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SELECT COMMITTEE ON FUEL AND ENERGY
08/12/2008
Issues relating to the Fuel and Energy Industry

CHAIR —Welcome everybody. I declare open this public hearing of the Senate Select Committee on Fuel and Energy. The Senate has referred to the committee matters associated with fuel and energy, including the price of fuel, the impact of an emissions trading scheme, regulation and taxation arrangements and alternative fuels. The committee is due to report to the Senate on 21 October 2009. Today the committee is focusing mainly on the impact of an emissions trading scheme.

I welcome you all here today. This is a public hearing, and a Hansard transcript of the proceedings is being made. Before the committee starts taking evidence, I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public but, under the Senate’s resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera.

If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, also be made at any other time. I would also ask witnesses to remain behind for a few minutes at the conclusion of their evidence in case Hansard staff need to clarify any terms or references. I remind people in the hearing room to ensure that their mobile phones are either turned off or switched to silent. Finally, on behalf of the committee, I would like to thank all those who have made submissions and sent representatives here today for their cooperation in this inquiry.

I welcome Mr Hooke, Mr Pearson and Mr Coates from the Minerals Council of Australia. Do you have any comments to make on the capacity in which you appear?

Mr Hooke —I am the Chief Executive Officer and also the Company Secretary of the Minerals Council of Australia.

Mr Coates —I am currently Chairman of the Minerals Council of Australia’s standing committee on climate change. I am also Chairman of Xstrata Australia, Chairman of Minara Resources, a director of Santos and a director of Downer EDI Mining.

CHAIR —Thank you. I invite you to make a brief opening statement and then the committee will ask questions.

Mr Coates —Thank you. We welcome the opportunity to appear before the committee on behalf of the Minerals Council of Australia. The Minerals Council of Australia is the peak body for Australia’s exploration, mining and minerals processing industry, with member companies producing more than 85 per cent of Australia’s annual mineral output.

As you are aware, Australia’s mineral sector is a major contributor to the Australian economy and accounts for more than seven per cent of annual GDP. It employs 130,000 Australians, mostly in regional and remote areas. It provides half of Australia’s exports and it contributed nearly $20 billion in tax receipts in 2007-08.

Our remarks will focus on the committee’s consideration of the impact of an emissions- trading scheme on Australia’s minerals and energy sector. The MCA supports the introduction of an emissions trading scheme as part of an integrated policy approach which includes (1) a global protocol involving commitment from all major emitters, (2) the development and deployment of low-emission technologies and (3) a measured transition to an emissions trading scheme, with the resultant cost burdens comparable with schemes being developed by our competitors.

The development and implementation of these policy tools must be closely synchronised. If we move too fast on an emissions trading scheme, without progress on a global protocol or technology solutions, then the policy simply will not work. The Australia economy will suffer and the environmental impact will be negligible and possibly even negative. For example, a unilateral 20 per cent reduction in Australia’s emissions by 2020 will impose real pain on the Australian economy but reduce global emissions by only 0.2 per cent. Under such a scenario, global emissions would plummet from 57.2 gigatonnes of CO2 equivalent to 57.06 gigatonnes of CO2 equivalent.

We have some key concerns with the green paper approach. Firstly, the lack of alignment of the three policy pillars is the core of our concerns with the proposed approach. The proposed emissions trading scheme is not calibrated to other elements of an affordable and effective climate change policy. The cost burdens imposed by an ETS are not comparable with or linked to actions by other major emitters and take no account of the limited availability of low-emission technologies. The proposed trading scheme is out of step with schemes being developed around the world. It goes further and faster than any comparable scheme either in existence or being contemplated. It is the world’s most aggressive emissions trading scheme.

The scheme proposes full auctioning, other than 20 per cent of free permits for a small proportion of Australia’s trade-exposed sector. The result is that Australian businesses will pay the highest carbon costs in the world by a very wide margin. No other emissions trading scheme has ever embraced full auctioning of permits, let alone from the start of the scheme. For example, for the first eight years of the EU scheme, more than 98 per cent of permits will be issued free. Only after 2013 will some European firms have to buy some of their permits.

An average Australian firm emitting one million tonnes of CO2 per annum will face carbon costs of nearly $100 million over the four years from 2010 to 2014, and over that same period an EU firm with the same emissions profile will pay less than $6 million. Identical firms located anywhere else in the world—in the US, China, Brazil and other key competitors, such as Indonesia in the case of coal—are likely to face no carbon constraint over this period. Even firms classified as emissions intensive and trade exposed will pay much more than their international competitors. That is here in Australia. By comparison, an EU firm classified as emissions intensive and trade exposed will pay no carbon costs until 2020 at the earliest.

