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

CHAIR —Good morning. I invite you to make a short opening statement if you wish to do so.

Ms Quinn —I am here principally to answer questions around the economic modelling undertaken within and with other parties through the Australian Treasury. I believe that tomorrow there will be a roundtable policy discussion that will canvass broader issues in relation to the Treasury portfolio. I am happy to take questions on notice to answer tomorrow if I am not the appropriate person to answer those questions.

Senator BOSWELL —Out of the Treasury report you have assumed that all countries—developed, high income/developing, and middle income/developing—will be involved in a scheme by 2020, and that is what your modelling has been based on. Has the Treasury undertaken any sensitivity analysis of your modelling with respect to the assumed path for international engagement? In other words, Take all these people in China and India who are middle income and low income/developing. The Treasury has assumed they are all going to be on board in 2020. Have you modelled their not coming on board?

Ms Quinn —It is true in the international assumptions in the CPRS scenarios that the Annex I countries, plus the United States, are assumed to start taking some type of action in 2010, high income/developing countries from 2015, medium income/developing countries from 2020, and low income/developing countries from 2025. It is important to note that means they take some action relative to the reference scenario, and the reference scenario in our modelling has no climate change action in it at all. It does not encapsulate action that countries such as the European Union, the United States or China are currently undertaking. It is important to understand the references between some action and no action. In some ways, the reference scenario in our analysis is worse than the current business as usual practice, because there are policies in place in various countries to reduce emissions. We found it easier to take those out of the reference scenarios so that we could judge the implications for climate change policy in total, rather than those that are announced, or those that might be announced in the future.

Senator BOSWELL —I have looked at your modelling and the graph. You are assuming that everyone is going to be on in 2020.

Ms Quinn —Those people other than very poor low income/developing countries will take some action by 2020. That does not mean that all countries will be reducing their emissions, by any stretch of the imagination. For instance, China’s allocation, the amount of emissions they are allowed to emit, continues to grow until into the 2030s, and India’s allocation continues to grow into the 2040s. They start taking action and reducing their growth relative to a reference scenario, but they do not reduce their level of emissions until well into the 2030s and 2040s.

Senator BOSWELL —I have looked at that. America has to reduce its emissions by 2020 to 19 per cent below 2001 levels, and you have allowed China a 170 per cent increase above 2000 levels by 2020. Do you really expect in your modelling that America is going to agree to reduce by 19 per cent but China, which it compete against in manufacturing, should be allowed up to a 170 per cent increase?

Ms Quinn —There are different ways of thinking about how the international negotiations will play out in terms of allocation of emissions across countries. We looked at two different schemes, one for the Garnaut review and one for the CPRS scenarios. It is a very complex topic about how equitable burden sharing occurs. We judge that the Garnaut version was one way that the international agreement may play out, which similarly also gives China an increasing growth in emission through time.

Senator BOSWELL —The question was: can America be reasonably expected to take a 19 per cent cut when China is given a 170 per cent start when they are both competing in manufacturing?

Senator FEENEY —The witness is answering the question. She is explaining the core assumptions in the model.

Senator BOSWELL —Okay. Keep going, then.

Ms Quinn —The Garnaut rule, which is called differentiated contraction and convergence, says that basically by 2050 every person in the world has the same amount of emissions per person. You then multiply by the number of people in each country and that is how much each country gets to emit. There are some adjustments on the way to allow countries that are lower income to continue to grow their emissions for some time. The other version, which was the CPRS allocation method, placed a little bit more weight on current economic circumstances and current development paths, and allowed more allocation to those countries that were going to have a higher economic cost to adjusting to a low emission target.

Senator BOSWELL —I would like to ask another question about the Garnaut review and the CPRS scheme. Can you explain to the committee the difference between the model increases in electricity prices of the CPRS -5 and Garnaut -10 scenarios and comment particularly on the extent of the difference that is attributable to the renewable energy target?

Ms Quinn —The Garnaut review modelling was more stylised. All sectors of the economy were included, all countries acted uniformly at the same time and it did not include the domestic renewable energy target analysis. The CPRS scenario is differentiated by not including agriculture initially and having slightly different arrangements for trade exposed emission intensive countries, because we assumed that some countries would be outside the international scheme to start with. We did include the renewable energy target modelling.

Senator BOSWELL —Can you tell me how much is attributable to the RET?

Ms Quinn —Between two per cent and four per cent increase in electricity prices for the economy as a whole as a result of the renewable energy target was what we found in our modelling.

Senator BOSWELL —The generators and power people are saying that it is going to be around 60 per cent. That is not due to the RET alone. It is due to the ETS and RET.

Ms Quinn —Are you asking me precisely for the RET analysis?

Senator BOSWELL —Yes.

Ms Quinn —The RET analysis, in our modelling, suggested between a two per cent and a four per cent increase.

Senator BOSWELL —Is that at a retail level or at a wholesale level?

Ms Quinn —That is at the retail level. The modelling undertaken by the Department of Climate Change also looked in detail at the renewable energy target, with slightly different policy parameters following ongoing discussions. It suggests an increase in retail electricity prices of about 4.5 per cent.

Senator BOSWELL —That is wildly different from what we are getting from the electricity suppliers. In fact, some of them have said that the RET impacts worse than the ETS. I can only assume that you have done your best with the modelling, but I think there is a huge difference between the modelling and the people who actually produce the power.

Ms Quinn —With the renewable energy scheme there is the advantage of having some historical experience to help with the modelling. There is currently a renewable energy scheme, which is of smaller magnitude, but there is that experience in the Australian scheme to be able to look at what the renewable energy certificates might be. In some ways you could think of the modelling undertaken for the renewable energy scheme to be more firmly based on empirical evidence, given the historical experience to draw on. There is a consistent set of analysis that suggests that the price increases from the renewable energy target at the retail level will be of the order of between two per cent and 4.5 per cent.

Senator BOSWELL —We have some generator witness coming in later, so we can challenge that then. I have been told that the additional investment in transmission and distribution networks could cost between $20 billion and $25 billion to implement this renewable energy. In other words, the renewable wind is in the Australian Bight and the energy is going to be used on the east coast of Australia. We have been told that to get the power across to where it is going to be used it will cost between $20 billion and $25 billion. Did you model that?

Ms Quinn —Yes.

Senator BOSWELL —You still came up with four per cent?

