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Emissions trading and reducing carbon pollution

CHAIR —Would you like to make an opening statement?

Ms Wain —I will start with what came out of the Copenhagen scientists meeting last month where message is that the scientific data now says that the situation we are facing is dire; we really have to act and very quickly. A survey was done yesterday by the Guardian newspaper of some of the scientists who attended that meeting. The majority of them said that it is going to be extraordinarily hard to meet a two degree maximum global average temperature rise. So we are looking at major risk, financial cost and non-cost impacts.

How do we avert them and why should Australia lead? I think that Australia should lead because as an energy intensive nation we have a good opportunity to show that a country can become smarter and more efficient and retain its prosperity by using new energy sources. It is a question of technology transfer and capital flows that can then be assigned to other parts of the world, especially the countries in our region, where a number of the developing countries are as vulnerable to climate change as we are. Ultimately, it will be Asia where the battle against climate change will be won or lost. So it is in our own vested interest to be looking at ways to put in place those technology flows.

I have one more piece of background before I go in the CPRS. The issue of climate change and the convergence of other major risks that we are seeing around the world—peak oil, peak fish, peak soil, peak food production, ocean acidification—are manifestations of a broader problem; that is, that we have lost the sense of value and how to assign value to the marketplace. The marketplace no longer has indicators and the global financial crisis collapse of large parts of the financial sector has demonstrated that quite clearly.

Where we are coming from in Environment Business Australia is how we build new markets, new industries and new jobs in the face of climate change and this financial situation. It is not an impossible ask. A report was issued by the British Government last month that said that the global marketplace last year—2007-08—for low carbon environmental goods and services was in the order of $6 trillion Australian, and that Australia’s domestic and export market was worth somewhere in the order of $60 billion. Internationally, at the UN, IMF and the World Bank level, we are seeing a lot of action on the global green new deal. How do we get capital flows to invest in infrastructure that is not going to lock in heavy carbon outcomes? Perhaps equally important as abating emissions or reducing emissions is how we draw down legacy carbon from the atmosphere. As Nick Stern has said, it is a question of flows and stocks. It is not sufficient to say that by 2050 we will have 60 per cent reductions. What we have put out in the meantime and what every other country puts out in the meantime will mean we either succeed or fail at this.

I think it was clear from the scientists’ meeting that the sensitivity in the climate is something that they had not been expecting. There was a great deal of very honest nervousness about the situation in which we find ourselves—there are real danger signs.

In terms of the CPRS, I think it started life as a very healthy animal. It has become somewhat subdued and watered down. A low target of five per cent unconditional and 15 per cent conditional is really just not up to the task. We need to be thinking in the region of 25 per cent to 40 per cent cuts by 2020. I think that is possible. I will through some of the ways that I think we can deliver on that in a minute.

Other problem that I see with the CPRS as it is outlined in the white pipe and the exposure draft at the moment is the 2020 date to reset the 2050 target. We will need to be a lot more nimble and flexible than that. Originally the concept of the CPRS was for it to be a flexible market mechanism. It has lost a lot of its flexibility and market aspect as well. In terms of the nimbleness, I think the five-year gateways may be a problem because we may need to reset those given the science that is coming out. We need to be far more flexible if we do need to set much stricter year-by-year targets for emissions cuts.

In respect of the compensation to polluters, I think the word ‘compensation’ is more of a problem than any actual payment. It would be preferable from our perspective to see payment go to structural adjustment or to green depreciation so that we are funding things that we want to achieve and help to make those companies more competitive in a marketplace where they see their competitors in other countries not having to conform to the same standards. Having said that, most of those companies—the aluminium companies particularly—are multinationals. It is a bit of a catch-22 argument, I think.

