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Emissions trading and reducing carbon pollution

CHAIR —Good afternoon. Welcome to the hearings. I invite you to make an opening statement.

Mr Evans —Just by way of introduction, ACCI considers a market based mechanism, such as the CPRS, can be effective in reducing Australia’s greenhouse gas emissions. We support an emissions trading scheme that is efficient, generally broad based, and minimises structural adjustment costs to protect the competitiveness of business.

However, we do have some concerns. The first of those is that the economic and transitional costs associated with the implementation of a CPRS have not been fully identified. The global financial crisis has limited the capacity of business to prepare for and to operate in a carbon constrained economy, and there is an absence of firm international commitments to date. There are also limits on the availability of low emission energy options and a limited capacity for Australia to change its energy generation profile over the medium term without substantial economic costs.

In summary, though, our firm view is that the continuing global financial crisis warrants a delay in the introduction of the CPRS until there is evident economic recovery. That is not just the ACCI saying that. Our recent survey of investor confidence published by the Australian Chamber of Commerce and Industry has found that 48 per cent of businesses considered that the CPRS should be delayed beyond 2010, with 28 supporting the current timetable.

I would also like to clarify the position from which we speak at this Senate inquiry and the basis of representations that we have made with respect to the CPRS. The impact and consequences of a CPRS across the breadth of Australian business will have varied consequences. Much of the debate to date, and the draft legislation, necessarily deal with the covered sector, those large emitters required to purchase and acquit permits. We support the direction of their representations and the compensation measures designed to assist the EITEs in the strongly affected industries. However, what has received less focus is the detail of concerns expressed by small and medium sized enterprises. Treasury modelling indicated an increase of up to 24 per cent for electricity prices and up to 15 per cent for gas prices. These increases are in addition to the soon to be adopted regulatory increases in prices, which may be of a similar scale. These increases will have a substantial impact on SMEs, especially those that are energy intensive, some of which are also trade exposed and have limited capacity to pass on costs. It is a major flaw in the analysis to date that there is no detailed economic modelling that addresses this impact.

ACCI also considers the CPRS will have an even more serious cost impact on SMEs and uncompensated households in regional Australia. We had hoped the Treasury modelling exercise might have addressed the impact of higher energy prices on a sectoral, firm or regional level. However, the fact that they did not do this added to uncertainty. In fact, the analysis stated that the models were not suited to examining short-term adjustment paths, so it may understate costs from changing capital to retraining workers.

That is the underlying theme, if you like, of our submission. It is that the introduction of the CPRS will have major cost impacts on business, but particularly small and medium sized enterprises. They are not part of the scheme. They will not be buying and acquitting permits. However, they will suffer as a result of energy price increases.

As I said, these small to medium sized enterprises can also be trade exposed. Therefore, they have limited opportunity to potentially pass on costs. From that point of view, a 25 per cent increase in energy prices, such as electricity, is a substantial increase in prices. Through our survey work over the last 12 months we obviously noted that SMEs are a stressed sector at the moment. All economic indicators of sales, profitability, investment and employment indicate a decline in trends in those figures, so the capacity to absorb, to the bottom line, a price increase of that magnitude is indeed very difficult. It is true that SMEs are varied in their composition. Some are purely in the services sector, as you would appreciate, and therefore have low energy costs as a proportion of total operating costs. However, some have very large energy costs as a proportion of total operating costs. I cite one example of a member of ours in the food processing industry that has substantial cold storage facilities. Up to 30 per cent of his operating costs are indeed energy related. An entity like that is particularly concerned about a 25 per cent increase in prices, particularly where this entity is trade exposed and trades internationally, and that could have a devastating impact on the overall viability of that company.

That basically concludes my introductory comments. We do recognise that in the CPRS scheme that the government has introduced the Climate Change Action Fund to address some of the issues in relation to small and medium size enterprises by way of education initiatives, and I would point out that, by and large, SMEs across Australia are not fully informed about the implications of a CPRS or have not necessarily modified any of their business activities as a result of the CPRS. One of the purposes of the Climate Change Action Fund is directed at that issue of education and also provides some capital allowance associated with allowing SMEs to improve their energy efficiency. The government has recognised that. What we are concerned about, of course, is the adequacy of that fund, and indeed to date there has not been any rigorous analysis of the economic impact of the CPRS on SMEs. To that end, we have commissioned our own research. We are in the process of doing that now and hope it will be available later this month. It will look at particular sectors in food processing, car component, and plastic and chemicals industries to drill down at a firm level to see what the impact of increasing energy prices might be in those particular areas.

