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Senate Select Committee on the Scrutiny of New Taxes
17/05/2011
Carbon tax pricing mechanisms

LINNEGAR, Mr Matthew, Chief Executive Officer, National Farmers Federation

McELHONE, Mr Charles, Manager, Economics and Trade, National Farmers Federation

Committee met at 09:07

CHAIR ( Senator Cormann ): I declare open this third hearing of the Senate Select Committee on the Scrutiny of New Taxes inquiry into a carbon tax. These are public proceedings, although the committee may hear certain evidence in camera. The proceedings are governed by rules set by the Senate, copies of which have been given to witnesses. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. I ask all present to switch off their mobile phones.

I welcome Mr Charles McElhone and Mr Matthew Linnegar from the National Farmers Federation. Mr McElhone, would you like to make an opening statement?

Mr McElhone : Yes. I will ask Mr Linnegar to make the opening statement.

Mr Linnegar : The National Farmers Federation reinforces its opposition to any carbon tax proposal that places the Australia farm sector’s competitive position at risk. While pleased that agriculture has been excluded from the direct impacts of the carbon tax, the NFF maintains its concern about the proposal’s potential detrimental impact on the Australian economy and farmers’ ability to compete on international markets.

It is sometimes misconstrued that because agriculture’s direct emissions have been excluded from the government’s carbon pricing plans the sector will be unaffected. This could not be further from the truth. Up to 45 per cent of a farmer’s inputs are either energy or energy dependent—all costs that will increase under the government’s plans.

Australian farmers argue that the degree of trade exposure of our agricultural sector is on the extreme end of the spectrum. We are not proud of the fact that we can argue that the inability of the Australian farm sector to pass on additional costs through the supply chain is almost second to none. We are very much price takers in the marketplace. Therefore, heightening our sensitivities to increased costs. Australian agriculture is a sector that has spent considerable effort over many years to extract costs from our system in order to remain competitive on international markets, upon which we depend.

It can be clearly argued that developing new mechanisms which unilaterally add costs for Australian farmers, in the absence of appropriate trade exposure compensation provisions, would fly in the face of ongoing efforts to stay ahead of declining terms of trade for agricultural commodities. Not only do farmers export approximately two-thirds of everything they produce; they also do so in the most distorted sector of all international merchandise trade. As a farming community having one of the highest levels of exposure to international markets, it is important to be mindful of this when drawing comparisons with other international carbon mitigation schemes, such as that in the EU, where high levels of government intervention within agricultural markets exist.

For many farmers options to reduce their exposure to these energy related costs or to attain offsets through the carbon farming initiative are limited or nonexistent, despite the claims within some sections that farmers will be the big winners in this debate. Despite our support for the carbon farming initiative, the NFF is under no illusion that it will revolutionise revenue streams for farmers, at least in the short to medium term. The reality is that the carbon farming initiative offset credits will still require participants to adhere to stringent obligations and will deter many farmers from engaging in the scheme. This will particularly be the case in the absence of a significant injection of research and development funding into abatement opportunities and measurement. The NFF is therefore seeking firm and upfront assurances that the indirect cost impact of any carbon tax, particularly those derived from fuel and food processing, will not impinge on farmers’ competitiveness on the international and domestic markets upon which they depend. Thank you.

CHAIR: Thank you for your opening statement. How will the price on carbon not impact on your international competitiveness in the absence of an appropriately comprehensive global agreement on pricing carbon emissions as was envisaged in Copenhagen but not achieved?

Mr McElhone : We are not sure how it will not at this stage and that is why we are opposed to it, until it can be demonstrated that it can. We have not seen a way of delivering a trade exposure compensation provision, particularly for our sector, and the indirect costs, to offset those total costs. We are open to looking at new ways of doing it, but we have not seen anything on the table as yet that will give us those assurances.

CHAIR: What was your position on the final version of the CPRS back in 2009? Was that enough to protect your international competitiveness, given that there was no international agreement on pricing carbon?