I should also add that methane, the gas generated by the fugitive emissions from coalmining, will not even be covered by the EU scheme before 2020 at the earliest. In other words, most nations are taking a measured, cautious approach to the introduction of emissions trading. All of the emissions trading schemes in operation or being developed around the world adopt a phased approach to auctioning, and we would be happy to provide the committee with details of these schemes at any point.

We continue to be surprised and disappointed that the government has not adopted a similar approach. It is very hard to see how the government can deliver a soft start to the scheme with the design it has developed. The interim targets under discussion will be extremely difficult to achieve. After all, even a five per cent reduction on year 2000 levels by 2020 will mean something like a 250-million-tonne CO2 equivalent reduction on a business-as-usual projection. To put that into context, Australia’s total current electricity generating industry produces about 200 million tonnes and, even at a five per cent reduction on 2000 levels, we are talking about something like 250 million tonnes on business as usual.

Finally, the lack of flexibility in the proposed emissions trading scheme means it is ill suited to adjusting to the sudden global economic downturns like the one confronting Australian business today and which will likely continue well into 2009 and 2010. In the minerals and energy sector, demand is contracting rapidly. Prices are falling rapidly and competition for market share is more intense than ever. There has been a significant contraction in the world steel industry in recent months. It has been unprecedented the way the world steel industry has contracted, and that has flowed on into demand for nickel, demand for iron ore, demand for chrome and demand for coke and coal. It simply reflects the way the steel industry has contracted so rapidly. The adverse impact on our competitiveness will be obvious. The nature of this competition is such that Australia actually lost market share in the eight top trading commodities in the last five years, and that was before the major contraction.

In summary, the mineral sector does support the introduction of an emissions trading scheme as part of an integrated approach to climate change. Unfortunately, we do not have the three key policy pillars in place: first, we do not have a global protocol and we will not know whether we will get one until December 2009 in Copenhagen; secondly, whilst the government has made some positive steps forward on the development of low-emission technologies, there are still some practical and funding obstacles to be overcome; and thirdly, the proposed emissions trading scheme is not measured. We need to look again at ways to calibrate the scheme with international developments. A phased approach to auctioning is the most obvious way to achieve that.

Whilst these pillars are not aligned, there can be no certainty for business investment. Until we know whether or not we have a global protocol, investment decisions will continue to be deferred. If we move too fast without a global protocol, energy intensive businesses will adjust by either shutting down or moving offshore. If we move too fast without access to the technology solutions, we will simply be imposing a tax on the most competitive parts of our economy. Thank you very much for your attention.

CHAIR —Thank you very much, Mr Coates. You raise some very serious concerns in terms of the design of an emissions trading scheme as it is currently proposed. I suspect you would have had those sorts of discussions with government. Can you perhaps just talk us through the nature of those discussions and whether you are getting a sense as to whether you are being heard.

Mr Coates —I might ask Mr Hooke to respond to that, if you do not mind. From a personal viewpoint, we have had numerous discussions with government and I think they have heard what we have had to say. They understand what we have to say but I am not sure that we are getting the response we need. That is my personal viewpoint. I think we are too deadset on committing ourselves to getting this scheme away and setting an interim target rather than establishing a scheme which is part of a global protocol. That is the most important point.

CHAIR —You say we are too deadset. From your discussions, what do you think is driving the government to be that fixed on a particular deadline? Why do you think the government is so committed to 2010?

Mr Coates —It is clearly an election promise. The commitment was to have an emissions trading scheme in place by mid-2010.

CHAIR —So it is political?

Mr Coates —That is my belief, yes. That was part of the government’s policy platform.

Senator HUTCHINS —I am not sure Mr Coates can answer why the government—

CHAIR —No, but I asked him for his perspective.

Mr Coates —It is an opinion. You are quite right, I do not know what is in the government’s mind, but I do know that that is part of the government’s commitment.

CHAIR —But essentially, from what you have just been saying, you think that it would be better if we ensured that the design was right rather than stick to an arbitrary time line if that were not in the best interests of Australia.

Mr Coates —My personal belief on this scheme is that we need three things. We must first of all ensure that we get a global protocol. Secondly, in the design of the scheme, we must ensure that there is sufficient incentive to develop the current low-emission technologies and to encourage the development of new low-emission technologies. That is absolutely important.

The final thing is that we must take into account what is happening on a global basis. If we are going to start this scheme without a global protocol, then it must recognise that and our targets must correspond appropriately and the scheme must be designed appropriately. As I said, our position on the emissions trading scheme is quite straightforward: we do support it. We understand that and we want to make a contribution to climate change but it requires a global protocol to be effective and the design of our scheme must take that into account. That is the most important point.