CHAIR —Thank you. Senator Cameron.

Senator CAMERON —Did you do a similar economic analysis of the impacts on any of those areas that you just mentioned on the US free trade agreement or the Thai free trade agreement?

Mr Evans —With respect to?

Senator CAMERON —The costs impact on those industries.

Mr Evans —In the context of climate change?

Senator CAMERON —No, in the context of effects and impacts?

Mr Evans —I personally did not so, no, not that I am aware of. I was not actually involved in it, but my recollection is that there was economic modelling done at the time of the introduction of those free trade agreements to try to measure the economic impact.

Senator IAN MACDONALD —That work—

Mr Evans —It actually predated my employment.

Senator CAMERON —I do not want to go too far off the track. I am just wondering why you did economic modelling on climate change but you did not do it on the free trade agreements.

Senator IAN MACDONALD —They called for it.

Senator CAMERON —They have a similar economic impact on your membership.

Mr Evans —With respect to trade liberalisation, we think there are unambiguous benefits of free trade, and with respect to the implementation of the CPRS, where we may unilaterally adopt something the benefits are less clear.

Senator CAMERON —Are you associated with the Confederation of British Industry? Do you have linkages with them?

Mr Evans —We have no formal linkages with them. We may liaise with them. We might meet with them, but there are no formal linkages.

Senator CAMERON —They are the pre-eminent voice of business in the UK, just as you claim to be the pre-eminent voice for business here.

Mr Evans —That is correct.

Senator CAMERON —Could you comment on the position that the CBI is taking where they say that the government needs to speed up the pace on action on climate change drastically if it is to meet its target to cut greenhouse gas emissions by 80 per cent by 2050? The CBI Director-General, Richard Lambert, states that the global economic crisis is not a reason for inaction on climate change. How does that position fit with yours? In looking at your public position on it, it is completely at odds with the CBI. What is the situation now?

Mr Evans —For a start, there is no way I speak for CBI and there is no way I agree with everything that the CBI does. The economic profile of Britain is that it is not an energy intensive economy like Australia’s. It is a service economy. The economic and energy profile of Europe is entirely different from the circumstances we face.

Senator CAMERON —You say the profile is different, but there are similar power stations, manufacturing industries, confectionary industries, food industries, and all the industries you are claiming that you are going to do an analysis on here. There is some similarity in terms of sectors of industries.

Mr Evans —My understand of their energy generation profile is, for example, they have nuclear energy. They have a lower carbon emission energy profile than we do. They have a great reliance on gas. They had a major push to gas over the last two decades. Coal is not a large factor with respect to British energy.

Senator CAMERON —They are fitting five power stations with carbon capture and storage as a result of the last budget, are they not?

Senator IAN MACDONALD —Nuclear?

Mr Evans —I accept your advice on that.

Senator CAMERON —I cannot understand why it is good for British industry to deal with the long-term question of global warming, yet in Australia short-termism is alive and well. Your submission is not to do it because we have got an economic crisis. Their position is that it is not an excuse.

Mr Evans —I am not saying that. We are indicating if you want to compare the two countries the carbon intensity of their generating sector is substantially different from ours. Go across the channel to France and they are up to 80 per cent nuclear. People have different amounts of skin in this game and Australia, as you know, happens to be an energy intensive economy reliant principally on fossil fuels, and so any penalty on those fossil fuels will flow through to business. We accept that and we accept the notion of a CPRS. We are saying that we have particular concerns. We want to identify what those costs are for business. Also, we want to be sure that we do not act unilaterally so we unambiguously face a disadvantage.

Senator CAMERON —I did not think unilaterally. There are carbon schemes in place in 27 countries around the world.

Mr Evans —We hope that is the case. We hope there will be international agreement on this so that we do not suffer a particular economic disadvantage.

Senator PRATT —Are people overemphasising this idea of Australia acting alone? It is already clear how many countries are moving forward in this regard.

Senator IAN MACDONALD —Chair, I have a question rather than a debate.