Mr McElhone : No, it was not enough. We were still concerned about the indirect cost impacts from the carbon pollution reduction scheme, although we recognised that from the initial proposal it had come a long way. We still felt exposed on those international markets.

CHAIR: What were your main outstanding areas of concern?

Mr McElhone : The major area of concern for us was the treatment of fuel. We recognise that under the CPRS there was a three-year moratorium. There was a one-year moratorium on heavy vehicle transport. Despite that moratorium there was still uncertainty about what would happen into the future after those moratoriums had completed. This was an extreme exposure to diesel fuel use from the agricultural sector and particularly those regional communities in which they exist. That is one of the major concerns and, just reinforcing that, even with a moratorium in place there is still uncertainty about where that cost exposure will come from.

The other major one is food processing. As Mr Linnegar mentioned in his opening statement, we are price takers in the market. Price increases through the supply chain inevitably come back down the supply chain on to the farmer instead of going the other way on to the consumer, and from that perspective we are quite concerned, particularly for industries such as the red meat industry with meat processing and dairy. We export a lot of dried milk powder. That drying process is quite energy intensive. We also feel quite exposed in other things like sugar milling, grain milling and so on.

They are the two major areas, but obviously this is intended to be quite a broad-sweeping impact. Fertiliser use is also an area that inevitably will be effected as well as some of the embedded costs within tractors, machinery and those kinds of inputs which go into our system. I reinforce that fuel and food processing are the two major areas of concern for the farm sector.

CHAIR: What sort of compensation were you offered as part of the CPRS, given that we are told that the final version of the CPRS scheme was the starting position for the carbon tax that is now on the table?

Mr McElhone : For starters, agriculture’s direct emissions were excluded. That was being proposed, and we are pleased that has been carried over into the next part of the debate. On top of that, the three-year moratorium for consumer consumption of fuel and the one year for heavy vehicle users.

CHAIR: So, there was no compensation specifically for the increase in the cost of electricity, diesel fuel, fertiliser and so on?

Mr McElhone : Outside that moratorium period there was no compensation for direct diesel use. There was a provision in there for food processing, with about $150 million towards helping food processors to transfer on to lower energy intensive energy sources. But we had some issues with that, being in mind that the dairy industry, in particular, had already converted in many instances or wherever available on to natural gas. In terms of that money to help them convert, they were not really sure what they could convert on to, because they had already moved away from some of the coal-fired electricity power usage. There were complications in terms of how that $150 million for the food processing sector was going to be addressed.

CHAIR: You raise an important point there. Would it be fair to say, given that fuel, energy and fertiliser costs are a significant input cost of your industry’s production now, that you already have an incentive to minimise those costs in any event irrespective of a carbon tax?

Mr McElhone : Absolutely; that is right. It is a significant cost component of our business. As I mentioned, 45 per cent of our costs are energy or energy dependent. If we can reduce that cost component, it would have a very positive impact on our bottom line.

CHAIR: On top of the already significant costs that you are trying to minimise, how much additional scope is there for minimisation of costs or minimisations of emissions, for that matter, beyond what you are doing now, or is it just going to be a straight cost that will hit your bottom line?

Mr McElhone : That is what we are very concerned about; that this becomes just a cost of agricultural production—a new cost on top of your existing cost, which you are unable to offset. As I mentioned, particularly in light of the international market for agricultural goods, which is so distorted, the margins for Australian farmers, who are some of the least government supported in the world, in terms of our producer support estimates, we feel very exposed on those.

CHAIR: You say you were not happy with where the CPRS ended up, but there was a lengthy and robust process in the last parliament. We had the Garnaut review, the green paper, the white paper, the Treasury economic modelling, the exposure draft, the CPRS bill version I and CPRS bill version II, yet the government did not land in a position that was adequate to prevent an impact on your international competitiveness. How confident are you that you can take it to a point where a carbon tax is workable?