Mr Hooke —First, we accept the concept of global warming; second, the minerals industry has transitioned quite significantly from being pigeonholed as the carbon lobby to an industry that clearly understands that it has a fundamental responsibility. There are plenty in the cheer squad of enthusiasts but they mostly have all care and little responsibility. Our role is to actually put into effect the kinds of requirements that are necessary for this country to move to a low-emissions economy, to do that in a way that is measured and to do that in a way that enables industries to adjust, hence the importance of the alignment of the three pillars. If any one of those pillars is out of whack with the other, then all you are ending up doing is charging a tax which goes to the bottom line, or negating the prospect of any real and tangible solutions, or putting the country in an economically disadvantaged position.

If you stop and think about it, if you do not have a global protocol but you have the technologies and the tax, then you are going out on your own. There are no prizes for unilateral disarmament in this equation. This is not like trade liberalisation, where protection damages primarily the protecting economy. Therefore, the government’s motives are quite legitimate—that is, that Australia can, will and should play a role in global leadership. That leadership must be affordable and effective.

There is absolutely no point in having the adverse impact whereby we set out on something that is overly ambitious and it becomes apparent to anybody looking across our shores that we have taken the risk of tanking our economy with the prospect of trying to actually do something meaningful. Australia’s emissions are small as a proportion of the global emissions. That is not a platform for doing nothing. It is a platform for understanding our proportionate responsibilities and where we fit in the global scheme. So the motives are honourable and the objectives are honourable.

There are few people who contest the concept of global warming. The science is still out in terms of the Earth’s ecological buffering capacity and what is a sustainable level of atmospheric concentrations of carbon dioxide, but few serious contenders out there argue the concept of global warming and most support the precautionary principle, which is that you do not need the science to smack you in the face before you do something. But again, if you have a price without the technologies, you have got to tax to the bottom line. If you have a price of carbon and you even have the technologies but you have no global protocol, then you have not negated the loss of international competitiveness to Australian firms and businesses.

Our view is that the time line for the start of an emissions trading scheme will look after itself if you get the framework right. Getting the framework right is the absolute, fundamental priority. We do not see the current economic downturn and turmoil as a platform or reason for moving off the start date, but we certainly see that as an added imperative to making sure that we have the framework right and that there is sufficient flexibility within that framework to adjust to the prospect of a global protocol, to adjust and pull the levers to be tighter on the trajectory to an emissions reduction target as new technologies become available, and that there is sufficient flexibility to pull the levers depending on the economy’s capacity to adjust.

CHAIR —Is it more important to get the framework right or is it more important to stick to a deadline of 2010?

Mr Hooke —With great respect, that is an academic exercise, because the start date will look after itself if you get the framework right. If you do not have the framework right, then you do not start it.

CHAIR —Has the Minerals Council of Australia reviewed the Treasury modelling of the proposed Carbon Pollution Reduction Scheme? Can you perhaps talk us through some of the conclusions.

Mr Hooke —Yes, we have. We have been disappointed in the Treasury modelling. We are disappointed because it conveys a perception to the community of: ‘A dollar a day and you can save the world.’ That is a bit misleading. We can spend a lot of days going through an academic exercise about the costs of building new plant and equipment for electricity stations and energy. We can have a lengthy discussion about what we think the assumptions ought to be on the costs of carbon capture and storage, which is a critical technology. In fact, without a clean coal solution, we just do not have a solution, particularly one that allows for retrofit. With China building a gigawatt of capacity every nine days, unless we have a capacity to retrofit technologies, then the consequences of that kind of expansion in electricity generation around the globe will be visited on generations to come.

But the real issue that we had with Treasury modelling was the assumption that the impact on Australia’s international competitiveness would be negated by the prospect of a global protocol, and I think the words were ‘other countries taking comparable action to Australia’s emissions trading scheme by 2010 for developed economies, by 2015 for China and by 2020 for India’.

That is, quite mildly, an heroic assumption. Anybody who follows the current negotiations internationally knows that that has got about a zero prospect and anybody who has had anything to do with international negotiations—and I have had a history in trade negotiations—knows that they are very difficult and complex areas and will require a great deal of skill. In the current economic environment, whilst we may well see merit in continuing the path that we have embarked upon in Australia, that is not universally and globally accepted as a platform for moving forward, so this is going to be a pretty tough call.

That is the area of modelling that has caused us great disquiet. We have undertaken our own modelling exercise, comparing our proposal. I might add, Chair: your earlier question was how have we gone in working with government? Pretty well. But we have been profoundly disappointed that the proposal we put to government, which we considered to be a rather simple amendment to the green paper, has been somewhat characterised as a complex alternative model. Nothing could be further from the truth.