Senator HEFFERNAN —Well get to some facts. No-one wants to talk about the fact that coal-fired power stations do not have to emit any CO2.

CHAIR —Senator Heffernan, your interjection is not helpful. Senator Cameron.

Senator CAMERON —I am finished.

CHAIR —Senator Macdonald.

Senator IAN MACDONALD —Thank you for your submission. As always, it was well thought through and well prepared. Who is doing your work that you were telling us about?

Mr Evans —We have engaged a company that was founded in France, Castalia consultants. They have done similar work to this on industries in New Zealand when there was consideration of introducing an emissions trading scheme in that country.

Senator IAN MACDONALD —We look forward to hearing about that.

Mr Evans —Just by way of clarification, they specialise in looking at it sector by sector, rather than the economic modelling of the type that Treasury might do.

Senator IAN MACDONALD —Treasury did not bother about sector by sector or region by region, which was devastating to a lot of your members up in the Bowen coalfields, for example, where I come from. I wanted to raise with you whether the ACCI or anyone else that you know of has done any work on the taxation impacts of trading in carbon certificates and so on? It was suggested to me by a witness after they had given evidence that this was a huge sleeper for industry and business.

Mr Evans —That is true. We have only done limited work on that. There probably are other organisations that have done more, perhaps the Taxation Institute, for example. We are obviously concerned about that issue. There are the implications for CGT, stamp duty and GST. We do not want this to be another cost impact on business. As you can appreciate, with a tax of such complexity as capital gains tax it is never quite clear what the consequences of particular transactions might be for a CGT liability. That is something we would certainly want clarified. We have an independent policy with respect to CGT and that is that it should be a stepped rate and phase out over a period. Our policy with respect to transaction taxes is that we oppose transaction taxes and there should be an attempt at state level to eventually abolish those taxes.

Senator IAN MACDONALD —In relation to income tax and capital gains, do you know whether the government has given any thought to that? Have any of your discussions with the government or the department led you to—

Mr Evans —We have only had limited discussions with them on that, but that is also part of the Henry tax review as well.

Senator PRATT —The Insurance Council of Australia has outlined some pretty dire consequences in regard to our capacity to adapt from the impacts of natural disasters and other consequences of climate change unless we put significant adaptation strategies in place. I would like to know what the ACCI is doing to assist its members to adapt to the consequences of climate change, and what impact you see increasing insurance premiums having on members.

Mr Evans —With respect to what our membership are doing, as you know, we are a peak body. Our members are the state chamber and also various national business organisations. Many of the state chambers have programs to help business try to quantify, for example, the carbon intensity of their emission profile and they have various tools in place where they can assist business. They also advise on energy efficiency programs. Many of our chambers do that, but also many of our specific members.

Senator PRATT —I should have made my question a little clearer. In relating my question to insurance, it is really about what your understanding is of the impacts of climate change. The Insurance Council of Australia outlines them as a high usage of temporary accommodation, higher rates of unemployment and failed businesses, higher reliance on welfare, higher rates of migration away from areas where natural disasters happen, a larger number of health issues, growing crime rates, and greater probability of further impacts to that community when you get another climate change disaster. These are the sorts of impacts that the Insurance Council of Australia outlines are the impact of climate change that we are going to need to deal with. Yes, we need to mitigate in order to prevent that from happening, and it is good to see that you acknowledge that needs to happen. My questions relates to how we get business to take those issues seriously that the Insurance Council has identified; these sorts of impacts are going to have a very dislocating effect on business in Australia if climate change brings those kinds of impacts with it?

Mr Evans —I take what you say as to what the Insurance Council claims. We may not necessarily agree with the sorts of catastrophic predictions they make and, if those sorts of events are happening, the extent to which they are attributable to climate change. That is their view. It may not be the view of all of business.

From the point of view of business, at the end of the day our organisation represents all of business. It does not represent particular sectors that are looking after their own commercial interests, be it insurance or banking. Their views may well differ on climate change policy from ours, because they are not large emitters in their own right.

Senator PRATT —You do not think climate change will have that kind of impact on the local environment and therefore business?

Mr Evans —I am in no position to make those sorts of predictions.

CHAIR —Senator Boswell.