There is another problem that is getting a lot of play in the media; that is, the five per cent that was originally considered as being the top 1,000 polluters. There are a lot of cities, states, territories, individuals, householders, sectors of commerce that would like to play a very meaningful role here, and they have the attributes to be able to do so. But if they consider that their contribution is only going to serve to reduce the amount of work that has to be done at the top 1,000 level, a lot of the empowerment and motivation will disappear from the marketplace. What I would propose here is that we could conceivably consider that the top 1,000 polluters, take the five per cent that is outlined in the CPRS and the white paper, and then move to the aspirational target of five per cent for households, commercial sectors and cities—and that would include transport and buildings. I am sure you have heard from the Australian Institute of Architects and others that buildings are responsible for 23 per cent of Australia’s emissions. There is some really low hanging fruit there can be picked quite easily and quite inexpensively.

In relation to the word ‘inexpensive’, I think you have heard the word ‘cheap’ throughout the CPRS, the white paper and the exposure draft. It refers to coal and fossil fuels. There is nothing cheap about collateral damage. Coal is not cheap; it is merely that it has never been asked to assume in its pricing structure the negative externalities that somebody else has to pick up. So if the consumer is not paying the full and proper price for a good or a service then the taxpayers or the community has to pick up the unwanted non-cost impact. So there really is no free ride, although it may have seemed as though there has been for a number of decades.

Another issue I would like to address is that of carbon leakage with the question: How companies with a reputation to protect are going to abandon sunk assets in a politically and economically stable regime and seek a licence to pollute from their shareholders, bankers, investors and insurers to seek a marginal decrease energy cost for an indeterminate period of time and to be temporarily shielded from the cost of carbon? I think that from our conversations around the world it is fairly clear that developing countries will be taking on targets at some point in the next five years simply because they want to access the technology and capital flows. Another reason why carbon leakage probably is not as much as of an issue as it is made out to be in the media is that the major renewable energy sources that are coming on line will be able to provide very large slabs of energy at relatively low cost. Already we see aluminium smelting going to Iceland to take advantage of geothermal energy.

The geothermal resources that are coming into play in Australia will be more than adequately up to the task of coping with aluminium smelting. In that line, we have suggested that a vision for Australia would be to have mega-clean energy parks operating by 2030, where Australia is a regional hub for minerals processing and manufacturing as well as might renewable energy into the grid. Depending on the different locations, renewable energy sources such as solar thermal, geothermal and marine, in particular, have great capacity to be scaled up.

Back to the CPRS, I preface my next statement by saying that we are hugely in support of emissions trading. It is a cornerstone of action to reduce emissions. But it is not a big enough step and it is not one that will happen quickly enough to make the necessary dent in the flows and stocks of greenhouse gas emissions. So the renewable energy target is vitally important and the energy efficiency target is equally important. The standards for things like appliances, electrical fittings, automobiles should be put into a package alongside the household retrofit program where there is a national trade-in scheme for appliances. If we are talking about automobiles, if all three levels of government were to mandate that they would buy or lease a certain standard of fuel-efficient vehicles each year that would give the automotive companies a very clear signal about what a basic market is in this country that would then allow them to produce that scale and it would bring down the unit cost for the community.

It is more about building resilience into the economy, but valuing the environment as the fundamental basis of the economy because if we lose the ecosystem services such as the atmosphere there is no amount of money or technology that could ever replace it. We are really in a very serious risk-management situation at the moment.

I know that a lot of people when they hear me say things like this say, ‘Yes, yes. But where is the money coming from?’ Well, firstly, if all the permits in the CPRS were auctioned and that money hypothecated depending on whose analysis you use, that would create anywhere between $14 billion and $20 billion a year. That would buy an awful lot of retrofits, a lot of green depreciation, a lot of new technology deployment and a lot of good infrastructure that will take us into the future. We do not want to corral the Future Fund or the Australia Infrastructure Fund but make sure that their investments do not lock in unsustainable infrastructure and that everything is predicated on a low carbon basis. Of course, government has access to cheaper debt and the framework to amortise next generation infrastructure much better than the private sector.

Then we have things like defence and security spend. Looking long term, I am still hoping to get a copy of the revised Pentagon report. But it states that climate change is a security issue major proportions. So it will would be logical to use part of the defence and security funding to help to shore up security aspects of climate change.

CHAIR —We have only another 25 minutes for questions. Members of the committee might like to ask questions to draw out further evidence from you.