Ms Quinn —Yes.

Senator BOSWELL —Thank you.

CHAIR —Senator Furner.

Senator FURNER —The committee has heard from copious witnesses from the higher end of emissions into the environment. Could you explain the results of your modelling for Australia’s main emission intensive trade exposed activities in terms of output, particularly out to 2050?

Ms Quinn —It is the case that putting a price on emissions will affect different parts of the economy differently depending on their emissions intensity. It will also depend on the opportunities they have for abatement, the technology options they have and their ability to reorganise their production processes. In general, growth of high emission intensive parts of the economy is expected to slow relative to the reference scenario, but in very few cases is output expected to fall below current levels. Industries such as aluminium, which is quite emissions intensive, is expected to slow and, similarly, with other high emission intensive parts, such as smelting and so on.

Senator FURNER —I also recognise Treasury models do not look at the cost of the economy for not acting on climate change. Could you explain what some of those costs might be for Australia and for the world on that basis?

Ms Quinn —It is true that the modelling that was produced in the report that Treasury coordinated looked just at the mitigation costs of climate change. We worked closely with the Garnaut review, which looked at the impacts of climate change on the Australian economy. The Garnaut review joined together both the mitigation costs and the impact costs to look at the costs and benefits to the Australian economy of reducing emissions. The Garnaut review’s conclusion is that the costs of inaction are higher than the costs of action, looking out over the future and taking into account what can and cannot be modelled. There is more science and more certainty around the mitigation cost element of the modelling, given that we have a longer run history of analysing those sorts of things, and putting a relative price on the economy is easier to judge than some of the economic analysis of impacts, which is in its infancy in Australia with the Garnaut review being the first organisation to actually look at this analysis. It is fair to say that there are possibilities that one side is a better measure than the other, and that is one reason why the Garnaut review looked at non-modelled costs as well as actual modelled costs for the cost impacts on Australia.

Senator FURNER —Do those costs of inaction escalate if you procrastinate with the introduction of the scheme?

Ms Quinn —The costs of inaction are driven by the emissions path that the globe is going to take. If the world were to delay action and the accumulation of emissions in the world environment increased, then it is the case that the costs of inaction rise. For instance, in the Garnaut review they examined the economic costs to the economy of a 450 parts per million world versus a 550 parts per million world, with one associated with the 50 per cent probability of a two degree increase in temperature and the other with a 50 per cent chance of a three degree increase in temperature. It was the case that delayed action, higher emissions and higher cumulative emissions would result in larger impacts on both Australia and the world.

Senator FURNER —Thank you.

CHAIR —Senator Xenophon.

Senator XENOPHON —In terms of the employment outcomes with respect to the modelling, you have said that, given this particular scheme, there will be a fairly minimal adverse employment outcome; is that right?

Ms Quinn —I do not think that I used those words in particular.

Senator XENOPHON —I am sorry. I do not want to misquote you.

Ms Quinn —The economic analysis we did was using CGE models. We used three different types of models and they have different ways of examining the labour market in them ranging from how they analyse the economy. One reason for using three different models was that they do have different ways of looking at how the economy works, and we wanted to make sure that we encapsulated a broad range of analysis. In that context there is one model that suggests that the labour market adjusts fairly quickly so that any change in demand for labour is reflected in real wage rather than employment prospects. That is the GTEM model.

Senator XENOPHON —What does that mean? Do real wages then go down?

Ms Quinn —Yes. It is the case that in Australia, just looking at mitigation costs alone, the introduction of an emission price in Australia will ultimately reduce Australian GDP slightly and would reduce real wages as a consequence.

Senator XENOPHON —By how much?

Ms Quinn —In the report there is a chart that looks at real wage reductions, and it varies across the scenarios. If you bear with me I can find the exact chart. To 2020 the reduction is around three per cent for the CPRS -5, -15 and Garnaut -10. It is slightly more for the Garnaut -25. This is relative to the reference case, so real wages continue to grow in all scenarios; just relative to where they might have otherwise been they are lower.

Senator XENOPHON —Can you just clarify that full employment is an input assumption rather than a modelling outcome?

Ms Quinn —Not in all the models, no. I explained in the GTEM model that it does assume that labour and capital adjust quite quickly. The G-Cubed model by Warwick McKibbin and Peter Wilcoxen does not assume full employment. It has to be a result of the economic modelling. It suggests that there are sticky wages and wages take time to adjust, so there are employment changes in the short to medium term. Similarly, the MMRF model, the detailed model of the Australian economy, has in the long run that real wages adjust but there are time lags. It takes time for those adjustments to occur. In the short to medium term while real wages are starting to adjust there are employment consequences between sectors and it is only in the very long run, once everything has played out, that employment will return to their reference case scenario.

Senator XENOPHON —So, it is quite feasible that the employment outcomes on the CPRS could potentially be more severe?

Ms Quinn —It depends on which modelling results you are looking at. The results that we mainly focussed on in chapter 6 of our report, which is the Australian chapter, used the MMRF model for its analysis. That was because it was the model where we could most easily capture all the mitigation potential in the economy. It has the largest coverage of sectors and has the ability to put the bottom up sector modelling in. In that model the employment takes seven to 10 years to adjust, which is consistent with the empirical evidence through other estimated dynamic models of the Australian economy. It is true that the social cost of unemployment or employment shifts is not captured in any of the models, but other than that the possibility that employment will be lower or not is captured in the models.

Senator XENOPHON —Social cost is a key issue, though, is it not?

Ms Quinn —Yes. We highlight in the report that no economic models in Australia, whether used for climate change or other policies, necessarily capture the social costs, that is, the knock-on effects of employment changes, such as people having to move and people’s welfare.

Senator XENOPHON —Is there a model that can capture those social costs?

Ms Quinn —To my knowledge there is not a macroeconomic model that captures those social costs. It is not something that is easily captured by economic models in the way that we build them. Usually they are added on through surveys or other analysis.

Senator MILNE —I would like you to reiterate the difference in the cost to the Australian economy of a five per cent cut in emissions and a 25 per cent cut in emissions?

Ms Quinn —At 2020 or 2050?

Senator MILNE —2020.

