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SELECT COMMITTEE ON CLIMATE POLICY
30/04/2009
Emissions trading and reducing carbon pollution

CHAIR (Senator Colbeck) —Welcome to our eighth hearing of the Senate Select Committee on Climate Change. On 11 March 2009 the Senate established this committee to inquire into policies relating to climate change.

These are public proceedings, although the committee may agree to a request to have evidence heard in camera or may determine that certain evidence should be heard in camera. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, also be made at any other time.

A witness called on to answer a question for the first time should state their full name and the capacity in which they appear, and witnesses should speak clearly into the microphones to assist Hansard to record proceedings. Mobile phones should be switched off or to silent. I ask you to do that if you can, please, colleagues.

I welcome Mr James Cameron from Climate Change Capital, who is on the line from Oslo. I understand it is midnight there, so thank you for staying up to talk to us. I invite you to make a short opening statement.

Mr Cameron —I am happy to contribute to your inquiry. I have been working on the climate change issue for a little over 20 years. My original introduction to the topic came through giving legal advice as an international lawyer on the arguments that could be made in state responsibility for the creation of the problem and failure to resolve it. Then that led to a combination of academic work and the negotiation of climate change agreements from the Second World Climate Conference, through the UN Framework Convention on Climate Change and the Kyoto Protocol.

In recent times in my professional life I have tried to connect public policy, finance and technology so that a rational response to climate change could be made with the levers of power that we have and to try to make the investment community aware and understanding of the systemic risks posed by the physical consequences of climate change, and the policy response to climate change. Work that I have done through the Carbon Disclosure Project, as its chair for many years, has convinced me that there are systemic risks to the financial community that are not properly understood and managed, and where there are insufficient incentives for investors to act prudently and with full fiduciary responsibility, to manage that risk and find opportunities so that over time they can properly represent the interests of their beneficiaries. A better alignment between public policy finance and technology is necessary in order to act in a responsible manner if you are an investor, but it is also necessary if you are a policy maker as you will need the resources to flow into the solutions to climate change and in a relatively short time.

Perhaps the only additional message that I would like to add to a very brief career introduction and appreciation of my current interests is that I am absolutely convinced that it is possible to make a better alignment between public policy, finance and technology, so that it is no longer necessary to make trade-offs between environmental sustainability and sustainability in economic terms. We are in a moment of great creativity because of the economic crisis that we are in and because of our now much better appreciation of the environmental crisis that we are in, so that many orthodoxies can be severely challenged and the steadfast opposition to the sorts of interventions both by governments and by leadership in business that could properly value environmental resources now seem not only necessary from the point of view of dealing with climate change but provide opportunity for economic stimulus as well. We are seeing that in many of the stimulus packages around the world. I have a particular conviction that it is possible for governments to go further and provide incentives for significant capital flows into the necessary changes in our energy, water and waste infrastructure through the assurance of environmental or climate bonds. This particular idea needs further work and development but is showing promise and becoming understood both by the institutional investor community, which I think would be attracted to these instruments, and by governments looking to resolve the difficult challenges of stimulating an economy and maintaining momentum in greenhouse gas reduction.

Senator CAMERON —Can you comment on the issue of the relationship between public policy, finance and technology, and what it means for jobs? Could you also give us a brief breakdown on the situation in the UK after the budget in terms of investment in abatement in the UK?

Mr Cameron —Yes, indeed. It is a good moment to assess how to bring these three points together so that they provide a stable basis for future development of a society. Let me just begin with the UK budget. Leaving aside a general comment about whether the budget was sufficient or adequate to deal with the current economic crisis and the very significant amounts of public debt that are now made known, on the environment side you can sense proper appreciation of the importance of the environment in the economy, most particularly through the very significant decision to include a carbon budget within the main budget of the economy. This is a striking innovation. It is to be applauded. It will have a profound effect if it is maintained and properly implemented over decades to come. It is the sort of thing that one hopes a government would institute and organise around in order to properly assess the economic risks associated with failure to deal with climate change. That is a major innovation and something to be proud of if you are a policy maker in the UK, but much of course depends on how it is implemented in practice and we are going to see that over the coming months as decisions are made, informed by the climate change committee, on implementation.