Senator XENOPHON —I refer to the issue of low hanging fruit in terms of energy efficiencies. Is that something that can be done separate from an ETS? In other words, are these things we can do now with some urgency to reduce emissions? If so, in terms of energy efficiency, to what extent does Ms Wain say we will be able to achieve in terms of reductions?

Ms Wain —I think energy efficiency is hugely important and it can be done separately from the CPRS. At the household level, at the moment we have insulation going into roofs or solar hot water. It would make sense while to have street-by-street or block-by-block rollouts of energy efficient retrofitting including insulation, double glazing, ventilation, reflective roofs and so on. There is a whole package of items that can be put in place. These help to reduce costs for the householder, reduce the amount of emissions quite significantly and they create really good, high-quality jobs in the process.

Senator XENOPHON —Can you provide some details about that in terms of the cost effectiveness?

Ms Wain —I do not have the figures.

Senator XENOPHON —No.

Ms Wain —I am happy to send them through to you, yes.

Senator XENOPHON —Yes.

Ms Wain —Certainly, two groups that have done a great deal of work on this in the commercial sector of the build environment is the Australian Institute of Architects and the Australian Sustainable Built Environment Council. I would really commend their report on energy efficiency across the whole of the built environment, not just households.

Senator XENOPHON —What is your estimate? Let us say we wanted to make the built environment more energy efficient, what sort of savings do you see arising from that? Again, if you need to provide that on notice that is fine.

Ms Wain —Nothing is simple. But it would not be a complex and overly costly ask to suggest that household efficiency, commercial sector efficiency, city efficiency with the right policy framework in place—that goes well beyond the CPRS—could each offer another five per cent reduction in greenhouse gas emissions by 2020. The question of 25 per cent or 40 per cent is achievable if we ask how we harness what is available in innovation and technology and provide financing from the private sector, but putting it together in a package with the policy framework. So, it is not just emissions trading but also a strong regulatory governance framework, new standards, government’s own procurement and investment. I have not seen any empirical studies into this, but I hazard a guess—a rule-of-thumb guess—that if you looked at three levels of government, including asset management, procurement and investment, and if that were focused on delivering a low carbon outcome, that itself could deliver another five per cent cut by 2020.

Senator XENOPHON —In addition?

Ms Wain —In addition to the CPRS. I am thinking now of the CPRS being the top 1,000 polluters.

CHAIR —Following on from that, I refer to the method of rolling out those energy efficiency measures. We have a process in front of us at the moment that the government has legislated for through the stimulus package to insulate properties on an individual basis. I am aware that in the United Kingdom some of this work is being done through the power companies and they essentially do block lots or job lots that provide for some efficiencies. Do you have any experience or information about those efficiencies could be gained most effectively?

Ms Wain —Some excellent work has been done by the Sustainable Energy Development Authority that the New South Wales government set up a number of years ago that no longer exists. But I do recall doing some work with them on fast food restaurants. I give this as an example because when the fast food restaurant—either the wholly owned Macdonald, Kentucky Fried Chicken or the wholly owned subsidiaries—were presented with a retrofit package that cost, say, $15,000 per restaurant with savings over three to five years in the order of, say, $45,000—I cannot remember the exact figures. Head offices said, ‘Yes, this makes sense. Let’s roll it out.’ However, the majority of restaurants in that chain were individual franchisees. They understood the maths, the logic and why they should be doing this for themselves and the greater energy saving, but they could not put their hands on $15,000 and it was not something that was thinkable at that time.

So a lease-financing program was created so that they could pay back the loan they took out, and that could be payment against their against their energy savings. It was a lay down misere at that point. Like a line of dominoes, everybody said, ‘Yes, now it makes sense to us financially as well. We will get on with it and do it.’ In the United Kingdom, I think the household sector is responsible for 26 per cent of emissions, which is slightly higher than here. But if we look at a government package—and again taking it either subdivision by subdivision or by 10 streets by 10 streets—scaling the solutions up so that they are much more thinkable projects and of greater interest to institutional investors, the outcome is far more significant, greenhouse gas savings are more significant and, yes, it can bring in companies like the energy retailer, the banks and maybe even some of the retail outlets as well.

