will make them totally incapable of maintaining their business and totally incapable of providing power. What is the other option? The argument they are putting to us is that if they cannot run a profitable business, they will go out of business. Where do we go?

Dr MacGill —If there are no alternatives to these power stations then introducing emissions trading will not put them out of business. They will very effectively pass on those costs to the end users because the end users have no other options. So there is a contradiction there. I want to pick up more generally on polluter pays. One of the issues with transition is that sometimes it gets forced upon us—the global financial crisis—and sometimes it is a conscious policy choice, microeconomic reform or an effective action on climate change. You need some principles and then you have a messy, complex transition and all sorts of potentially very disadvantaged parties. But the polluter pays is the starting point. A revenue stream is created when the polluter pays and that revenue stream can be used to support the sorts of transitions that some parts of the Australian economy will require.

The risk when you move away from that principle of polluter pays is: are you supporting transition or are you effectively helping them not have to change? That is a very important difference in transitioning an economy. So, on the question of transition, we would totally agree—it is the critical challenge. But the principle of polluter pays creates the starting point: ‘We are going to have transition; now let’s work out how to do it.’

Senator CAMERON —The government’s scheme does have a big element of polluter pays, and I think that payment is worth many billions of dollars. That is then being divided up in terms of support for community and support for a transition process for industry. Isn’t that a reasonable way to go about it?

Dr MacGill —There are many ways to look at that. One of the risks you face when you try to work on some politically negotiated solution of who sees a carbon price and who does not is the challenge that poses for governance. The example we sometimes use is a company that understands the importance of change will see innovation opportunities—ways they could change their business—but what they also see is that some large polluters appear to be getting special deals in Canberra. What happens then is the governance process means that basically all parties have to focus a little bit more on that than on the question: ‘How do we actually make money and create a business out of this transition?’

You referred to specific regional issues and implications earlier. I think Queensland is a good example. One of the great development stories in Queensland over the last five years has been coal seam gas. At least one of the drivers of coal seam gas, both for Australian electricity generation and potentially for LNG exports, is this view that gas plays a key role in climate change. So there are opportunities as well as adverse impacts. We do not pretend there is an easy answer, or that government can find a straightforward way to manage this, but the principle of polluter pays and a governance process that is clearly robust to all stakeholders against unreasonable influence from large polluters are really key.

Senator CAMERON —I was smiling, because you are saying there are no easy answers and you have given us two pages here. But I am sure this will equate to a lot of trees somewhere down the track. You have done a good job in simplifying the arguments. I am not arguing that you are providing simple solutions or simple arguments. Thanks.

CHAIR —I think Senator Furner has some questions to put on notice. If you could just take them away with you and provide a response to the committee, that would be good.

Senator FURNER —Firstly, in part 25 of the bill the scheme provides for five-yearly built-in reviews. I would like to know what you consider should be reviewed with respect to that.

Also, the proposed system provides for gateways and allows the government to set a wide range between the upper and lower limits. The OECD has indicated that that is possibly the best solution in that particular policy challenge. What do you think about gateways?

Lastly, David Pearce from the Centre for International Economics provided evidence to this committee the other day that we need a carbon price to work out whether other policies like large-scale biochar are cost-effective. I wonder whether you agree with that position at all.

CHAIR —If you could take those on notice. Thank you very much for coming in this afternoon.

Committee adjourned at 5.09 pm