Ms Quinn —We looked at the CPRS -5 scenario, which has a five per cent cut in emissions at 2020, versus a Garnaut -25, which has a 25 per cent cut at 2020. The results vary across the different models, but for the CPRS -5 the economic costs range from -1.3 to -1.9 at a lower level of GNP per capita. For Garnaut -25 the range is -2 to -2.6. The differences between those two scenarios are not restricted just to the change in the emission cuts. There are also differences in coverage and policy framework. Typically some of those differences would raise the economic cost in the CPRS -5 scenario. For example, agriculture is excluded for the first five years of the CPRS -5 versus the Garnaut -25, which includes it straightaway. Also, the CPRS -5 includes the renewable energy target, which the Garnaut -25 does not. There are some differences that would magnify the cost differentials between the CPRS -5 and -25 that are not directly attributed to the emission reductions.

Senator MILNE —What is interesting to me is that there is a relatively small difference between -5 and -25, notwithstanding what you have said about what is included. Was there any point between -5 and -25 where there was a stepped change?

Ms Quinn —It is true to say that it is not linear; you do not take a -5 and double it to get a -10 and double it again to get a -20. It is easier to tell the differences between the Garnaut -10 and the Garnaut -25, because they are on the same framework and other assumptions. Going for harder targets does not double the costs. There is a non-linearity, which means that the costs do not go up by as much as the emission reductions go down. That is principally through the land use modelling undertaken by ABARE, which suggests that there are points at which it is profitable for large chunks of the Australian environment to be translated to carbon sinks. Similarly some of the technology options on the table are brought forward earlier with the higher carbon price. For instance, we find that with the higher carbon price the acceleration of renewable technologies and potentially carbon capture and storage in the electricity generation sector occur earlier. Similarly with the transport sector the adoption of existing technologies and new technologies occur earlier.

Senator MILNE —On the renewable energy target, have you modelled what exempting all of the large emitters would do to the cost of the renewable energy target to the rest of the economy? I am particularly thinking in terms of groceries, from the food processing sector, and households, commercial entities and so on. Have you modelled the full exemption from the RET, the energy intensive trade exposed, and from the coal fired power stations, and so on?

Ms Quinn —Not for the modelling that we did for the renewable energy target. We applied the renewable energy target across all electricity users. It is the case with all analysis with CGE models that if you restrict coverage of a particular component, whether it be what part of the economy is faced with an emission price or which elements of the economy are covered by a particular scheme, we find typically that narrowing the scope on which the policy acts increases the economic costs to the economy in aggregate. It obviously has different impacts at the sector level, but narrowing the focus on a particular component tends to raise the aggregate economic costs of any policy.

Senator MILNE —If the government did move to exempt the big emitters from the RET completely, would we see an aggregate increase in cost to the whole economy and a much higher cost to the remainder of the economy?

Ms Quinn —We have not undertaken that modelling. There are some possible offsets depending on exactly how the exemption happens, but a general principle is that a narrower scope raises costs.

Senator FEENEY —We have received varying bits of evidence about the economic opportunities that the CPRS represents. Can you tell us how the modelling takes account of any job creation or economic activity that might result from switching to alternatives to fossil fuels—infrastructure, demands and so forth?

Ms Quinn —The general principle of the economic modelling is that putting a price on emissions or carbon raises the cost of emission intensive goods relative to other low emission intensive goods. As a result, there is a shift of demand amongst consumers to lower emission goods. One way to think about this is that in putting a higher price on electricity people may choose to run in the park rather than join a gym, because it will cost more money to run the lights in the gym. That is a simplistic characterisation of the sorts of choices that consumers might make in response to the change in prices.

On the supply side, in terms of what firms will do, they have a choice between what sorts of processes they use to produce goods and they have choices about what types of goods they use. That may mean using different technology to produce the same goods or it may mean they change the good they produce. In the electricity generation sector there are other alternative ways of producing electricity other than fossil fuels or there are ways of using fossil fuels more efficiently than are currently used. At the moment they would cost money and there is no incentive for companies to do anything about their current processes. Putting a price on emissions would mean that they have that incentive to either adopt technology to use things more efficiently, such as drying coal or gassifying coal. It also means gas is potentially a cheaper alternative relative to coal, or it means moving to other renewable energy, such as wind, solar, geothermal, and down the track carbon capture and storage is a potential technology option. There are opportunities.

The way the economic models do this is they move resources around—the capital and labour. When the economic modellers are thinking about what to invest in a year’s time or the next year, it goes to where it is most profitable once the carbon price has been placed into the economic model. Often this is about the choices of the future rather than necessarily changing the existing way things happen. This is an adjustment over time, and it is important in a lot of the economic results to think about it relative to a reference scenario, which is a world that ultimately will not appear, or look at it from the world today. You have to be very careful about statements that economic cost will be lower full stop. All the economic modelling undertaken in Australia and the world suggests that economic growth will continue to be higher in the future relative to today, even in a carbon constrained world. It just might be slightly lower than it otherwise would have been.

Senator FEENEY —I want to ask you about that in a moment. In answer to an earlier question about the assumptions of the model you spoke about how the model had assumed 450 parts per million, the move to 550 parts per million and the damage that would flow from that. I wondered if the model, in calculating the damage that would flow from that, accounted for the fact that Australia’s damage is unique—and indeed uniquely bad. Does the model account for the fact that Australia is particularly exposed to damaging effects from climate change?

Ms Quinn —The impacts of climate change analysis was done by the Garnaut review, not undertaken by Treasury. It is the case that the Garnaut review looked specifically at the implications for Australia and the Australian circumstances. They took into account the fact that Australia has quite a heavy reliance on agriculture, for instance, and that our geographical location and the issues around water suggest that Australia could well be more impacted than other parts of the economy. It is the case that some countries will do better under a hotter world. There are parts of Russia, for instance, that potentially will benefit from an increase in temperature, but it is true that for Australia, as a dry continent and being subject to already extreme weather conditions, the possibility of more regularly extreme weather conditions does mean that we are exposed more than some other developed countries.

Senator FEENEY —When you spoke of the CPRS -5, for instance, you said that the GDP per capita would decline within the zone of 1.3 per cent to 1.5 per cent. I would like to clarify your use of the word ‘decline’. The model overall assumes strong economic growth going forward, so really you are talking about a decline relative to business as usual within the context of overall continuing economic growth; is that right?