Mr McElhone : We have real concerns. Our members have genuine concerns about where this debate is going and the potential for this mechanism to not have a bearing on their ability to compete. Those concerns remain strong.

CHAIR: You talk about international competitiveness, but have you done any modelling on how the carbon tax is likely to impact on your costs of production? Can you put some figures on it?

Mr McElhone : Yes. We are in the process of doing some modelling through individual commodities. We are looking at ABARES’s farm input data, and overlaying various scenarios in terms of carbon prices to really give a better perspective on some of the cost impacts. Obviously a lot of that work was done from the CPRS period, but with the new debate we are keen to update that data and make sure that it is new, fresh and relevant for the current debate. We expect to have that data within the next fortnight.

CHAIR: Would you be prepared to provide that to the committee?

Mr McElhone : Absolutely.

CHAIR: Thank you. In the current economic circumstances with the high Australian dollar and various other challenges, how is the carbon tax in Australia, in the absence of comparable action in other parts of the world, going to impact? You have touched on some of the European dynamics and where the market there is distorted, but you work in a global market and you are obviously quite exposed, yet you are not treated as a trade-exposed, as I understand it, because normally you are excluded. Can you talk us through some of the broader economic dynamics within which a tax on carbon would come into play for your sector?

Mr McElhone : Just talking about the trade exposure of our sector, a lot of sectors have come out talking about their sector’s trade exposure, but as Mr Linnegar has said, we believe ours is second to none. It is the most distorted sector of international trade. It works on very fine margins and, as mentioned, we have spent 30 years really reforming our sector to take costs out of our business and become very lean in our business. That is the only way that we have been able to stay ahead of declining terms of trade within the agricultural commodity markets. From that perspective, the potential for new costs to come on to our system flies in the face of the big reforms that we have seen on our domestic economy, such as the tariff reform agenda and the trade liberalisation agenda, which were really about taking costs out of our system. In reality, this debate is about putting a new cost on to the systems to send a price signal. So it is from that perspective, of an industry that is so dependent with two-thirds of our production going on to those international markets. It should be said that no other international country outside New Zealand is looking at putting any kind of serious constraints on their farm production systems. Even those such as the EU, which have an indirect exposure, are at the same time hiding behind quite severe tariffs and quota restrictions, which bring into question their exposure to the international market. This is the complexity that we are dealing with as agriculture. We have had such pressure on us to reduce our cost base for so long and even with that process our margins are very fine.

CHAIR: If I paraphrase what you are saying, past economic reforms were aimed at making Australia more competitive, whereas this is one that will actually make us less competitive internationally?

Mr McElhone : At the heart of it, it is about adding costs to the system to send that price signal, and that really places in jeopardy our competitiveness on international markets.

CHAIR: A lot has been said about the European emissions trading scheme. I was interested to read yesterday research which showed that the Australian scheme, as proposed, if it had a price of $25 a tonne—and today they are talking about $40 a tonne—would raise in three months what the European scheme has raised over six years for the whole of the EU. Would you care to comment about the proportionality of that?

Senator CAMERON: The government is talking about $40 a tonne?

CHAIR: There is talk today. There is a proposal reported in the Sydney Morning Herald today from a multiparty committee. There is a Deloitte report to the government.

Senator CAMERON: I just wanted to make that clear.

CHAIR: The Treasury Secretary has talked about a $26 a tonne price on carbon that would be the minimum required to achieve a five per cent emissions reduction in Australia by 2020. Let us just stick to the 25 figure. What is your view on that? The European scheme does not seem to be quite as tough as people might want to make us believe it is.