We also see proper recognition of the right areas for investment, both public and private, and understanding that public investment could help leverage private capital flows into energy efficiency, carbon capture and storage, offshore wind and, indeed, into the built environment, but I am afraid my own view is that there is still insufficient appreciation of the scale of the capital requirements, and there is insufficient alignment between public policy incentives and private capital. For example, you cannot take provisions in that budget to an investment committee and commit capital to carbon capture and storage. Much more work needs to be done to make that a realistic prospect for private capital flows.

It is also the case that one or two opportunities were missed. We have some structures in the UK that could have been turned to the advantage of capital flows, especially in environmental technology, so you see nothing with venture capital trusts, which have proved quite useful for modest investments in small and medium sized companies; that could have been expanded and turned to the advantage of environmental technology. We have the same with our ISO savings schemes. They could have been turned to the use of the environment.

Unfortunately, given that I have been promoting this idea, I am disappointed not to have a hook upon which to hang a bond issue. A green gilt or climate change bond issuance would have been helpful. We could have had a productive discussion about how to make that idea good over the next year or so. I shall not be giving up on it. I will be back into the Treasury to make my points, but it is a pity that was not in the budget.

There are some very good signs that the issue is moving into the centre of economic planning, but not sufficient to stimulate investment. It is certainly not sufficient to stimulate investment in manufacturing in the UK, and we are a long way off meeting our public policy targets for renewables or for finding sufficient resources to do energy efficiency at scale in the UK.

Senator CAMERON —Could you comment on the proposal that has been put to this committee consistently by, I would say, the majority of business representatives who have appeared. They are putting forward propositions that the global economic crisis is the priority and that we should not introduce a carbon pollution reduction scheme under the current economic circumstances. The line is, ‘We support a scheme, but we do not support a scheme now.’ I would like you to comment on that and also on the position of the Confederation of British Industry. I had a look at their website and compared that with the rhetoric from business in Australia, and it is chalk and cheese. Can you tell me why the CBI is totally committed to dealing with carbon pollution reduction and does not simply adopt the strident opposition we have in Australia from business?

Mr Cameron —Yes, I am happy to do that. I will break it up into two parts. The first is that it is a false type of dichotomy to set dealing with our current economic crisis against dealing with the climate change issue. The idea that a price for carbon disables economic growth or that you could not combine job creation with the expansion of renewable energy, energy efficiency, the establishment of smart grids or the development of carbon capture and storage is such a poor argument that I wonder why people are not embarrassed to make it. There are clearly job creation opportunities in the alternatives to fossil fuel power generation. There are big infrastructure demands for the establishment of more intelligent grids. There is a tremendous amount that can be done in the built environment that needs labour. In some cases, it needs quite skilled labour, for example, for the installation of micro power, and some training programs for upskilling electricians and people who install equipment that can measure and monitor supply and demand of electric power. The notion that somehow it is impossible for an economy to cope with a carbon price and still grow is just not rational. It is not a very impressive case to be made.

There are major differences between the Australian economy, its profile and the very significant proportion of wealth created through the natural resource industry in Australia as compared with the UK economy, so it is not surprising that political and economic power in Australia are associated with the resource industry; that situation is diluted in the UK. There are many more economic interests and the profile of the economy is different. We have never had a sustained business opposition to dealing with climate change in the UK, not since the days of the Thatcher government. We have never had anything approaching a powerful lobby against action on climate change from within the business community. On the contrary, the business community has often led government. The establishment of an emissions trading system in the UK, and which ultimately led to one in Europe, was largely the result of efforts by industry and business on the basis that, if there was going to be an intervention in the economy to deal with climate change, business wanted it to be the most efficient form of intervention that gave them the most scope for business creativity and innovation. Our version of a cap and trade system was considered to be preferable in every way to a command and control system dependent upon an all-knowing and highly efficient bureaucracy to pick up the carbon problem across an economy.

It is of no surprise that the CBI should be an advocate for economic instruments to reduce greenhouse gas emissions across the UK economy, and it is of no surprise to see them argue for greater clarity and a longer term framework for public policy to reduce emissions, because the CBI wants to see UK business position itself to be a winner from the technological and business innovation associated with coping with climate change. We want our economy to be vibrant and effective at coping with the need to reduce greenhouse gas emissions and to find alternatives often to imported fossil fuels. There is a strategic advantage to be achieved in business having clarity from government, a price for carbon that they can work with, and incentives to switch to cleaner energy and more efficient consumption of energy in our economy.