We argued that we could take pretty well all of the design features of the green paper if the treatment of trade-exposed emissions-intensive industries did not degenerate into something akin to a GST food fight, where lines and arbitrary determinations were made between muesli bars and breakfast bars and cold and hot chooks, who is in and who is not, which is kind of where this debate has degenerated to. We suggested quite strongly that government ought not to visit on the Australian economy this kind of perverse inherent contradiction of, ‘We are actually trying to change industrial behaviour but we’re carving out the most intensive trade-exposed industries, and we are not actually requiring households to make adjustments but we’re going to compensate them for a change in industrial behaviour or in a consumption behaviour that we’re trying to change.’

We thought it was better that all industries were in from day one and that there was a phased approach to full auctioning, which would bring us into line with every other country that has in fact embarked upon an emissions trading scheme—the European Union, the Western Climate Initiative, US congress’s consideration of this, the Dingell-Boucher bill, the Boxer-Lieberman-Warner bill in the US. Every single country that is looking at a cap and trade system is doing so on a phased approach to full auctioning. As the chairman said earlier on, Europe will be where we were proposing to be at the 15th year of their operation of their emissions trading scheme.

The bottom line is that it provides an opportunity for accommodating both the policy and political imperatives of moving forward with a framework that has sufficient flexibility and workability in it. We have modelled our proposal, and it comes out that every single factor that you would expect to be critical, such as GDP, investment, employment, real after-taxes wages and exports, will be higher under a phased approach to auctioning.

CHAIR —Have you got some figures or some detail that you might provide to the committee?

Mr Hooke —We can, once those figures are public, if you do not mind.

CHAIR —Okay.

Mr Hooke —We have written to two ministers, giving them the broad outline, and we are happy to table that.

CHAIR —Are you in a position to table that today?

Mr Hooke —Yes, we can table that today, but we will not table the full details, and the reason for that is not because we are being cute; we just have not finished the modelling. Our first phase of modelling was against our assumptions and it was our assumptions of when we think a global protocol is going to come into force. Now what we are doing is modelling Treasury’s assumptions against our proposed alternative, but it is an amendment. This is not about turning the Titanic around. This is about turning the Titanic off the iceberg. So we said to government, ‘We’ll take just about every aspect of the green paper.’ We have gone through all that—all the growth scenarios, all the cut-offs, all the margins, all the bits and pieces—except for these arbitrary determinations between trade exposed and emissions intensive. The green paper really only pays lip service to a definition of ‘trade exposed’, because it is actually really about emissions intensive.

Senator HUTCHINS —Mr Hooke, will the cabinet be aware of these detailed figures before they make a determination on the white paper? Is that your intention and is that possible?

Mr Hooke —My understanding is that that has already happened, and we certainly wrote to Ministers Ferguson and Wong ahead of the consideration of the framework of the white paper, but we will not have the detailed figures.

Mr Coates —You asked whether the detail would be available to cabinet, didn’t you?

Senator HUTCHINS —Yes.

Mr Coates —The senator asked whether the detail would be available to cabinet before the—

CHAIR —And, of course, if you want to influence government making a sensible decision, it is all in the timing, isn’t it?

Mr Hooke —Yes. My understanding is that the timing of the white paper characteristics has been determined. The white paper is due out next Monday—the 15th—and we have certainly proffered the information that I have put on the table here in terms of the broad outline. We were not able to get our modelling completed in sufficient time. There is actually a shortage of modellers, believe it or not; they are all tied up.

Senator HUTCHINS —On catwalks or something, are they?

Mr Hooke —Yes, something like that! Cute. So the answer is: yes and no.

CHAIR —You are not able to provide us specific figures in terms of impact on employment, impact on GDP, the sorts of things that you have raised? There is nothing more specific than what you have given us so far that you can share with us?

Mr Hooke —The answer is no.

CHAIR —Mr Coates mentioned earlier how a number of investment decisions in relation to projects of member companies are in serious doubt as a result of this and might well be deferred or cancelled altogether unless we get the design of this right. Can you talk us through some specific examples of projects that might be in that sort of situation where investment decisions might be either deferred or cancelled?

Mr Coates —Chairman, I think that there have been a number of public statements by some heads of Australia’s major corporations about investments that may be deferred. The obvious investments will be those where there is a significant level of CO2 or CO2 equivalent gases that may be emitted. It is not even the start point that is the issue. Investment decisions are made over a period of time and one of the most important things from an investment viewpoint is to form a view on what the CO2 price is going to be to get us to the interim target.

That again comes back to the point that Mr Hooke made in terms of this phased approach. We have to tailor the interim target. The 2020 target has to be tailored so that people can take a reasonable view on what the CO2 price will be to get to that point. If you look at the sorts of figures we have created, where even a five per cent reduction on year 2000 levels comes back to something like 250 million tonnes of CO2 equivalent, you could assume that it will require a significant carbon price to get to that point, and then any investments in this country that relate to high energy consumption or CO2 emissions or CO2 equivalent emissions will go through the same process, where businesses will defer until they can get some level of confidence and surety in what the long-term carbon price is going to be and how competitive the businesses are going to be with other industries.