Mr McElhone : Absolutely. We are watching the European scheme and what is happening in the United States quite closely, as they are two of the major players in the international agricultural markets. Europe is an interesting one. We have seen analysis and have been quite interested in it from the broader perspective, but we also need to remember that in their scheme there is no transport fuel. Food processors are excluded from that scheme. They also have an already significant nuclear power generation industry. I understand that between 70 and 80 per cent of France’s power generation is from nuclear sources. Their indirect costs, particularly from countries like France, which are big in the dairy sector in particular, are not going to see the same kind of exposure that our agricultural sector will feel. On top of that, as mentioned, there are also those additional trade barriers, which are very much shielding their agricultural sector quite severely, regardless of what happens with their carbon pricing mechanisms.

Mr Linnegar : In essence, if any costs find their way through the system, despite fuel and food processing being excluded, they have the policy levers available to them to adjust.

CHAIR: That is in Europe?

Mr Linnegar : Yes, in Europe, to ensure that their farmers are not affected by any costs that make their way through the system. We also need to bear in mind that market and that system has now been in place in Europe for six or seven years and it still only covers about 45 per cent of their emissions.

CHAIR: Trade exposed industries get 100 per cent free permits.

Mr McElhone : Yes. I can add that we would not endorse moving down the European path of requiring quite significant trade distorting barriers at the border in order to try to offset some of the costs of your domestic policy response.

CHAIR: The key point is that the EU ETS is often used as an excuse in that if they can do it then we should be able to do it, but as you have pointed out, the circumstances are quite different. They have access to alternative energy sources which are low emission, like nuclear. By the looks of it, it raises significantly less revenue for the whole of Europe over a six-year period than we would raise in a year in Australia.

Mr McElhone : That is right.

CHAIR: We have 1.4 per cent of emissions and Europe has 14 per cent.

Mr McElhone : At the same time we also need to look at some of the non-carbon issues. I know that the Productivity Commission is going to be looking at the carbon policies generated by various countries, but it is also important to look at some of the additional factors that might shield their economy from some of the trade exposure impacts, and that is the at-the-border measures, which are already very distorting and probably will not be taken into account.

CHAIR: Both the government and the opposition support a five per cent domestic emissions reduction target. If you could take a pick as to how we achieve that, would your preference be for direct action or for a carbon tax?

Mr McElhone : We do not have a position on making a direct comparison. Obviously there is a lot of detail to be worked through in terms of the coalition’s direct action plan. We have had some discussions with the coalition on that, but it is fair to say that there is still a long way to go to understand a lot of the detail that is around that proposal, just as there is a long way to go to understand the details about the proposal of the government. We have pretty scant detail out there at the moment about that system.

CHAIR: So you no longer stand by the comment from the NFF from the Farm Trader Website:

It should be noted that the Coalition’s Direct Action plan in this area will offer up - front benefits to farmers that will not rely on the uncertainties around international carbon markets ( and with associated funding ) .

Mr McElhone : On the face of it, using market based mechanisms of a voluntary nature—using a carrot rather than a stick approach—we think is a much more appropriate way to deal with the agricultural sector in terms of carbon abatement. On a principle level, the coalition’s direct action plan seems to tick a lot of those boxes, but we would still need to work through a lot of the broader detail. The reality is that it is still looking at curbing emissions from the energy sector as well. We would still need to work through some of those details regarding what kinds of indirect impacts that would have in terms of our indirect costs.

CHAIR: Thank you.

Senator CAMERON: We seem to be doing this on a regular basis. Have you seen the recent CSIRO publication Adapting agriculture to climate change?

Mr McElhone : Is that the one where it says that at $36 a tonne the whole of the Murray-Darling Basin would be converted to trees?

Senator CAMERON: I have not read the whole thing. I am asking you whether you have read it.

Mr McElhone : I have seen a number of publications from the CSIRO. I am not sure I am talking about the exact same one.

Senator CAMERON: It is by Chris Stokes and Mark Howden, two senior CSIRO scientists.

Mr McElhone : I have read a number of publications from those people.

Senator CAMERON: Do you agree with the CSIRO that climate change is a major threat to agriculture?

Mr McElhone : We do not have a position on the actual climate change science. The reality is that Australian farmers deal with the climate every day. We are very aware of climate risk, but at the same time we are also aware of the risks from the policy to curb climate change.