Senator BOSWELL —We have heard from the big end of town, the cement industry and iron and steel makers. Have you done any modelling on what this is going to do to small and medium enterprises?

Mr Evans —You are right; we span all of business, including large and small. The area of particular interest for us with respect to the CPRS and the ETS is in fact small business. To that end we are concerned by the lack of modelling results as to the impact of increases in energy prices on Australian business, especially small businesses, and the impact it might have on their capacity to trade or be competitive. To that end we have commissioned work. We do not have the results of that work yet. We have identified certain sectors that are known to be energy intensive and also trade exposed but small businesses to assess what the impact of increasing energy prices is on those sectors. They include areas such as car component manufacturing, food processing and the plastic and chemicals industry, many of which are occupied by smaller businesses.

Senator BOSWELL —You do not have any modelling at all on that?

Mr Evans —No, we do not. We are hoping to provide that. You would be aware that the Treasury modelling, to the extent it looked at this issue, mentioned that the price of electricity and gas would go up by 25 per cent and 14 per cent respectively, I believe, which are quite significant increases and that is what makes us particularly concerned.

Senator BOSWELL —The government has announced today that the big emitters will be carved out—the aluminium industry and the EIT industries—of RET. You need to reduce the emissions that those people use in the target or the people left, small business, will be paying extra. Have you considered what the RET will do as well as the ETS?

Mr Evans —Our fundamental position on the RET—and we are not involved in the detail of it—is that if you have a properly functioning CPRS or ETS then the requirement for a renewable energy program is that much less. We would have thought that if you have a properly functioning ETS those sorts of schemes should, in fact, be less relevant and just merely add to potential costs in the system and the compliance burden.

Senator BOSWELL —The Electricity Supply Association of Australia released a report on 14 April on the financial global crisis and the energy supply sector, which raised serious concerns about the government’s ETS. With this global downturn it would be very difficult to hold an ETS and an RET and live through that, together with a global downturn. Some people believe that the global downturn is the right space to get into an emissions trading scheme. Could you elaborate on that?

Mr Evans —We do have concerns about what the impact of the global financial crisis might be on the timing and the introduction of the CPRS. As you would appreciate, small businesses in particular are very stressed at the moment. All their growth indicators are down and declining, such as their sales and their profitability. It is not a particularly good time in which to add a layer of cost burden to small business.

One of the particular issues of concern to us is that the requirements to properly deal with the CPRS may involve capital expenditure on behalf of businesses rightly to improve their energy efficiency, but at this time of difficulty in accessing capital, especially for small business, it is not a very good time. If a small business operator went to a bank and sought money for an energy efficiency measure that would have a payback over 20 years, that would not be a credit proposal received very well by an Australian bank at the moment. It is hard enough getting working capital let alone something that might have a payback over a 20- or 30-year period.

Senator BOSWELL —This is important, and I think you are our only chance to get information regarding the impact on small businesses. We do not need to know the names, but you could model a small business that is in manufacturing or food processing that employs 20 or 30 people and has 20 electric motors? What is the impact on that business? I think you are really the only group that can deliver that information for us. When could we expect you to get that?

Mr Evans —We are hoping that by the end of the May we will have that information. The other thing we would also like to do in that process is look at the impacts on a manufacturing enterprise such as you mentioned in regional Australia. Obviously, energy inputs are higher in regional Australia than they are in urban areas.

Senator HEFFERNAN —Are dairy farmers included in your portfolio?

Mr Evans —No.

Senator BOSWELL —They may come under food.

Mr Evans —Food processing potentially.

Senator HEFFERNAN —At $17 a tonne they are insolvent.

Senator BOSWELL —It is important that we get that information, because we are just dealing with the very big end of the market here at the moment. The evidence we have had is from the big companies such as Caltex and the cement industry. We have not drilled down into the small business area.

Mr Evans —We would acknowledge that is a gap in the analysis to date.

Senator BOSWELL —How do we get that, Mr Chairman? Do I put it on notice that I would like the information on small business to come to us when it is available?

CHAIR —Certainly.

Senator BOSWELL —We will certainly provide that to the committee and any interim advice that we get from our consultants.

CHAIR —Senator Furner.

Senator FURNER —How many members/constituents do you have?

Mr Evans —With respect to small business?

Senator FURNER —No, how many members do you have overall?