At the end of the day it comes down to ensuring that our businesses can compete. Mr Hooke mentioned that we had a position where we think that if you design the scheme correctly and design the targets correctly so that you continue to allow our businesses to compete, so that you ensure that there is no leakage offshore, then you do not have to worry so much about who is in the boat and who is out of the boat. The whole scheme is designed to enable our businesses to continue to compete.

CHAIR —Are you saying that competition and being able to compete is one thing, but you do not have sufficient investment certainty moving forward (1) at the moment and (2) when the scheme is in place, if it is in place as it is designed?

Mr Coates —Yes. Let’s say we start off with a very low carbon price, $10 per tonne or something. I will not say all businesses but a lot of our businesses will compete very well at $10 a tonne.

But you also have to form a view of what it is going to be to get us to the 2020 target, because 2020 is not very far away, and you have got businesses that would like to get a return on capital over that period. It is absolutely critical. The Australian resource industry can compete very well in a carbon constrained world.

It cannot compete with the rest of the world in a carbon constrained Australia that is out of touch with the rest of the world. That is the issue. We can see straightaway that long-term margins are not the same as we have had for the last couple of years, so that is a very important point: that the Australian resource industry can compete in a carbon constrained world; it cannot compete in a carbon constrained Australia which is out of touch with the rest of the world.

Mr Hooke —To follow up what Mr Coates was saying, the one thing that is figuring and factoring in businesses’ decisions is that business is best served by certainty, in a policy framework that enables the government to set the parameters of the scheme as scientific, technological and environmental circumstances change and as business is able to respond to the dictates—in other words, it has the technologies. A carbon price without the technological capacity to adjust is like taxing cigarettes: you just raise revenue; you do not change behaviour. That is the first point.

The second point goes to the point that Mr Coates was making—that is, for Australia, a system that becomes punitive and not aspirational and incentive driven becomes another hit to the bottom line. That is where we come back to the motives of government and that is, if this is about demonstrable and effective global leadership, big tick, but it has to be designed in a way such that it has the flexibility within those parameters. The interim targets are important but it is not a straight-line curve.

We think the 2050 targets are achievable and we think the 60 per cent by 2050 on 2000 levels is achievable because we are confident in the technological progress we are making in those critical technologies—the whole basket of clean coal technologies—but in the process of getting there, businesses increasingly, and particularly in the current environment, are sensitive to an increase in sovereign risk, and our industry has got a number of footballs in the air in that area. Fiscal stability and taxation certainty are really very important in measuring the sovereign risk for an industry whose mobility of capital and resources has never been greater.

People often think that we are mining and, because we are mining in situ, that we do not and cannot move around. There is no shortage of global resources, and these highly globally integrated companies will move those resources to where it is strategically opportune to do so, and where the sovereign risk is lowest. The Fraser Institute every year out of Canada publishes an index of how 350 CEOs around the world rate sovereign risk. Australia is slipping down the map because of (1) precipitate capricious decisions on royalties coming out of the state to repair fiscal decisions—not a really smart move, particularly when there is no up-front indication and no consultation in working it through; (2) the fact that everybody was going to get a fuel excise offset for the increase in fuel costs on account of the Carbon Pollution Reduction Scheme in the green paper—except mining, because they could pay for it; (3) the kind of disposition that social and physical infrastructure in the regional and remote communities ought to be paid for by the mining community because they can afford to do it.

Each one of these decisions is starting to add to the sovereign risk, and here we go again, in terms of a lack of understanding about what is the industry’s ability to adjust to and absorb and be negated in their loss of international competitiveness because of other sectors coming on board. So sovereign risk is the take-home message.

CHAIR —Thank you very much for that. I have a final quick question and could I have a quick answer so that I can get some of my colleagues to ask some questions. We are in the middle of a global economic downturn and it is something that has not been modelled as part of the Treasury modelling. I am trying to get a sense of how your members are impacted by the global economic downturn and how that impact might relate to the introduction of an emissions trading scheme in 2010.

Mr Coates —Chairman, can I answer that question, because I am directly involved with a number of companies. I mentioned earlier that there has been a dramatic fall-off in world steel production. That has materialised itself very rapidly in a fall-off in demand for iron ore; for nickel, which makes stainless steel; for chrome, which makes stainless steel; and, of course, for coke and coal, to name just a few. The demand for those commodities has fallen off very rapidly. You can assume that price is going to fall with the reduction in demand.