Senator CAMERON: I am asking you about the science. Let us get it clear once and for all where the National Farmers Federation stands. You do not have a position on one of the biggest challenges to your industry; is that what you are saying?

Mr McElhone : We do not take a position on climate change and the science surrounding that. Our issue is around managing the climate change policy risk. In terms of climate change, the climate variability, farmers are acutely aware of it. Whether it is climate change, climate variability or other factors, we are dealing with it on a daily basis and we have for many years; no two seasons are the same. There is a lot of division within our membership on this issue. A lot of people are saying, ‘We’ve seen this before. It is nothing new.’ Others are saying, ‘We think there is some truth in it.’ There is a division there. From our perspective it does not matter. We are still dealing with the policy risk that is in front of us.

Senator CAMERON: Surely from a scientific point of view, from a leading employer federation in this country you have to have a view as to whether climate change is real or are you just going to show no leadership and try to dodge the issue?

Mr McElhone : There are many views within our membership. As I said, a lot of it is saying, ‘We don’t believe in the climate change science’ and others are saying, ‘We do.’ Our position is that it is not an issue for us. We are dealing with the policy risk in front of us.

Senator CAMERON: I find it quite unbelievable and bizarre that the National Farmers Federation, who are supposed to be looking after the interests of the agricultural sector, do not have a view on what scientists and economists around the world are saying is one of the biggest challenges to the agricultural sector in history. You do not have a view?

Mr McElhone : Our view is dealing with the policy risk in front of us. We believe that has a potential to be a greater risk than the climate change risk itself.

CHAIR: You seem to be getting bogged down in this. The witness has answered the question.

Senator CAMERON: I will ask the questions.

CHAIR: And I am chairing this meeting.

Senator CAMERON: You will not be determining what questions I ask.

CHAIR: I am chairing the meeting, so please move on.

Senator CAMERON: You cannot stop me asking relevant questions and you will not.

CHAIR: Mr McElhone has answered the question.

Senator CAMERON: He has not answered the question.

CHAIR: He has, but maybe not the way that you want him to answer it.

Senator CAMERON: He has not answered the question. In terms of the overwhelming bulk of scientific fact that is out there and the economic approach to say that we should deal with this through a market process, you say, as a federation, that you do not have a view on the factual matter that you are trying to deal with. You are only trying to deal with the policy outcome. Don’t the facts of what the policy outcome is trying to deal with make a difference on what your view should be?

Mr McElhone : From our perspective, we do not think it does and we have taken that position. Your concerns have been noted, but that is the position that we have.

Senator CAMERON: It is not my concerns. The Farmers Federation are responsible for a great deal of the carbon pollution in this country and are not prepared to look at the science, which I think is a bit bizarre, to be honest.

Mr McElhone : We are not saying that we do not look at the science. As I said, there is a multitude of views about the science, and from that perspective we have taken the position that we are going to deal with the policy in front of us.

Senator CAMERON: Would you accept the overwhelming scientific view is that climate change is real?

Mr McElhone : From the scientific view, from the IPCC, absolutely. The strength in numbers is there, but that has not influenced our position.

Senator CAMERON: Are you anti-science in the National Farmers Federation?

Mr Linnegar : We are not anti-science.

Senator CAMERON: What are you?

Mr Linnegar : Farmers have been at the forefront of reducing emissions over many years, whether that is changing practices to store more carbon in the soil, through minimum tillage and these sorts of things, to other advances made through—

Senator CAMERON: I have heard these speeches from the National Farmers Federation ad nauseam, to be honest. They are just simply a front for you to avoid the reality of climate change and to take a position that is scientific in your point of view. You have taken an anti-scientific point of view.

CHAIR: Where is your question?

Senator CAMERON: I am wondering why.

CHAIR: We are not here for speeches from you, Senator Cameron.