There is a supply chain solution here that when this issue gets debated it is often drilled down to a detailed element of why something cannot work instead of looking at the very, very big picture and why it can work and then making it work by back tasking from there. I think there are a lot of players who can be brought into providing solutions who do not necessarily themselves as part of a climate change action structure at the moment.

CHAIR —You talked about the new energy types of relatively low cost and you mentioned geothermal, which certain parts of the country do have prospectivity for. Can you give us a sense of where within the energy scale of cost they might fit at this stage?

Ms Wain —At the moment they would be pretty much at the top end. I am happy to get the figures sent through to you. The important thing about the renewable energy sector—whether it be geothermal, solar thermal or marine—is that once they are scaled up and refined they can come down their cost curve. That in itself makes them more competitive. But even just getting them to scale makes them more competitive because if one is using full cost recovery pricing there are very limited, if not zero, negative externalities associated with their introduction into the marketplace. There are some ancillary aspects that need to be developed alongside the source of energy itself, and one is the smart grid EC.

CHAIR —We would certainly be interested in getting some projections of the scale of cost of those. That would be valuable information.

Senator CASH —It was put to us this morning that the policy model of the current scheme is wrong in that it is based on a production target and it would be more effective to have a consumption target, in particular because this is better at the at delivering emissions reductions and minimising dislocation and job costs. Can I get your thoughts on that?

Ms Wain —Six of one and half a dozen of the other, really.

Senator CASH —Why do you say that?

Ms Wain —Because when you are looking at it from the production end huge savings can be made in a systemic approach from the resource extraction through the grid to the energy plant and then out to householders, the commercial sector and to industry.

Senator CASH —Even though carbon leakage has been raised as an issue?

Ms Wain —I just mentioned the questions that need to be asked regarding carbon leakage and I do not think it is anywhere near as big an issue as is being made out. There are certainly come companies that would place new investment into the other countries. But that would probably happen anyway and it is not going to be predicated solely on the cost of carbon. Taxation rates, infrastructure availability, skilled work force and the cost of labour will have far more impact on where a company puts a major plant or a new operation. Do I think that many companies will pull out of Australia because of a shadow cost of carbon? No, I do not. As I have already said, I think—

Senator CASH —On what do you base that given that there is a substantial amount of evidence from industry that they will do the exact opposite of what you are saying that they will do?

Ms Wain —I ask the question again: How many companies with a reputation to protect are going to seek a licence to pollute from their shareholders, investors, bankers and insurers and leave a stable economic and political regime to seek out the sightly lower cost of energy perhaps and be shielded from a cost on carbon? Have they factored in what the new amortisation costs will be for relocation for the new plant? Have they factored in that developing countries are very, very likely to be taking carbon targets on themselves because they want the capital and technology flows? We are actually seeing carbon leakage in a very different way at the moment; that is, aluminium smelting going to Iceland because it has clean, green geothermal energy. We are very shortly to have that geothermal energy available to do this kind of minerals processing, smelting and manufacturing. I do not discount carbon leakage entirely, but I think it is an entirely overplayed hand.

Senator CASH —You say that energy efficiency is the fastest and most economical way to reduce carbon emissions at industrial, commercial and household levels. Under the current scheme as it stands, is it in a form that will deliver the energies efficiencies that you refer to?

Ms Wain —Are you asking whether the CPRS will deliver that?

Senator CASH —Correct, yes.

Ms Wain —As it is outlined in the white paper?

Senator CASH —Yes.

Ms Wain —No, it will not. That is why the CPRS really requires complementary measures to sit alongside it. I do not think any one measure, be it a regulatory framework, a market mechanism, a set of standards which one could argue could be either, is going to do the task we need to have done quickly enough. It really needs a portfolio approach.

Senator MILNE —I am interested in the issue of efficiency and renewables. It has been put to me that one of the investments that government needs to make very fast as a direct investment in the economy is to upgrade the electricity grid so it is an intelligent grid and to roll out proper smart meters so that the community is enabled to make the decisions it wants to, and that that needs to be complemented by a gross feed-in tariff to bring on solar thermal and geothermal in addition to the wind that will be brought on by the MRET. Would you like to comment on that?