Ms Quinn —Yes, absolutely. The reduction is relative to a reference scenario. Our expectation is that the Australian economy will have significantly higher economic welfare in the future than today. Another way to think about growth is that it suggests taking 0.1 percentage point off annual growth. So, instead of growing at a number like 2.2 per cent a year, we may grow at something like 2.1 per cent a year. It is a one-tenth of one percentage point reduction in economic growth. Those numbers exactly match the previous numbers that I talked about.

Senator FEENEY —The same is true, is it not, when you used the word ‘decline’ in the context of real wage growth?

Ms Quinn —Absolutely. As I said to Senator Xenophon, in relative terms real wages may be lower, but the growth rate will continue to be positive and the level of real wages in the future will be higher than they are today.

Senator FEENEY —You are not, of course, suggesting a decline in our standard of living?

Ms Quinn —Not at all. In fact, the chart in the modelling report highlights this quite clearly in that the level of GNP per person is expected to be significantly higher in the future relative to today.

Senator BOSWELL —You based that model on everyone coming in. That is where you are wrong. You are assuming that everyone is going to do this. That is what your model is based on. It is fantasy land.

Senator FEENEY —You have already asked questions about that and you have also been told that that is not the case.

Senator BOSWELL —It is the case.

Senator FEENEY —The model assumes—

CHAIR —Arguing between senators is not going to help us and we are getting short of time already.

Senator FEENEY —The educative process of these committee hearings is not underrated by me.

Senator CAMERON —You will never educate a denier.

Ms Quinn —Chart 6.1 is the chart that I was looking for.

Senator IAN MACDONALD —Your modelling gave no results on the regional impacts of the CPRS around Australia.

Ms Quinn —We looked at different implications at a state level, or what the implications were for different states within Australia, and not substate regions.

Senator IAN MACDONALD —For example, take the very important Central Queensland Bowen Basin coalfield area. There is no modelling on what the impact will be there?

Ms Quinn —No, not for substate regions.

Senator XENOPHON —Ms Quinn, you have no doubt seen the media reports in relation to the modelling undertaken by Frontier Economics for the New South Wales government, which it has not yet released. Have you seen a copy of the report from Frontier Economics and its modelling?

Ms Quinn —I have seen a version of a report by Frontier, but I am not sure whether it is the same one that is referred to in the media reports.

Senator XENOPHON —I have seen a version that was sent to me by the Climate Institute. Would you be in a position to provide a copy of the version that you have to the committee?

Ms Quinn —No. I can take that on notice, but that was provided in confidence so it would be a matter for the New South Wales government.

Senator XENOPHON —You have been provided with that and that is something that you have had a chance to look at in the scheme of things?

Ms Quinn —Yes.

CHAIR —Senator Macdonald.

Senator IAN MACDONALD —You have told Senator Boswell and others that your modelling is based on other countries taking some action by 2015, 2020 and 2025, but you say that it may not be much action at all. Is there anywhere we can see what anticipated action you are taking? Would talking about it in a parliament in the United States be the ‘some action’?

Ms Quinn —No. The action is actually putting a price on emissions through some mechanism in their economies. The economic modelling is based on having a price on carbon so it is the case they take some action—

Senator IAN MACDONALD —A particular price or just a price? Would it be anywhere near Australia’s price?

Ms Quinn —Yes, the assumption is that there is a world price as there is today. There is a world price of carbon at the moment and some countries are accessing that and other countries are not.

Senator IAN MACDONALD —Your assumption is that America will have a world price the same as Australia’s by 2010?

Ms Quinn —It will not be the same as Australia, because there are exchange rate differences, but there will be a world price?

Senator IAN MACDONALD —Plus or minus the exchange rate, but the same.

Ms Quinn —Yes.

Senator IAN MACDONALD —You are saying that the high income/developing by 2015 will have the same price for carbon as Australia’s?

Ms Quinn —There will be a world price that they access, yes.

Senator IAN MACDONALD —And the low income by 2025 will have the same carbon?

Ms Quinn —Yes.

Senator IAN MACDONALD —From that, you would say that places such as Indonesia, Colombia and Somalia by 2025 will have in place a carbon emissions scheme with a price?

Ms Quinn —It is not the case that they will have a carbon emissions trading scheme, no. It is the case that they will have access to the international market. At the moment, under the Kyoto protocol rules, those countries that do not have targets have the ability to sell permits into the CDM market.

Senator IAN MACDONALD —Let me take an example. Indonesia competes with our coal. Are you saying that at 2025 it will have the same cost impost on its coal exports as Australia will have in 2010?

Ms Quinn —No. In 2025 the cost that Indonesia faces will be similar to the costs faced in Australia in 2025.

Senator IAN MACDONALD —That is the same price for carbon?

Ms Quinn —Yes.

Senator IAN MACDONALD —And the same for Colombia?

Ms Quinn —Implicitly, yes. We do not do all individual countries. There are groupings of countries.

Senator IAN MACDONALD —If they fall into the medium income group then it will be 2020.

Ms Quinn —Yes.

Senator IAN MACDONALD —Is your modelling based on that?

Ms Quinn —Yes.

Senator IAN MACDONALD —Who gave you those parameters?

Ms Quinn —The discussion of the scenarios was done jointly with the Garnaut review for their scenarios and with the government for the government scenarios.

Senator IAN MACDONALD —The government gives you those scenarios and then you do the modelling?

Ms Quinn —It is done in discussion. It is not that the ministerial officers did it themselves. There was discussion with advice from the modellers in order to undertake those scenarios.

Senator IAN MACDONALD —I cannot follow your estimates of impact on electricity prices. We have had evidence from the people who are actually doing it and whose livelihood and business depend on being accurate on this. They are forecasting by 2020 between 40 per cent to 50 per cent increases in household electricity under the CPRS and then adding another 40 per cent or 50 per cent to that for the MRET. That is doubling the price of electricity, yet you are saying that it will have a much smaller impact than that.

Ms Quinn —The analysis for the MRET suggests about a four per cent increase in retail prices.

Senator IAN MACDONALD —Can you explain to me why the people whose livelihoods depend on being accurate about this are just so different from you?

Ms Quinn —I have seen the detailed analysis that has been performed for us and it seems entirely plausible, given the historical experience of the MRET to date, which has not significantly raised electricity prices. It has raised them, but not significantly. I have seen the analysis done for the Department of Climate Change, but I have not seen analysis that suggests that the MRET will add 40 per cent to electricity prices.