I have got a list here of a number of Australian companies that have announced cuts in workforce very recently and I will read you out just a few: Newcrest, October announcement, 400; Consolidated Minerals, 182; Minara Resources, 500; Mount Gibson Iron, 190; Perilya Ltd, 440; CBH Resources, about 400 more; GBS Gold, 220; Norilsk Nickel, 230; and so on and so forth. The total here is something like 3½ thousand and there is more to come on that. On Friday Xstrata announced 200 job losses at McArthur River zinc operations.

All of this is a reflection of reduced pricing. To give you another example, nickel prices, which are part of this fall-off in steel demand, have fallen from a peak of $45,000 a tonne and are currently running at $9,000 a tonne, so 25 per cent of what we were getting we are getting now. Copper prices have fallen—

CHAIR —What was that again?

Mr Coates —About $45,000 down to $9½ thousand. Copper prices have fallen from about $4 a pound to, this morning, $1.37 a pound, so 33 per cent of their original price or a 66 per cent fall. We are moving into a very critical period in terms of commodity pricing. The stock market reflects that. We are seeing the price of resources stocks going down rapidly. This is all of these operations that are energy intensive. If we go through the resource industry and look at the operations that provide commodities that are energy intensive, I can say that they will be threatened by whatever we do to add cost to the business. Royalties have gone up in Queensland. Royalties have gone up in New South Wales. All of these things make our businesses less viable.

CHAIR —Do you think that government should take the impact of the global financial crisis into account in the design?

Mr Coates —Absolutely.

Mr Hooke —In the flexibility.

Mr Coates —We have to cut the cloth to suit. This is the world we have to live in. Absolutely. The government has to take this into account. We cannot say, ‘Oh, this is a minor variation in the long-term scheme of things.’ This is a very serious period in this country.

Mr Hooke —But that is not to be misconstrued as an argument for doing nothing and for delay. It is an argument for getting the framework right and it is an argument for not being so hairy-chested out there in the international arena but actually understanding what a slow, measured approach looks like. I have one final point to add to what Mr Coates said.

The costs have not come off to the same extent. You have seen prices come off, you have seen a contraction in demand, but these guys have been working through double-digit inflation on costs and many of those costs are actually structured into the long-run average cost curve, so even though they are marginal operating costs they are actually increasingly structured. They are not fixed but they are structured into the equation, so some of them are actually not fixable and they are not reducible, and even though the dollar is giving them a natural hedge in some places, again that is going to impact on cost going forward. It is a bit like getting hit behind the ear when you stop at the traffic lights; it eventually catches up. So you are going to see the cost equation continue to work its way forward. There will be very little relief in cost. That is why the job losses are so acute; that is one of the areas where those costs can be constrained in line with demand. But negative cash flow in capital markets where liquidity is the issue—not availability, capital; it is a confidence issue—is where the real crunch is coming. If we add yet another cost, without the technological availability, without capacity to adjust, it goes to the emitter—straight to the emitter.

CHAIR —Thank you very much, Mr Hooke.

Senator HUTCHINS —Thank you, gentlemen, for that very comprehensive presentation to us. I do not know if you had a chance to see this morning’s Age. There is an article in there from a fellow of—I cannot remember the name of the institute, but he is from China—and he said that the developed world has to take the lead; otherwise the developing world will not take the lead.

Mr Coates —Yes, I saw that.

Senator HUTCHINS —I think that sums up the nature of the article.

Mr Coates —Yes, that is right.

Senator HUTCHINS —And it mentioned someone from Brazil. Do you have any comments to make on that statement?

Mr Coates —If I were in the developing world, that would be a reasonable position to take. There is no doubt at all that the developing world does have a problem in terms of this particular issue, but the only comment I can make is that we are not going to solve the problem of reducing the impact of climate change by simply ignoring the developing world.

Mr Hooke —My response to that is that there has never been a greater imperative for the developed world to take the lead, but if the developed world takes the lead on the wrong tangent, it will not be effective. A lot of the debate at the moment, in terms of where we are going to go in an international agreement, is about per capita emissions. If that becomes the sort of diplomatic language for bringing developing economies along—and, since you refer to press reports, you will see Professor Garnaut’s commentary in the Australian today along those lines—that may well be the price of getting the developing economies on board.

My own view is that that actually gets it wrong, because per capita emissions and targets become a concession, whereas global leadership should be about commitments. This ought to be about commitments to a reduction in greenhouse gas emissions, not providing some country the weasel room, which goes to the fundamental design of our emissions trading scheme. It is inherently flawed, because it continues to carve out those where we should be trying to change industrial behaviour. And the same with global leadership: if the global leadership is all about debate and negotiations about who can get out of a space, it is coming from the back end.