Ms Wain —Yes, I am a great supporter of the concept of a gross feed-in tariff. It is another one of those elements that will speed up what we need to have happen. The faster that we can roll out solar photovoltaic, solar thermal, geothermal, marine energy and more wind, the better off we will be. The smart DC grid is an element of it, but there is also distributed energy where local supply meets local demand. We are also getting pretty smart on storage technologies for renewable energy now as well. So that will help to tend to balance some of the criticism that has been traditionally thrown at renewable energy that the sun does not always shine and the wind does not always blow. Of course, if you have that really smart grid operating, the wind is always blowing somewhere and the sun shines for most of the time when you need that high level of energy to be delivered.

Senator MILNE —You also said that you think the target should be in the vicinity of 25 per cent to 40 per cent below 1990 levels by 2020 consistent with the Bali negotiating range. Presumably that is a position of your organisation Environment Business Australia?

Ms Wain —That is correct.

Senator MILNE —Can you tell us something about Environment Business Australia? Which sort of businesses and how many businesses are involved and who do you represent?

Ms Wain —There are about 130 to 140 member companies. It is a very broad church that we represent—banks, finance houses, technology companies, utilities, infrastructure developers, consultants, engineers. I am happy to send you a list of the membership and it is available on the website as well.

Senator MILNE —That is alright. I am trying to establish the breadth of interest in the organisation. Given what you said about Iceland, would you agree that in the longer term the best way to make trade exposed industries—aluminium, cement, steel and so on—competitive is to get them on to renewable energy as quickly as possible because the greatest risk is them not going offshore because of coal because rather because they cannot reduce their carbon footprint and get on to renewables fast enough?

Ms Wain —And somebody else will offer that renewable energy.

Senator MILNE —Yes.

Ms Wain —I think you are absolutely right. It is part of how Australia builds its next competitive edge in this is well. We are extraordinarily vulnerable to the impact of climate change, but we are also blessed with an awful lot of renewable energy we can tap into in very many sources. We also have a very large marketplace on our doorstep in Asia.

Senator CAMERON —I refer to the proposition put to you by Senator Cash. I have been involved in this committee and in the economics committee and I have not heard one company say that they are going to move offshore because of the government’s scheme. So I think that is giving some weight to the position you are putting at that this whole question of carbon leakage is overstated. Even the coal industry has said that it might result in a smaller growth in jobs not job losses and moves overseas by companies—they just cannot do it.

Senator BOSWELL —There are already 4,000 jobs gone in the Queensland coal industry.

Senator CAMERON —Haven’t you heard of the global financial crisis, Senator Boswell?

Senator BOSWELL —4,000 and they are all young men.

Ms Wain —One of the important things about looking at coal is that we do have a certain amount of time to weed out inefficiency and outdated plans and to weave in the new technologies and new approaches. Whether carbon capture and geological storage will work in time, at scale, safely and at comparative cost with renewable energy, I do not know. My internal jury is out on that—this is not an industry perspective. However, we do have things coming down the pipeline such as algae sequestration of carbon from point source. We could take carbon dioxide from a coal-fired power plant, force feed it to rapidly growing algae and get a biofuel or a biodiesel, a potential soil additive or potentially animal fodder. Obviously this depends on the type of algae that one is using. I think an awful lot of new technologies will still come to the fore.

What I am worried about is the concept that it is either all coal or all nothing, and we will lose all these jobs, because I do not think that is the case. We have five, 10 or 15 years to recreate an energy economy to start substituting. This does not mean any loss of jobs. I heard somebody mention Queensland in the background. Queensland is looking very actively at solar thermal energy for a lot of its communities. In terms of coal exports, if we are doing to be exporting coal, maybe we should take a leaf out of the book of the nuclear fuel proponents. They want nuclear fuel leasing; let’s have coal leasing—but let’s be responsible for our emissions as they go out around the world. Let’s bring them back.