Mr Evans —We have something in the order of 35 to 36 direct members of peak organisations. Our members are the state chambers and large business organisations. They represent over 300,000 Australian businesses.

Senator FURNER —When you sent the survey out and asked the two questions about the CPRS how many returned those surveys? You said you had a 48 per cent indication of opposition to it, but out of those 300,000 how many bothered to respond to the survey?

Mr Evans —We have the longest running survey since 1961 with the Westpac Banking Survey of Industrial Trends, and typically we get over 1,000 responses to it.

Senator FURNER —How many did you get? I do not want to use an average.

Mr Evans —I understand the survey of investor confidence had 1,200 respondents.

Senator FURNER —So, 1,200 out of 300,000 is not really a good return, is it?

Mr Evans —If you look at business surveys that is the sort of figure.

Senator FURNER —I do not know about that. Before you sent out the survey did you explain to those businesses what the CPRS meant to them?

Mr Evans —Businesses are aware of what an emissions trading scheme is.

Senator FURNER —How are they made aware? If you are the peak business body how are they made aware? Are you advising them? Are you conducting seminars to explain what the CPRS is?

Mr Evans —Our membership is very active and wide ranging. It provides policy detail through our membership.

Senator FURNER —So, you have not conducted any seminars to explain what it means?

Mr Evans —ACCI itself has not other than through our normal engagement with the media and so on.

Senator FURNER —How many of your member businesses would be directly liable to hold emission units under the CPRS?

Mr Evans —How many would be?

Senator FURNER —Yes.

Mr Evans —Our members span both large and small. All of the household name businesses in Australia would most probably be members in the respective state where their head office is and also throughout the country.

Senator FURNER —We have heard from the ACTU, which indicated that it is developing a building skills network to address the challenges of climate change. What do you perceive as being the skills needed to reduce Australian emissions?

Mr Evans —From the point of view of business?

Senator FURNER —Yes.

Mr Evans —Business certainly needs to be cognisant of the government’s CPRS proposal. Primarily they need information. Amongst small businesses, as you indicated, there is limited knowledge about the operation of the CPRS and what its impact might be on their businesses. That is one of the most important communication requirements. They also need to know what energy efficiency measures they might be able to undertake and there is a role for government and also business organisations in providing that level of information.

Senator FURNER —Will ACCI be involved in the training of those skills requirements?

Mr Evans —Through our members that may well happen. For example, one of our members is the Master Builders, and they have very industry specific issues. That will differ from other organisations such as the Consulting Engineers of Australia. Through our membership they will be tailoring their programs suitable to their type of industry that their membership may be involved in.

Senator FISHER —I wanted to ask about ACCI’s concerns regarding the commencement of the CPRS. I am sure that you are aware that in a separate Senate hearing today ACCI gave evidence that delaying, in particular, the implementation of Fair Work legislation and delaying the impact of cost increases to employers and business would not stop the negative effects of those increased costs to business. How is this consistent with ACCI’s advocacy that the CPRS be delayed?

Mr Evans —I did not follow the thread of your question there.

Senator FISHER —Essentially ACCI is saying, on the one hand, delaying implementation of a bad thing does not stop something being a bad thing. However, in respect of the CPRS are you saying, ‘This is a bad thing. Don’t do it’, or are you saying, ‘This is a bad thing. Do it a little bit later’?

Mr Evans —We now have an opportunity brought about by the slowdown in the economy for the government to consider the CPRS in more detail and how it can be implemented more smoothly for Australian business. We support the notion of a market based mechanisms such as the CPRS and the ETS, but we believe that there are a few steps that need to be taken before its implementation should go ahead. One of them is, firstly, to identify what the gaps in the modelling are and what those costs are for business. Also, one of the major issues that we do have is the level of international engagement at the moment. We would expect, over time, that there will be more commitment and the prospect of international agreement will be that much greater. Over that period we believe the circumstances will be much more fitting for the introduction of a CPRS. We believe in a market based mechanism and the CPRS is one way in which to do that. We do not think the timing, at the moment, is necessarily good for Australian business, because we really have not identified what the costs are for small and medium sized enterprises, in particular, as we have said in our submission.

Senator FISHER —Are you saying this CPRS must be changed if it is to be implemented or are you saying this CPRS is suitable for implementation without change but that it just be done later?