Senator CAMERON: Can you deal with the position as to why the overwhelming scientific view is that climate change is real and you are supposed to be representing the industry, but you will not take a position on it?

Mr Linnegar : We recognise the science and the breadth of science that is out there. We recognise that there is a climate risk, both now and in the future. We are doing what we can to prepare ourselves and the industry for that risk, and that includes taking into account the policies that are put in place from government to try to deal with that. That is what we are dealing with.

Senator CAMERON: That is at least a bit better position than has been put that you do not have a position. You recognise there is a problem and you are going to deal with the problem, which is good. You say there are two areas out there, and that is so-called direct action. Both the government and the opposition have a position of a five per cent reduction by 2020. CSIRO has said that to achieve a five per cent reduction using direct action you would need to have 500 million hectares of land, 65 per cent of the land mass, in the agricultural sector. Have you had a look at that information from the CSIRO?

Mr McElhone : As I said, we are going to continue to engage with the coalition on their direct action plan. We have real concerns about the potential for land use change. Whether it is the carbon farming initiative, direct action or what have you, there are concerns within our system. You can talk about the science, but there is a lot of science out there talking about the opportunities from soil carbon and what can and cannot be done. We are sitting here saying, ‘Let’s look at all of these issues and the potential opportunities and risks that emerge from those debates.’ One thing we know is there is a big information gap, and the R&D requirements around the carbon abatement challenge are going to be quite significant into the future.

Senator CAMERON: Do you agree with the CSIRO that to get a significant carbon reduction through agricultural means you would have to put 500 million hectares of land into use in reducing carbon to get to the five per cent reduction?

Mr McElhone : We have not done the analysis on those figures and, to be frank, it is not relevant. From our perspective, our issue is what contribution agriculture can make to the broader debate. In terms of meeting five per cent targets, 20 per cent targets or whatever the target is, that is a matter for governments. We are talking about where agriculture can make a contribution in that challenge.

Senator CAMERON: Tell me the problems with the direct action plan from your point of view?

Mr McElhone : As I said, there is a broad framework in place about the direct action plan. We have had some discussion with the coalition, but there is going to be a hell of a lot more detail to run through in terms of looking at the potential opportunities for agriculture to play a role through that.

Mr Linnegar : There are three main areas, as there are with any policy, be it the government or opposition in this case and that is, firstly, the potential to load more costs into our system.

Senator CAMERON: As a direct action?

Mr Linnegar : Either way.

Senator CAMERON: I am asking as a direct action.

Mr Linnegar : It has the same relevance. Firstly, there are the costs. Secondly, there are the opportunities for the agricultural sector and, thirdly, the potential of the policy to actually reduce emissions and what part agriculture can play. Those three elements are the same.

Senator CAMERON: Do you agree with the estimates of CSIRO in relation to the contribution to carbon pollution from the agricultural sector?

Mr McElhone : Is that the 500 million?

Senator CAMERON: No, I am talking about the amount of CO2 emissions from the agricultural sector. What is your estimate on that?

Mr McElhone : You cannot just look at agriculture from a CO2 emissions perspective. We are a biological system which has sequestration as well as emissions. I think that has been unfortunately missed in this whole debate. When we are talking about the Kyoto carbon accounting rules, unfortunately it is a construct that has been designed with the stationary energy sector in mind, which does not appropriately take into account the sequestration opportunities through various sectors such as agriculture. It is a complex equation, but in terms of the emissions profile it is incorrect to look at agriculture purely within an emissions construct. We need also to look at it through that sequestration opportunity that is available.

Senator CAMERON: Do you concede that you make a contribution to carbon pollution?

Mr McElhone : Not necessarily; if you take into account the broader carbon cycle where you look at the full carbon cycle of the agricultural sector, it becomes a very finely tuned equation.

Senator CAMERON: So, all the scientists have it wrong?