Senator CAMERON —Thank you. The tenor of some of the evidence to this committee has been quite negative and has concentrated on carbon leakage, job losses, costs and economic theory. I think that would summarise some of the debate this morning. I went to your website and picked up a submission called ‘Building new markets, new industries and new jobs’. One of the core 11 recommendations talks about building on the government’s carbon scheme. Do you see the scheme as something that the proposed legislation can be built upon and that it gives a base to move forward in terms of new markets, new industries and new jobs?

Ms Wain —Very much so. There are certain things I would like to see tweaked and improved before the legislation is passed. That includes the issue of targets and the 2020 date to set the 2050 target. However, as long as flexibility is retained so that we do not lock in a lowest common denominator approach—which I am sure a lot of the people you spoke to this morning were opponents of—and if we look at this as an opportunity for wealth generation and wealth preservation that the world has not seen before we can either seize that opportunity or we lose it big time. There is no halfway measure here. We are very gratified to see a report released by the United Kingdom government a couple of weeks ago talking about a $6 trillion market worldwide for low carbon and environmental goods and services. Those are actual figures from 2007-08. I highlight that that is Australian dollars, not American dollars.

Senator BOSWELL —You said you have 130 companies that are members of your organisation and that you reflect their views. Is that correct? Do you reflect the views of those 130 organisations?

Ms Wain —We reflect the views of the industry as a whole. Each individual company may well have a different opinion on some aspects of an issue, technology, financing other legislative procedure.

Senator BOSWELL —I wonder whether you reflect the views of Visy, which is a member of your organisation. It has already stated that it will close a factory down if this comes in, and that will result in the loss of 80 jobs. I also wonder whether you reflect the views of Boral, which makes cement. Or are you taking their money under false pretences?

Ms Wain —I think you have to look at the totality of those companies. Let us look at Visy for a second. The issue that Visy has is with the historical legacy landfills and how they are treated under the legislation. One of the things that I have not mentioned here is that at the same time as abating or cutting carbon emissions another really important aspect is drawing down legacy carbon from the atmosphere.

Senator BOSWELL —I do not need a lecture on the virtues of how you do this. I am just asking whether you reflect their views. Obviously I do not think you do reflect their views.

Ms Wain —I may not reflect 100 per cent of their views, but I think that in terms of members of the environment and the cheap tech industry and their ability and genuine intent to grow on the basis of sustainability we are of one mind.

Senator BOSWELL —I do not think you are of one mind with Visy and Boral, but I do not think we will solve that. There are a lot of people in your organisation that are banks and consultants and of course they are going to back an ETS. They are going to make a squillion out of it. They are they will get their snout right in the trough.

Ms Wain —Let me ask you a question, Senator.

Senator BOSWELL —No, I am asking you the questions. You do not ask me questions.

CHAIR —Senator Boswell, we are over time and we need to get to your questions so we that can get answers and move to the next witnesses, please.

Senator BOSWELL —You talked about geothermal. Most of geothermal and wind energy comes from the windy areas around South Australia. I have heard that it will cost $20 billion to $25 billion to put in a pipeline to take that commodity—whether it be electricity from geothermal or wind—back into Melbourne, Sydney and brings. The Electricity Supply Association of Australia has said this week that electricity generators and network providers are struggling under current global conditions to refinance existing operations. That was in the Australian. Who is going to pay for this $25 billion pipeline from the wind farms—that is, if wind farms will effectively replace generators? Who would provide the $25 billion pipeline? Do you believe that would be government’s role or the banker’s role? Whose role would that be?

Ms Wain —I have not heard that $20 billion or $25 billion figure, but it would be part of what we would consider necessary to build a smart grid around the country. There are any number of institutional investors that would be very interested in looking at projects like that as long as they are government backed. This comes back to my point about the policy framework that supports the steps that we need to take and the innovation that we need to implement. Of course, some of those costs can be passed on. With greater energy efficiency, electricity prices may not necessarily rise dramatically. There may be a slight rise. I think we need to look at this in its totality. It is much better to be making money out of the environment by doing well by the environment than making money out of the environment by creating collateral damage.

Senator BOSWELL —Okay.

CHAIR —Thank you very much, Ms Wain, for appearing before the committee today and for your evidence.

[2.19 pm]