Senator IAN MACDONALD —Have a read of the evidence. This has been given by people whose livelihoods depend upon selling electricity and being accurate.

Senator CAMERON —They have a vested interest in it.

Senator IAN MACDONALD —And most of the witnesses you have brought along have not had vested interests? Talk about rent seekers.

Ms Quinn —The electricity price increases under the CPRS are expected to be much more significant than MRET.

Senator IAN MACDONALD —They are giving the opposite evidence. I do not know. I am just quoting what they said.

Ms Quinn —It is difficult to imagine the interaction between the MRET and the carbon price. Once the carbon price gets high enough to bring forward renewable energy in itself the certificates in the renewable energy scheme will fall to zero. The CPRS dominates the MRET eventually.

Senator IAN MACDONALD —Perhaps it would be interesting for you, as well as us, if you would have a look at the evidence and give us an advice on how you could be so different in your outcome. Finally, I accept that the modelling is only as good as what you put into it, but you are predicting in your modelling not significant job losses under the carbon pollution reduction scheme. Did your modelling take into account the evidence that we have been given in other committees—and I am sure we will get later on—that a $1 billion investment and 500-odd jobs in a cement processing plant in Gladstone have simply disappeared because of uncertainty under the CPRS? How can your very moderate job loss scenario stack up against actual evidence we already have of significant job losses and predictions we have from people involved? Again, this is people who make their living out of this. There is evidence of substantial job cuts because of their lack of competitiveness and the lack of certificates to them under the scheme.

Ms Quinn —Just to be clear, is this around the uncertainty of the CPRS or because of putting a price on carbon?

Senator IAN MACDONALD —The price of carbon.

Ms Quinn —We did not model the implications of uncertainty.

Senator IAN MACDONALD —The price of carbon leads to investment decisions. This is what the government clearly does not understand. It is not just the direct impost, it is the lack of investment in the future. Multinational companies will invest where they get the best deal, and it will not be in Australia.

Ms Quinn —The economic modelling that we undertook does take into account the relativities of investment choices between different activities in the economy. That is exactly what it is designed to do. It looks at the whole economy and it allocates the investment money and labour to those industries that are profitable. Putting a price on emissions does mean that there is less investment in emission intensive products and more investment in low emission goods going forward. The modelling does capture that. It also captures the international competitiveness aspects.

Senator IAN MACDONALD —I accept all of that. I accept that you think it does that. What I am asking you is: how can you explain the difference between your modelling outcome and the actual experience?

Ms Quinn —It is difficult to say that that is the case. Our economic modelling does suggest resources will move between sectors. You have had people say that they will be adversely affected and you have had people say that they will benefit from this scheme. What happens is that there is a shift between industries and that means a movement of capital and labour between industries in response to relative price.

In our economic report we have said that the economic effects are moderate, which is consistent across all economic modelling that has been undertaken in Australia and the world, and that there are significant implications at different sector levels. Emissions intensive industries will—

Senator IAN MACDONALD —And therefore at different regional levels?

Ms Quinn —Yes, depending on where the different industries are located. I do not think there is any inconsistency between particular sectors being heavily hit. One of the issues is trying to make sure that you are comparing like with like in terms of expectations about carbon prices. If someone thought that carbon prices would be $100 a tonne versus someone who thought they would be $10 a tonne, you would get different sized implications.

Senator IAN MACDONALD —I think everyone can read the newspaper and look at what is happening. Thank you. You have clarified a couple of issues.

Senator FEENEY —On a point of order—Senator Macdonald asked about the particular modelling done by electricity generators. I think it would assist the witness and all of us if he made particular reference to what modelling it was that he was referring the witness to.

CHAIR —I think he actually referred to the evidence witnesses have given to us at the inquiry and he has invited this witness—

Senator FEENEY —The witness to read through a lot of transcript.

CHAIR —I am sure there is interest in government as to what is going on, and in fact I know the Department of Climate Change has had someone sitting in the inquiry for the whole proceedings. We are being monitored. Senator Fielding has the call.

Senator FEENEY —Big Brother is watching.

(9.25 am)

Senator FIELDING —Could you shed some light on the cost of manufacture in Australia? Is that going to go down under this scheme in the short term?

Ms Quinn —Manufacturing is quite a broad church with different types of activities within it.

Senator FIELDING —Which sectors does the cost of manufacture go down in and which sectors does it go up in?

Ms Quinn —The manufacturing sectors as a whole all continue to grow.

Senator FIELDING —I understand they grow, but I am asking about the cost of manufacture, not whether they grow.

Ms Quinn —Some of them will slow relative to our reference scenario.

Senator FIELDING —Time is short so I will draw you specifically to the cost of manufacture. I am not worried about the GDP growth or the growth in sectors. I am now talking about the cost of manufacture. Does it go up or down and in which sectors does it go up and which sectors does it go down?

Ms Quinn —Table 6.11 on page 164 of the report has gross output by sector by 2050, so over the long run. It depends how you define ‘manufacturing’.

Senator FIELDING —Time is short. I will interrupt just to let you know that that is gross output. I am interested in the cost of manufacture—something that Senator Cameron would know well. There was a big stink about underpants going offshore because of the cost of manufacture. In which industries will the cost of manufacture go down and which industries will it go up under the CPRS?

Ms Quinn —I am not quite sure I understand your question.

Senator FIELDING —That is a worry.

Ms Quinn —The way we typically think about economic cost of putting a price on carbon is what happens to the industry in terms of output over time. If costs go up industries have the ability to adjust over time and so output does not necessarily go down. The result for output is the end result of all the input cost changes, changes in other parts of the economy—things flowing around. It is the measure that is typically thought of as encapsulating the economic cost of a particular policy.

Senator FIELDING —I will try this question: have you modelled the cost of manufacturing in Australia? Does it go down compared with that of other countries that do not have CPRS or does it go up?

Ms Quinn —Looking at the output analysis, the Australian manufacturing sector output is higher as a result of CPRS. That is partly because the Australian exchange rate depreciates and manufacturing sectors benefit from that depreciation. It is also because, relatively speaking, a lot of Australia’s manufacturing is very efficient in the emission sense.

Senator FIELDING —Have you modelled the cost of manufacture?

Ms Quinn —Yes. I highlighted that table 6.11 contains that information.