Mr McElhone : No, the scientists do not have it wrong. The scientists are looking at it from that broader biological system perspective, and there is a whole raft of scientific work that demonstrates that agriculture is making a far lower contribution to the net equation on greenhouse gas emissions that has been purported.

Senator CAMERON: What is your view as to the overall impact of a price on carbon on the overall economy? A price in the lower end of $20 to $30; you are saying you are looking at these scenarios. What is the overall impact to the economy in the work that you are doing?

Mr McElhone : We are focusing unashamedly on the impact on agriculture. We are the National Farmers Federation. Clearly the focal point from our analysis and the work that we have undertaken is really where agriculture fits within this broader equation.

Senator CAMERON: So, your analysis does not take into account any of the broader economic impacts and it is simply from a narrow Farmers Federation approach?

Mr McElhone : That is why the National Farmers Federation is here, to provide input from the farm sector in terms of the impact of various policies on us as a sector.

Senator CAMERON: But do you need to understand the linkages back into the general economy?

Mr McElhone : Absolutely, and from that we are saying there is that indirect cost exposure. There are clearly broader concerns that have been raised from other sectors of the economy as well, in terms of Australia moving ahead of the rest of the world in carbon abatement and what we do in the absence of an international carbon price. There are those same principles. There are concerns across the whole of the economy, particularly with a trade exposed economy such as ours. We say that agriculture, in terms of trade exposure, is probably second to none, but that is not to say that there is not trade exposure through the broader economy, and in terms of having a population of 20 million, in order for many of our domestic industries to build and grow we depend on those international markets. Taking unilateral action is obviously quite concerning on a broader economy perspective.

Senator CAMERON: You are not running that nonsense that Australia is taking unilateral action, are you?

Mr McElhone : We will wait to see on some of the impacts on the Productivity Commission in terms of comparing the various programs that are in place. As I said, we are focusing more on the agricultural perspective. We note there are comparisons between the EU carbon price and what is being proposed here on the domestic Australian economy. We acknowledge there is a lot of work happening around the world, but the question is: what are the equivalents of those?

Senator CAMERON: I am glad you at least acknowledge a lot of work is being done around the rest of the world—

Mr McElhone : That is undeniable.

Senator CAMERON: and you do not simply keep running the political line from the coalition that we are out in front and the only ones doing something.

Mr McElhone : It is the equivalence.

CHAIR: You have one more question.

Senator CAMERON: I will have a few questions on notice for you. But, in terms of the issues Qantas is now facing in Europe, do you understand what is happening with Qantas?

Mr McElhone : Vaguely.

Senator CAMERON: Vaguely?

Mr McElhone : Yes.

Senator CAMERON: I would have thought you would have been looking at it very closely. The EU is saying it will put border adjustments in place.

Mr McElhone : Yes, that is right.

Senator CAMERON: What are the implications if we do nothing on pricing carbon and we face border adjustments in Europe and other countries on our agricultural exports?

Mr McElhone : Clearly we would be very concerned if carbon were used as a further way to convolute an already convoluted international trading environment. When we look at this, I think it is clear that protectionism is rife internationally and various countries are using various ways to try to justify various protectionist barriers. We have seen it. We have already seen carbon retaliation on Australian produce, with the food moulds debate in the UK. It is completely misleading, but still using carbon as the justification for taking those measures. I have no doubt that we will see more of that and that is a real concern for us, but how much of that is actually justified on carbon and if it is not carbon what will it be?

Senator CAMERON: I do not have a lot of time. I am not asking for the justification. If there is a reality out there that we are now seeing border adjustments, I am asking, what are the implications for the agricultural industry if we do nothing to price carbon and other major economies say, ‘That’s unfair, because you are one of the highest per capital polluters in the world so you have to do something about it’? You can take it on notice, if you like, but I would like you to turn your mind to what the implications are for your industry and your members if border adjustments begin to be put in place?