Mr Evans —We think that time will give the opportunity to change some of the details associated with the current arrangements and perhaps even looking at the viability of other models.

Senator FISHER —If I hear you correctly, you have said that the CPRS, as currently proposed, should not be implemented?

Mr Evans —We do not think that Australian business, at the moment, is in a position to absorb the impact of a CPRS in its current form.

CHAIR —We will have to move to Senator Feeney.

Senator FEENEY —One of the reasons you have put for advocating delay is the global financial crisis and the pressure it has put on Australian businesses. I have two questions for you with respect to that proposition. The first is: can you set out for us what you think appropriate economic conditions are for the introduction of a CPRS? If you know the conditions that you think are unsuitable then tell us the conditions that you say are suitable. The second question with respect to that is: do you think the principles you articulate in answering that could then be appropriately argued by other nation states and other jurisdictions?

Mr Evans —We would expect the suitable time for the introduction of the CPRS would be when the economy recovers and assumes its normal trend growth.

Senator FEENEY —Normal trend growth?

Mr Evans —When there is normal economic activity. We do not think, at the moment, that business is particularly stressed. Profitability measures for business, particularly SMEs in Australia, are at the lowest levels since the early 1990s. Investment is at low levels due to constraints such as capacity to access finance from banks. We do not think these are the types of conditions that would allow for the smooth introduction of a CPRS and allow business to do it in a proper way.

Senator FEENEY —Once again, you have successfully articulated the conditions that you think should not prevail. I want to hear what you say some of the benchmarks are?

Mr Evans —Strong growth in the economy.

Senator FEENEY —What would you define that as?

Mr Evans —In terms of percentage annual growth?

Senator FEENEY —Yes.

Mr Evans —An economy that has achieved its normal growth, for example, above three per cent.

Senator FEENEY —I would argue there is no such thing as normal growth. The economy is intrinsically cyclical.

Mr Evans —If you look at the growth in the Australian economy over the last 10 years—

Senator FEENEY —We find out what the average is over the last 10 years, we strike that number and then the ACCI say that is the number that needs to exist before an emissions trading scheme is implemented. Is that what you are telling us?

Mr Evans —What I am saying is when there are clear signs of economic recovery.

Senator FEENEY —The second part of my question is: would it then follow that you think that is a reasonable proposition for other jurisdictions to argue?

Mr Evans —Yes, and in fact that is what will happen.

Senator FEENEY —Do you think it is arguable that Australia is better placed than its trading partners with respect to the GFC?

Mr Evans —Insofar as our economy as an advanced country is not necessarily in as bad a position as many other countries.

Senator FEENEY —I guess that is what I am saying.

Mr Evans —Relatively, we are better placed.

Senator FEENEY —Is it, in fact, arguable that Australia vis-a-vis its trading partners is in a period of advantage at the moment?

Mr Evans —Perhaps, but that is just an argument for us unilaterally acting.

Senator HEFFERNAN —The top five are insolvent globally so you are working off a low base. The US, Japan, Korea and the UK are completely insolvent, so that is what you are modelling against.

Senator FEENEY —That is reinforcement from an unexpected quarter. I have finished.

Senator HEFFERNAN —They, of course, are not going to be included the way they are. We do not know whether farmers are in or out, whether we are Arthur or Martha. The US is saying they are going to include farmers in the credit side and not in the debit side. Has there been discussion about that here? Has there been any discussion about the MBD submission, which gives zero emissions from power stations and which is being commercialised up as we speak? No! That changes our cost of production for aluminium by 60 per cent in terms of the carbon tax.

CHAIR —Senator Heffernan, I—

Senator HEFFERNAN —I would like to ask some questions along those lines.

CHAIR —The time for this witness has expired and we are now moving on to our next witness. Thank you, Mr Evans, for appearing before us today. We appreciate your assistance. I think there might be a couple of questions on notice, and we appreciate your assistance with those questions.

Mr Evans —Thank you.

Senator CAMERON —I would like to table three documents that I mentioned earlier. They are from the Australian Energy Regulator, the Australian Energy Market Commission and the National Electricity Market Management Company and go to the issue of security of Australia’s electricity supply.

CHAIR —Does anyone have any objections to tabling those documents? Thank you.

[4.03 pm]