CHAIR —Thank you. Senator Boswell.

Senator BOSWELL —Can you explain to the committee how an emissions trading market will work? Who will run the exchange? Who will govern the exchange? How will a secondary market operate? How will it relate to the primary market? Who will be eligible to purchase and hold permits? How will business finance the purchase of permits and how will the business manage risk? There are a lot of questions there. Did you get them all?

Mr Cameron —There are an awful lot of questions. You might have to clarify whether you are asking me in theoretical terms or by reference to an existing system?

Senator BOSWELL —You are our expert witness on capital. Climate Change Capital is the name of your company. We do not have a market here as yet or only a very small one. Can you tell us how you envisage it will work?

Mr Cameron —The market is entirely public policy driven. It is based on the idea that atmospheric resources are scarce, that there is a public value associated with reducing carbon, and that as soon as a cap is established beyond which a company cannot emit without penalty, there will be incentives to reduce emissions. A company that has an obligation to reduce can discharge that obligation in a number of ways. It can spend its capital on reducing within its own plant, it can spend its capital purchasing a reduction already achieved in somebody else’s plant within the jurisdiction, or in the case of our market, which is connected to the Kyoto protocol global carbon market, it can purchase an emission reduction through a project that has been implemented in a developing country and certified by the executive board of a Clean Development Mechanism.

These are ways in which the obligation to reduce can be discharged. If you are good at allocating your capital you can produce a financial return, but there is an environmental return as soon as the obligation is honoured. The system depends upon regular review, which can be done through permanent monitoring of plant.

Senator BOSWELL —Can you answer the specific question: who will run the exchange? How does it get set up? Who will govern the exchange?

Mr Cameron —There is no single exchange. There are a number of exchanges, which are privately operated. Some of them are listed on the stock exchange. You have to extinguish the exchange from the allocation process. Allocations are made by governments. In the UK and in Europe so far that has been a free allocation, but it will go through an auction process. You are granted the right to emit up to a certain level by the state, and the state is both the issuer of that grant and the enforcer of the obligation to stay within the cap. The exchange of a credit, for example, or allowance can be made without a formal exchange. It can be done over the counter. It can be done in a contract.

Senator BOSWELL —Do you see an exchange being set up?

Mr Cameron —We have several exchanges. There are half a dozen exchanges that are regularly used. Some of them run off the power exchange. Some of them are tailor made for this process, such as the European Climate Exchange. Others are run off regional pools of power, such as Nord Pool.

Senator BOSWELL —Do you have any idea how the Australian carbon market, including international permits and derivatives, would be traded in Australia?

Mr Cameron —I have several ideas. Early on Australia was a major contributor to ideas to these exchanges. The Australian Futures Exchange was a pioneer in establishing contracts that would be very similar to the sorts of carbon contracts that you would exchange today.

Senator BOSWELL —Do you have any idea what the carbon market would be worth in Australia?

Mr Cameron —What it would be worth?

Senator BOSWELL —Yes.

Mr Cameron —In money terms?

Senator BOSWELL —Yes.

Mr Cameron —I could not give you a number at the moment. We would have to wait and see what the size of the demand is and what the obligation to reduce is. The market is created initially by the demand for reductions. That is where you start. Of course, the initial price will tell you what the overall value of the marketplace is and then, of course, it depends how much it turns over, or how much trade there is. The global market has grown steadily year on year and it depends on how you value the over-the-counter trade, which is sometimes quite difficult to find out about. If you look at a site such as Point Carbon, which is one of the more authoritative places, along with New Energy Finance, for assessing the size of the carbon market, it has passed $100 billion, that is, when combining the Kyoto and European markets.

You asked a lot of questions and I may not have covered all of them, but what you need to envisage is a market that exists solely to reduce emissions within which there are opportunities to trade, which companies need not take up if they do not want to. They could satisfy their obligation to stay within the target without any trading. On the other hand, the market produces liquidity.

Senator BOSWELL —I understand how the system works. What I am trying to envisage is how people trade permits. Is it done by a stock exchange? How much will the market be worth? You are saying the world market is worth $100 billion.

Mr Cameron —Yes, and rising. It is like a stock exchange or commodity exchange with specialised contracts.