Mr McElhone : As you know, when it comes to carbon abatement, a lot of it is linked to productivity gain. Australian farmers are some of the most efficient in the world, and if the international community wants to go down the path of trying to compare and equate different production systems around the world and put border adjustments, we have a very strong and defendable argument to mount to demonstrate that that would be completely unjustified, with or without a carbon price in place.

Senator CAMERON: Good luck with the argument.

CHAIR: Just as it is not right to say that the rest of the world is doing nothing, it is not fair to say that Australia is doing nothing. Bearing in mind that the Treasury modelling assumed the US would have an emissions trading scheme in place similar to that proposed in Australia and that China would have an emissions trading scheme in place by 2015—all things that of course are not happening—in the absence of an appropriately comprehensive global agreement to price emissions, how effective do you think a price on carbon in Australia is going to be in reducing global emissions? I am not talking about domestic emissions in Australia, but global emissions.

Mr McElhone : Clearly we are a very small percentage of global emissions. It would be much more advantageous and appropriate to see an international response, and in the absence of that it poses a considerable risk.

CHAIR: You also said that Australian farmers are among the most efficient in the world when it comes to energy intensity and emissions intensity. If you make overseas more polluting farmers more competitive and they take market share away around the world, then you might reduce emissions in Australia, but you are going to actually shift them to other parts of the world and potentially increase them in other parts of the world. Surely that international agreement is pretty significant there, is it not?

Mr McElhone : The leakage issue, as you said, is a key concern for us and that would be a perverse outcome for global emissions if that were to occur. Moving down that path in the absence of a global carbon price is a real risk. We have not seen a lot of the detail around Australia’s proposed scheme, but we are really concerned about that angle.

CHAIR: When you look at direct action, which proposes to reduce emissions in Australia in a way that does not shift emissions overseas, the impact is quite different when it comes to the test that you talked about of whether it reduces global greenhouse gas emissions; is that fair? I see Mr Linnegar nodding.

Mr Linnegar : Yes.

Mr McElhone : I would say that on the face of it with the broader principles we would agree with that, but we need to look through some of the detail and we are committed to doing that with the coalition.

CHAIR: There was a comment on concerns about more costs into your system. Direct action cost is capped, because program costs are capped. To what extent will that potentially put more costs into your system?

Mr Linnegar : What we are saying is that at the moment we do not understand the full detail of what is being proposed to understand whether additional costs will—

Senator CAMERON: I am happy to keep the witnesses here for another five minutes or as long as they want.

CHAIR: As you know, you came here seven minutes late, which is why we started late.

Senator CAMERON: That cannot stand on the transcript. I came here and indicated to you that I had to go back to my office. The Farmers Federation had not turned up, and you agreed that I should go back, so do not play those games.

CHAIR: We started at 9.07 and I am concluding the hearing as per normal practice. I have a final question, just because of the question that was asked about direct action and the use of agricultural land. You are aware, of course, that the proposal in terms of planting trees is to use low value land and not prime agricultural land for those sorts of activities?

Mr McElhone : The question is: define ‘marginal land’ for me? That is still a complexity that we have to work through. Marginal to you might not be marginal to others. There might still be a productive opportunity out of all land. It is an area of sensitivity that we are prepared to work through.

Senator CAMERON: Has the sky fallen in over New Zealand with the price on carbon?

Mr McElhone : Agriculture is not covered yet by the scheme, but they are intending for it to come in in 2015. At that point, let us watch.

Senator CAMERON: Yes, but with all the arguments that you are raising you are not covered either, and the sky has not fallen in as yet.

Mr McElhone : We have a very close dialogue with the Federated Farmers of New Zealand. I can tell you that they are extremely concerned about where the debate is going in that country.

Senator CAMERON: I am not asking about where the debate is going. But, with the price on carbon in New Zealand now, are farmers managing under the current circumstances to be competitive and productive?

Mr McElhone : My information from the New Zealand federated farmers is that it is too early to really see the full impact of what is going to happen with regard to the New Zealand scheme.

CHAIR: I thank the National Farmers Federation.