Mr Coates —I want to just have another go at answering your question, because the real answer to this comes back to something that was said earlier today: that there is no solution to this issue without a clean coal solution. We have to put all of our efforts into developing the technology, in conjunction with the rest of the world. I think the government’s initiative on the Carbon Capture and Storage Institute is excellent. It is providing the leadership that Mr Hooke is talking about that will get us to where we need to be. That is the sort of technology that has got to be developed, to be able to be retrofitted on old power stations and installed in new power stations, if we are to make a dent in this issue. We are not going to do it any other way. It has to be a coal solution.

Senator HUTCHINS —I would like to get your views on the record. You would be aware that the Department of Climate Change has released a discussion on alternative approaches, using a value added metric. What is your view about whether that value added based emission intensity metric would be more appropriate than a revenue based emission intensity metric for comparing the relative emissions intensities of different activities across the economy? I do not know if that is one that you want to take on notice. It sounds like there is a whole paper ready to be written on it.

Mr Pearson —I can see people pointing at me! Because of the scale and difference of the circumstances in different commodities, our submission in response to the green paper did not come down in support of one or the other. In some of our sectors, revenue suits better; in others, the value added option is more appropriate, particularly in the processing and smelting areas. We said that the government should perhaps consider an optional approach. Where there are certain circumstances in a particular sector, the option should be available for that sector to put its case using one or the other.

Mr Hooke —But the point is that you are still playing in the second-best option. We are still working out how we are going to carve out one or the other. We are still working out whether a muesli bar or a breakfast bar is the same thing. We are still arguing over a formula about which industries are going to be carved out and which are not.

My view is that it is all in, all out, okay, and you have all got to be in there. So we said trade exposed. Do not even worry about emissions intensive, just trade exposed all over here; the same cut-off of 25,000 tonnes—the top 900, the 25,000 tonnes of CO2 that they are emitting annually. All the firms that are above that that are in the trade exposed are trade exposed, full stop; no emissions intensive. Over here, you have got the non-trade exposed, which includes your electricity generators, your domestic gas, and your transport. They all start, day one, full auctioning. These guys are all on a phased auctioning. Then you have got the mums and dads and the compensation over here, pursuant to the government’s commitment about compensation. That is fine. That is an election commitment. Do all that.

We reckon our scheme will raise somewhere in the order of $5 billion plus in revenue; the government scheme will raise $6½ billion. We reckon our scheme will cover probably 45, 50-plus per cent of permits, compared to the government scheme of about 60 per cent. But there is a fundamental difference. They are comparable, but there is a fundamental difference in design—that is, we do not have to get into arguing and debating about whether it is value added, whether it is the breakfast bar, whether it is the muesli bar, the chook, the hot chook, the cold chook.

Senator HUTCHINS —I just want to ask one final question. We have had a number of submissions detailing to us the impact of the introduction of this scheme from the date that the government has set in the green paper. The CSIRO said that it would only have an impact of 1c a litre; that there would be a positive impact on employment. I am trying to find my notes. I think maybe in the Treasury modelling it was going to cost $4.62 or something. There is a figure that came out. In any of your publications, have you disputed not only that impact but the reasoning behind those statements?

Mr Coates —One important point about those analyses is: are they with or without a global protocol? The Treasury model assumes a global protocol. I do not know what these other people are assuming the impact will be. That is the issue. For whatever reason, the Treasury model was not done on the basis of no global protocol. That is one of the key problems we have. No-one has come up with an impact on the economy if we do not have a global protocol and some of our emissions-intensive industries are non-competitive.

Senator HUTCHINS —I would have to go back and ask them, Mr Coates. I am not sure.

Mr Hooke —And I think that is the point. They have assumed that this will be universal, so therefore it comes down to technology substitution, technology advances—move forward and so on.

Mr Coates —As I said, we as an industry can compete with anyone in the world, provided we are on a level playing field, but as soon as you tilt the field, we are going to struggle.

Mr Hooke —There will be a carbon price in a carbon constrained world. The question is about how it is delivered. If it is delivered in a way that puts Australian industries in the position of profound competitive disadvantage; it does not have the technologies yet—and, again, the CSIRO stuff presumes that that will happen. To the best of my knowledge, and talking to CSIRO, they are confident that we will be into commercial-scale demonstration of carbon capture and storage by 2018. They have presumed that. They have also made some assumptions about the costs of carbon capture and storage. All of those are figured and factored.

We can sit here and have an intellectual discussion about modelling for a long time, and we can all shoot the breeze about what we think the prices are going to be. The modelling has been done over a long period of time, and most economists will say to you that, once you get out to 2050, 2060, and even towards the end of the century, and start trying to model that stuff, you are really in the ether of speculation. The bottom line, though, can come back to the fundamental principles, and the fundamental principles are that you want a measured approach, you want to make sure that you have got your three pillars aligned—do not get any one of those pillars out of whack, otherwise you will visit costs on your industry, and an incapacity to adjust.