Senator BOSWELL —There are a lot of people who want to ask questions so I will yield to some of the others.

CHAIR —Senator Pratt.

Senator PRATT —When you were before the Senate economics committee you said that capital will flow in significant amounts to the new clean energy infrastructure of the future, which will create jobs and is frankly the best way to manage risk for an economy over the longer term. You also encouraged the committee to think positively about the investment flows that will come from this legislation being bedded down and implemented. I want to ask you about the implications of not moving forward on this matter, specifically about the uncertainty of a carbon price possibly restricting capital flows, even to industries that are carbon intensive as well as those that are low carbon, and the manner in which the overall economy could suffer as a result of that uncertainty, especially as we look for a more liberal flow of capital as we come out of the recession. Secondly, when you were last before the committee you also spoke quite positively of the leverage that Australia signing the Kyoto protocol has brought to international agreements, adding momentum and hope behind the prospect of getting a global agreement. To the contrary, you have said that it will not matter if Australia does not bring anything to the table at Copenhagen, because we are too small to matter. What do you say to that?

Mr Cameron —I will answer your last one first, very quickly. Of course it matters. My experience, as a negotiator, is that it is not a question of the size of your economy when it comes to negotiating a complex agreement like this. There are contributions that can be made from extremely small countries. I represented the Alliance of Small Island States, and some of those countries are tiny. If you have good leadership and you understand the value of cooperation, and that none of us has a chance of coping with climate change without working with others, then of course you could make a very significant contribution to a good agreement. Australia cannot represent its national interest without agreeing, at a global level, something that would be effective at reducing emissions globally. You should not spend too much time worrying about whether Australia is too small an economy to make a difference to the multilateral process.

Returning to the beginning of your question, if there is uncertainty and delay then of course that will affect investment flows. Investors do not like investing into a vague space where they are unsure of the rules or when the rules are going to come into play. The natural tendency would be to wait and either be told what they must do or to at least leave it right up to the last minute to anticipate where they should put their capital. They are often having to make quite long-term investments in infrastructure and energy. If there is a feeling that there might be delay in the establishment of a market price for carbon, that is a reason not to invest in low carbon investments of a variety of types. That also runs the risk that money will flow into investments that will create long-term liabilities. It is very important not to delay if you want capital flows to begin any time soon, and of course, looked at from a scientific point of view, it is essential that we start reducing greenhouse gas emissions everywhere in the world, and we are going to need capital to do that.

CHAIR —Can you give a sense of what your perceptions are of what might come out of Copenhagen, given where you sit in the global situation, and Australia’s contribution to the current process with its current policy settings, how they might be seen internationally and what influence they may bring to the table with the five per cent to 15 per cent targets?

Mr Cameron —I know the negotiators are a little bit worn out and worried that they are not going to be able to get agreement at the end of the year at this stage. In my experience that generally happens about this time. We certainly did not expect to get agreement in Kyoto the week before we turned up. It is very important for negotiators to be encouraged to persevere. Everybody realises that the position of the US government is central. The President of the United States has established a clear direction for the negotiating team, but there is still an awful lot of work to do inside the administration to get the right representation and the right policies lined up domestically. We all believe that it is unlikely the US will be able to agree to anything meaningful unless they have their domestic legislation either in place or close to it.

Everyone who comes to these multilateral negotiations has to come with a genuine commitment to implement at home. We also recognise that whatever is agreed multilaterally will be insufficient. People will look to best practice from other nations in their domestic legislation, and Australia will have something to bring if it is making progress with its own domestic legislation. If it is not, it will be a less credible negotiator. People will take less seriously those parties who turn up who are not making changes in the way greenhouse gas emissions are regulated or whatever policy device is chosen to ensure that a lower carbon profile is attached to the economic development of a nation. That is the sort of thing in the negotiations between parties. What are you doing? Are you a credible partner? Are you making equivalent efforts? How can we bolster our efforts by cooperating at the international level?

CHAIR —That essentially brings us to an end. Thank you for being prepared to stay up to speak to us. Thank you for your evidence.

Senator PRATT —Can I email a question on notice to Mr Cameron?

CHAIR —Yes, we will email something through to you.

Senator PRATT —I have a further question that I would like to put on notice to you.

Mr Cameron —That is fine. It might be easier to do that as I am travelling.

CHAIR —Thank you.

[8.41 am]