Senator FIELDING —Table 6.11 looks at the output and not the cost of manufacture.

Ms Quinn —I am unsure what you mean by ‘cost’.

Senator FIELDING —Obviously if the cost of manufacture in Australia goes down, we will most likely get more manufacturing jobs in Australia. If the cost of manufacturing in Australia goes up relative to other parts of the world, jobs will go offshore. That is why this is an important issue. There is a stink about underpants manufacturing going offshore.

Ms Quinn —And this is now suggesting that as output is higher employment in Australia will also be higher in the manufacturing sectors. As a result, Australia is gaining competitiveness in some of these industries relative to our compatriots overseas.

Senator FIELDING —Are you saying that there are no manufacturing sectors that will have costs of production that will go up and where jobs will go?

Ms Quinn —No. I am not saying that. I am saying that manufacturing is a broad church and there will be some companies that are more emission intensive than other companies, even within the same manufacturing component. There are relativities. Different people do things in different ways, just as they do in terms of using the amount of labour, capital or anything else. It is difficult to say that nobody will be adversely affected. That is not something I know. In general, the economic analysis suggests that the manufacturing sector in Australia is positively benefited relative to what they otherwise would be.

Senator FIELDING —I am not totally convinced. Thank you.

CHAIR —Senator Pratt.

Senator PRATT —We have touched briefly on early versus late mover costs and how there are lower costs for countries that move now. Does this include lower costs for carbon intensive industries? Can you explain to us whether early action will help reduce the prospect of stranding assets in carbon intensive industries because it gives them more time to adjust? What are the implications for carbon intensive industries if we have to make much more dramatic cuts because we have delayed action?

Ms Quinn —We looked at a scenario where the world delays in total. If the world delays by seven years and then they subsequently try to achieve the same environmental outcome, the economic costs do increase. That is because you have less time to adjust the economy and faster adjustment tends to be more costly.

Senator PRATT —Does that include carbon intensive industries?

Ms Quinn —That includes the carbon intensive parts of the economy as well. We also looked at the implications in a messy world where some countries delay action versus a world where everybody starts together. Interestingly, we found that countries that delay action relative to when they act together end up having higher economic costs. That is because they continue on their emissions intensive pathway of development. When they do enter a scheme later on they find themselves at a disadvantage relative to countries that took action earlier, and investment flows to the countries that took action earlier, and so they are worse off from delaying in that scheme. That is largely due to the emissions intensive activities in those economies.

Senator PRATT —Is it possible that ongoing uncertainty about carbon price in Australia could discourage investment in all sectors of the economy and not just in new green industries, such as renewable energy, because of the implications of the economic factors that you are talking about?

Ms Quinn —It is a general proposition that uncertainty raises the cost of capital. Therefore, it raises the economic costs of investing and is a suboptimal outcome. That is a general proposition with all uncertainty in relation to investment decisions. It is certainly the case that this was something that was in the minds of the taskforce for emission trading. They got some analysis from a private sector consultant to look at the implications of uncertainty and the economic cost that might be imposing in the Australian economy, in particular in relation to the electricity generation sector. There is a lot of discussion around uncertainty in the electricity generation sector delaying investment decisions, and at some point that will start to bite when the supply and demand situation in the electricity sector is such that there is an undersupply of electricity generation capacity.

Senator PRATT —We have talked about delay versus early action. To what extent do you believe that other developed countries are already moving faster than us? Where do we sit in terms of the consequences of that?

Ms Quinn —I am not an expert in the international negotiations or the international environment, so I would defer to my Department of Climate Change colleagues who more closely monitor these developments. It is my general perception that since we finalised our report in October there has been quite a lot more action in the international environment in some cases confirming arrangements that we anticipated and in other cases going a little bit further. There was the election of the Obama Administration and the announcement of specific targets in countries, in particular the announcement of targets in developing countries, such as South Africa, which is a new development. This is the first time that some of the developing countries have put on the table some views about what they might do.

I would expect that over the next six months there will be increasing announcements of policies that people might have been considering in private in the lead-up to Copenhagen. There is a bit of a difference between the negotiating positions. It is also true that the EU scheme has announced a new set of arrangements. Countries such as the UK are looking at what they are doing within the European scheme, and there is also a lot more action behind the scenes.

Senator PRATT —That is real in terms of how things are moving along. Lastly, I would like to ask you about comparisons between the consequences of not acting on climate change and previous economic reforms such as the reduction of tariffs. For example, in both cases there are real dangers that the Australian economy, by not responding to changes and challenges presented by developments in the global economy is at risk. By endeavouring to shelter ourselves from these changes what does it mean in terms of our global competitiveness?

Ms Quinn —One of the things that we found in our economic modelling is that, once the world takes on emission pricing, there is a shift in competitiveness within the Australian economy. Interestingly, some of our key export sectors were found to be quite competitive in an emission constrained world. For instance, our iron and steel sector is very efficient at using energy relative to some of the comparators overseas. Once people faced an emission price some of the Australian sectors improved their global share of trade. This was the case in iron and steel. It was the case in coal. It was also the case in some of the crops in particular as well. For instance, Australian farmers typically use significantly less fertiliser than their compatriots in the United States. If there was a common price on fertiliser in those countries Australia would improve its competitiveness.

The important transition issue for the Australian economy is what will be the competitive structure in a world with emission pricing and how do you get there over time through transitioning arrangements? It is certainly the case that all of the economic modelling undertaken in Australia suggests that Australia continues to grow and that there are shifts in comparative advantage but Australia continues to prosper even with emission pricing.

CHAIR —Senator Bishop.

Senator MARK BISHOP —In your discussion with Senator Xenophon some time ago you were talking about the impact on growth and social costs. You constantly referred to three sets of modelling data. Can you tell me whether the data inputs that gave you the finished modelling product is a static document or is it updated? Is the modelling data updated regularly on account of changes in both the domestic and the international economy?

Ms Quinn —We updated it through time for the publication of the report so that when the report was finalised it was the most recent information. We do ongoing analysis within the Treasury. We have a modelling unit that looks at various things at various times. It is an ongoing matter as directed by the government.

Senator MARK BISHOP —In terms of the changed economic scenario over the last 12 months because of the GFC, are data inputs to your modelling adjusted regularly to take into account that changing economic environment?