Senator BUSHBY —Thank you for coming along today. I have read your green paper and it is very comprehensive and makes the arguments very well, I think. On the basis of that and other submissions that we have received, it is quite clear that the current ETS proposal with the 100 per cent auctioning up-front is not going to be particularly friendly to our economy or to future investment. I guess there would be some that would argue that that is the price we may have to pay to bring down carbon dioxide equivalent gases. Do you think that the current proposal will achieve that result and how, in terms of the environmental impact, does your proposal compare?

Mr Coates —I might add, while you are thinking, Mitch: any scheme will work with the right carbon price. If you want to reduce CO2 production, just put a high enough carbon price on it, and you will shut down business. So the scheme works.

Senator BUSHBY —What about carbon leakage?

Mr Coates —You shut down business in the country, so investment decisions are made in other regimes where there is no carbon price. By definition, it has to happen.

Mr Hooke —You will encourage a migration, as I said before. I do not know, because I have not been around that long—I am a relatively young fellow, as you can tell—but there is unprecedented mobility in global capital and resources, and that goes for our industry right up-front, and so our companies will move. They will shift. They will just go to where they can employ their capital and their technology and their people far more effectively than they can when carrying the legacy of a burden that they cannot adjust to. That is the first point.

I think your question was: what will it mean? Will it impact this? Can we adjust? Will it have an impact on global greenhouse gas emissions? Yes, it will have an impact. Yes, we can adjust, if we have got the right framework and flexibility there, and particularly if we can continue to drive forward on the technology commitments that we have made. But that is all heavily qualified by the extent to which the trajectory is steep in terms of getting the interim targets and what that means. A five per cent reduction on 2000 by 2020 is still a 31 per cent reduction on business as usual, which is greater than the electricity generation total. If we just take that literally and metaphorically, that is a candle-lit economy. You get up to minus 15 and you get back to horse-and-buggy. So it is horse-and-buggy and candles if we impose those kinds of targets and then that becomes manifest in the carbon price going forward. It sounds a bit emotional, but that is the harsh reality. That is the take-home message for the Bill and Betty in Struggle Street.

In terms of what Australia can do, if we knocked our emissions off, China goes past us in three weeks. It does not matter how much we go out there and self-flagellate, it ain’t going to be bankable in terms of a reduction in global greenhouse gas emissions unless—back to your question, Senator—our leadership is demonstrable and effective and affordable. It will not be effective if everybody looks at us and says, ‘Why would you go down that path?’ and it will not be affordable if we tank our economy and our businesses in the process, and it sure as hell will be demonstrable, but it will be adverse.

Senator BUSHBY —We had some evidence given to our committee at a previous hearing that pointed out, ‘What sort of leadership are you showing if you actually lead your economy down a path where nobody else would want to go?’ The message is that you have to get the structure of what we are looking at right in order to deliver the environmental benefits and to make sure it is affordable and effective, to quote what you said earlier.

Mr Hooke —And there is no other country that is starting off at full auctioning. No other country has four carbon costs. There will be four carbon costs in the market: whether you are a 90, a 60, a 30 and—and there is another one if the media reports are right—then there is zip. There are four. We are supposed to be about building certainty and confidence in a fiscal and taxation regime.

There is still debate about the carbon price cap. There is debate about the banking and hoarding. I am not at all surprised to see the press: that there are a whole lot of companies out there signing on to tough interim targets. The financial community is just salivating at the prospect of visiting on us another set of financial engineerings with financial and fiscal derivatives which we are all currently working our way through, aren’t we? And we are going to have another crack. So I am not particularly enamoured of that kind of prospect. As I said, it is all care and no responsibility. We are the ones that actually have to put this into place.

CHAIR —How is the exploration sector going to be impacted by the emissions trading scheme the way it is currently designed?

Mr Coates —The exploration sector is an exact demonstration of business margins. There has been an enormous shutdown in exploration over the past few months that is very similar to the shutdown I have talked about in the steel industry. They reflect people’s confidence. As soon as people lack confidence in the future, they stop exploring. As soon as people’s margins are trimmed, they have to stop development and exploration. That is what happens.

CHAIR —That is something that has already happened. It has not happened as a result of the ETS.

Mr Coates —It is already happening.

CHAIR —So are you saying the ETS is not going to have a specific impact?

Mr Coates —If you cut margin further, exploration will diminish further. It is as simple as that.

CHAIR —Thank you very much to the Minerals Council of Australia for your assistance to the committee.

Mr Hooke —Thank you, Chair. We are going to table for you the letter.

CHAIR —Yes. Thank you. You are going to do that today?

Mr Hooke —Yes, given your question about prices. We will also table for you an analysis of real, A-dollar and US-dollar prices over the last half-decade.

CHAIR —Thank you.

[10.27 am]