Ms Quinn —If we were to do more modelling we would update things. It depends on what we are being asked to do at different times.

Senator MARK BISHOP —Have you been asked to update it since the GFC?

Ms Quinn —We have not been asked to examine in detail the implications of the GFC through the suite of economic models that we used for the report.

Senator MARK BISHOP —You have or you have not?

Ms Quinn —We have not. That is largely because we would not expect it to change the aggregate economic results significantly.

Senator MARK BISHOP —That is largely because of what?

Ms Quinn —As stated in the report, we are looking at trend growth in the economy and the world economy. What is very important in the emissions space is what is happening to the emissions intensity of growth through time and the sectors of the economy where that is occurring. A reduction in growth initially and then a stronger than expected growth, sort of a cyclical adjustment in output, would not change the economic results.

Senator MARK BISHOP —We do not know whether the current crisis is a cyclical event or a structural event in terms of medium and long-term consequences, do we?

Ms Quinn —No, we do not.

Senator MARK BISHOP —That is right.

Ms Quinn —Most people looking at this and forecasting in detail are expecting this to be largely a cyclical event.

Senator MARK BISHOP —Is it Treasury’s view that the current GFC is a cyclical thing?

Ms Quinn —It is the IMF’s view.

Senator MARK BISHOP —Is it the Treasury’s view?

Ms Quinn —I would have to defer to my colleagues who look after the economic forecasting details.

Senator MARK BISHOP —You are the one that is referring to cyclical propositions.

Ms Quinn —I can refer to the International Monetary Fund analysis.

Senator MARK BISHOP —I am not interested in the IMF at the moment. I am interested in the Treasury’s view.

Ms Quinn —The Treasury’s view will be updated in the forthcoming budget.

Senator MARK BISHOP —When was the data assembled for the modelling we are discussing now?

Ms Quinn —The report was published in October and the modelling was finalised shortly before that.

Senator MARK BISHOP —Has it been updated since?

Ms Quinn —Various aspects of modelling have occurred. We look at things every day but, no, there has not been an update to the report published.

Senator MARK BISHOP —In that time the government has had two stimulus packages and is talking about another one in the May budget.

Ms Quinn —Yes.

Senator MARK BISHOP —But there is no current updated modelling on the effects of the GFC that have been released?

Ms Quinn —No, that is true, but—

Senator MARK BISHOP —Thank you. That is all.

Ms Quinn —But I am just saying that the fact that output is lower than expected and then higher than expected is unlikely to impact significantly on the carbon price, because the CPRS scheme allows the banking of permits. It would just mean that there are more permits banked now and used later. Similarly, what is important is the structure of the economy. It is the case that in the analysis that we did we had the fall off in the commodity prices, which is going to be most affecting the sectors of the economy that are growing at the moment; that was captured in the economic modelling. In terms of the structure of the CPRS and the key things that matter for the economic costs, it was our judgement at the time in October—and it remains our judgement—that the GFC would not significantly alter the economic costs as reported in the modelling out to 2020 and 2050.

Senator MARK BISHOP —You are telling me that the government’s view is that the GFC would not have any impact on the long-term output in terms of this discussion we are having?

Ms Quinn —No. What I am saying is that it is the view of those people who put together the modelling report, and the analysis using the economic modelling, that the long-term economic consequences for Australia of placing a price on emissions is largely unaffected by cyclical variations in output.

Senator MARK BISHOP —If worldwide growth contracts by 1½ or up to 2½ per cent in the next three to four years, as has been forecast by various international organisations, and that comes into this country as well, with flow-on consequences that manifests in a decline in GDP growth or negative GDP growth, are you saying that is going to have minimal impact in terms of this debate?

Ms Quinn —No. What I am saying is that in placing a price on emissions over the long term, effecting the transformation of the Australian economy, that transformation is unlikely to be significantly affected by cyclical economic events over a short period.

CHAIR —We will have to move on. Senator Cameron, we are very tight on time so you need to be quick. I have a couple of questions that I would like to finish off with.

Senator CAMERON —Are you aware of an economic report released by David Pearce this morning?

Ms Quinn —I have seen newspaper reports briefly this morning.

Senator CAMERON —Were you given an opportunity to peer review the report?

Ms Quinn —No.

CHAIR —So, the federal government put its modelling out for peer review before it released it?

Senator CAMERON —Do you know whether there are any carbon prices or tariffs announced in terms of this review?

Ms Quinn —My understanding is this was a review undertaken by David Pearce of the CIE for the opposition to examine the CPRS, and as such it does not contain any economic modelling in and of itself in relation to the economic costs. It talks about the different policy frameworks that they have reviewed, but it does not contain any additional economic modelling in that report.

Senator CAMERON —Is this a political debate, not an economic modelling one?

Ms Quinn —It is around the policy decisions before the parliament as opposed to undertaking economic modelling of the different options.

CHAIR —My understanding is that the Treasury modelled its white paper, not the CPRS itself. Is that correct?

Ms Quinn —The Treasury modelling came out in October 2008, which was prior to the white paper. The Treasury modelling looked at the parameters announced in the green paper and examined the implications. The modelling report was commissioned largely for the government to have information on the table, and for people in the Australian economy to have analysis on the table ahead of discussions around the medium-term target range. That was the primary purpose of the analysis in the report.

CHAIR —What is the impact of the difference between the CPRS and the instructions that were given to you for the modelling? How does the CPRS itself, as it has been proposed in its draft release, impact on the modelling?

Ms Quinn —The main differences between the analysis that was undertaken in the modelling and the white paper announcements were around the emission intensive trade exposed sectors. It is the case that the arrangements in the white paper were altered such that more transition assistance was provided to emission intensive trade exposed compared with the green paper proposals. There was also a lifting of the limit on importation of foreign permits and a more comprehensive analysis of the revenue being provided to household assistance and other transition assistance arrangements through the CCAF and the ESAS, the various government mechanisms.

In general, more generous assistance to emission intensive trade exposed sectors changes the distribution between industries, and typically in the modelling we find that providing assistance to emission intensive industries slightly increases the overall income loss to the Australian economy, but it is not significant. The main issue is between sectors. More assistance to the emissions intensive trade exposed sectors means that more economic cost is borne by sectors that do not get that transition assistance.

With respect to the difference between the recycling of revenue, we assumed that the revenue raised by the sale of permits went back to households as a lump sum, whereas the government has articulated in the white paper allocation to different households. That changed the distribution within households, but once again would not significantly alter the economic costs as measured in the economic modelling.

The lifting of restrictions generally lowers the economic cost of achieving an emission target in Australia. The restrictions placed in the modelling did not bind in two of the models used but did bind in a third, and lifting those restrictions does reduce the economic costs in the order of between 10 per cent and 20 per cent over time because Australia has access to low-cost abatement. In general, the aggregate economic costs as a result of the changes between the green paper and the white paper would not be expected to be very large at all, but there would be different distributional implications for both households and for sectors.

CHAIR —Have you been asked to do any modelling on those differences between what you have actually modelled and what the government has put into place?

Ms Quinn —That is a matter for the government.

CHAIR —You have not been asked to do any modelling on that. I want to specifically come back to the point that you made about those that receive more assistance and then the cost being borne by those that do not receive assistance within industry sectors. Senator Milne asked you a question about the impact of the RET and the exemptions that major emitters might get for that. I have expressed some concern during this process that no modelling has been done and there is no idea effectively of the impact on agriculture from the impact of the CPRS on the manufacturing sector of agriculture. Agriculture is truncated at farm gate. It is left out. We have heard yesterday from the meat processing sector that they are going to have significant imposts placed upon them but effectively would not qualify for permits. They will have to pay for the costs of carbon, and similarly with the milk processing sector, which is as energy intensive as cement manufacture. There is no understanding of that—

Ms Quinn —There has been modelling. We certainly looked—

CHAIR —ABARE has told us that they have not modelled that. We have that in writing in a question on notice. They have not modelled the impact on agriculture from the manufacturing sector of agriculture. They have told us that. The CIE has told us that its modelling does not include that. It says it cannot be done. There is no understanding of what that impact is going to be.

Ms Quinn —It could be an issue about precisely what you are talking about. My understanding of the ABARE work, the CIE work and our work is that the meat products industry and the dairy processing industry are contained in the ABARE work that was updated for the outlook conference earlier in the year.

CHAIR —ABARE has given us evidence and stated that it does not include that. The CIE has also given us evidence and said that it does not include that. If the major emitters are going to receive exemptions from the RET, those energy intensive sectors of agriculture—in processing—will have to bear the additional cost of that along with Australian households, because the cost of the RET has to be borne somewhere through the economy. If the major emitters are out, the cost to everyone else goes up. The impact on agricultural processing, which is completely truncated from agriculture, is going to be passed back.

Ms Quinn —I just draw your attention to the—

CHAIR —It is going to be more intensified in areas that are not subject to the exemptions. If COAG gives exemptions today, the agricultural processing sector is going to cop a larger slice. It is a fact of the system.

Ms Quinn —I have before me page 24 from the Agriculture and the Carbon Pollution Reduction Scheme (CPRS): economic issues and implications, from the ABARE publication Insights in February this year. They do have processing of meat, processing of other food and processing of milk industries in that economic modelling. That does look at the implications of what the CPRS might do to those sectors.

CHAIR —Yes, but you tell me what it does to the agricultural sector itself? The Department of Agriculture quite astoundingly told us that there will be no impact on agriculture because it is not in. My view is that the government has absolutely no idea what is going on with respect to agriculture with attitudes like that coming out of departments.

Ms Quinn —The ABARE report also looks at the implications while agriculture is not covered. It does analyse, in detail, the industry sectors in the agriculture sector and says what they would expect to happen to the agriculture sectors in the absence of it being outside the scheme between 2010 and 2015. That is also on page 17. There is a table that has those numbers.

My understanding is that this analysis is quite comprehensive and does cover the implications if agriculture is out. It also looks at the implications of, and has much more detail on, disaggregating the meat processing and dairy processing from the input side, so that you can get a feel for what is going to happen through the process chain in agriculture. It also goes on to look at the economic implications if there were absolutely no abatement opportunities in the sector. That report was produced by ABARE and I thought it was quite comprehensive.

CHAIR —ABARE has given evidence to us here.

Ms Quinn —I understand they referred to this article.

CHAIR —I think we understand very well what their evidence is. Also, Mick Keogh from the Australian Farm Institute gave evidence to us, and he again said that he is not aware of any modelling that actually covers the impacts of manufacturing.

Ms Quinn —I would draw his attention to the ABARE report as well.

CHAIR —I think he is very well aware of that information. We need to come to a close.

Senator BOSWELL —I have a question.

Senator MILNE —I have some questions to put on notice.

CHAIR —You might have to put it on notice, Senator Boswell.

Senator BOSWELL —This will take about 30 seconds.

CHAIR —Senator Bishop promised me one minute and we went for a bit longer.

Senator BOSWELL —I will give you a commitment.

CHAIR —We will go to questions on notice. I have just one final question. You mentioned the projections of ABARE for forestry growth on agricultural land. ABARE appears to be stepping back from its projections in respect to that. In fact, it has said in evidence to this committee and at estimates that those estimates are on the high side. I would be interested to know the impact of a reduction in those estimates on what happens with the modelling and the projections of carbon reduction expectations by the government.

Ms Quinn —ABARE undertook the analysis for the report on the implications for land use change, so moving land from activities and increasing forests both through environmental plantings and forest plantation activity. That was the first time such analysis had been undertaken in Australia. As is the case with any first-time analysis, you can always think of ways to improve things over time. We thought it was very important to include—as least as good as we possibly could do at the time—analysis about that sector, given its importance in reducing emissions over time. Similarly, we included information for the world, which is very unusual in international modelling, because of the importance of the carbon sink potential. It is the case that, if subsequently down the track there is less abatement opportunity in the forestry sector through land use change, more abatement would have to either occur within Australia or be purchased from overseas.

CHAIR —Thank you. Obviously there will be some questions on notice.

Senator IAN MACDONALD —Can I put mine on notice. I will be 10 seconds.

CHAIR —Don’t break your promise to me.

Senator IAN MACDONALD —It is important that we understand how useful modelling is. Can you tell us what modelling Treasury did before the last budget and how useful that has been to the government in managing the economy subsequently?

CHAIR —That is on notice. Thank you for your evidence this morning. We appreciate your appearing before us. We will now move on to witnesses from the Australian Youth Climate Coalition.

[9.56 am]