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SELECT COMMITTEE ON FUEL AND ENERGY
02/04/2009
Issues relating to the Fuel and Energy Industry

CHAIR —I welcome Mr Price from Frontier Economics. I also welcome Senator Xenophon, who has joined us by telephone. Mr Price, I invite you to make a brief opening statement and then the committee will ask you some questions.

Mr Price —I am not here to represent any commercial interest. I am not being paid to be here. I am here appearing on my own behalf. My interest is to encourage the development of the most effective greenhouse gas emissions trading scheme that Australia can put in place. I think it is crucially important for such a small, open economy, if it is going down the line of an emissions trading scheme, to have one that does not undermine the economy because, if that is the outcome, it will give emissions trading the world over a very bad reputation. The good news is that there are more effective policies—simpler, less costly, less damaging policies to business—than the CPRS. We have been promoting this idea for quite some time. I wouldn’t mind just talking through a few of the different scheme types and talking about the benefits of an alternative scheme, but I obviously do not want to take up your time for questions.

CHAIR —Please go through it, bearing in mind that the committee will want to ask questions.

Mr Price —I am happy just to talk very briefly through this and then leave questions for you.

CHAIR —Of course, you could leave any material with us. Are you tabling those?

Mr Price —Yes, I am. I will not go through all of these slides. I will go through slide 3 to slide 6. I would like to say at the outset that I think there is a misplaced effort in concentrating the entire government’s resources, more or less, on developing an emissions trading scheme. Given the magnitude of the potential costs to the Australian economy and given the risks involved in us doing something and the rest of the world doing nothing, if we really do believe in the adverse effects of climate change, then it may well be worth thinking about dedicating those resources to managing and mitigating the effects of climate change rather than just on an emissions trading scheme. That is a broader policy issue.

It is worth saying that more or less all scheme types—emissions trading schemes, tax schemes—try and do the same thing: they are all trying to change the relative cost of clean versus high-emission activity. They do so through two key mechanisms. They seek to either charge for all emissions or alternatively reward good behaviour in terms of reducing emissions. The taxonomy I have presented here is one I have characterised as carrots and sticks. The CPRS scheme I would characterise as a sticks-only policy in that it seeks to change the relative economics of low- and high-emissions activity by charging for all emissions from a zero base line—you are charged for any emissions you create. Most certainly that type of scheme will work. There is no doubt that it will reduce emissions. We have never questioned that. What we have questioned is whether that is an appropriate policy response.

The alternative way of doing it is through a carbon tax, and a carbon tax does more or less exactly the same thing as a Carbon Pollution Reduction Scheme design does, except that it certainly does not get the benefits that come from trading emissions. I cannot really trade my tax. So it will probably lead to an outcome more slowly than an emissions trading scheme and probably at a higher cost. In terms of that view, I am supportive of the government’s position on a tax. I think it is quite often a misguided belief that tax will somehow result in a more certain outcome for investors, but I think that is an illusion. The reason I say it is an illusion is that what policymakers want is a reduction in greenhouse gases; they do not want to raise costs for businesses for its own sake. You can be absolutely sure that whatever the tax is, you will get that tax wrong. It will have to be adjusted over time to achieve a certain emissions target. So this illusion that a fixed tax will provide more certainty will not be the case. The tax will get constantly changed to achieve an emissions target.

The third type of scheme is one which is often referred to as an intensity based approach, and there are many different kinds. In fact, there is a fourth category called a baseline and credit scheme, which I am often claimed to have been supporting, and in this context I am not—I want to make that clear. I am promoting the idea of an intensity based scheme. The way that works is that it does exactly the same thing that a tax and a cap and trade tries to do in that it changes the relative economics of high and low emissions. Instead of charging for every tonne of emission, it charges for every tonne of emission over a particular benchmark. You can think of it as a benchmark being created in terms of an international best practice benchmark—anyone above that benchmark gets charged and anyone below that benchmark actually gets rewarded. It is not just a stick scheme; there are rewards in it. There is positive inducement rather than a negative inducement. That leads to very different outcomes in terms of prices. If I do not charge for every tonne of emission but rather only charge for emissions over a baseline, which is a non-zero baseline, then clearly I am not paying as much for emissions, and that is where a lot of people get tripped up. They say: ‘What we need is a cultural change. We need prices of carbon to come completely through the economy.’ We do not want to charge for emissions just for the sake of charging for emissions; we want to charge for emissions to switch the relative economics of high and low activity. This will certainly achieve it. No-one has ever questioned that.

Quite often it is stated that these types of schemes will result in higher cost emissions abatement because we are not getting the benefit of price response. There are a few things to say about that. It will be the case that the first price response you see will be through the exit of industry from Australia. There is no doubt about that. I know that people say that the spectre of carbon leakage is trumped up. It certainly is not. The industry has a legitimate claim. The reason that Australia is one of the highest per capita emissions countries in the world is that we have very energy intensive industries here because we have traditionally had very cheap energy. You will push those companies which are making investment decisions offshore to many countries that can supply these services and will not put a scheme in place. There is no doubt about that.

One of the aspects of the Carbon Pollution Reduction Scheme that worries me is that the government will claim that they can get the same effect as the scheme we are promoting by charging high prices for electricity and other goods and services that involve carbon intensive activity, and then gather the money up from the permits and hand it all back. When they do their own modelling and analysis of this, they assume they are handing this money back in a costless, purely efficient way for all time. They never see the inefficiency that arises from a $12 billion to $15 billion fund generated each year and handed out by government to whomever they like. There is very little control over the way in which they will hand that out in the longer term. It is almost certain that that money will create its own distortions through time. People come up with their pet projects—be it pink batts in houses or whatever. It will create its own inefficiencies through time. It is like a stimulus package every year, year after year after year. It is a frightening prospect.

In their own modelling, there is no cost attached to any of this. That is just not realistic. The sort of scheme that we are promoting does not create the initial huge price shock—that is not necessary to make people switch from high to low emission activity. It certainly will not generate the pool of funds going to the federal government to be handed out that will create future economic distortions. That activity will happen internally within industry.

The more important feature of that is that this type of scheme creates a far more stable carbon price than the Carbon Pollution Reduction Scheme will. It will not be subject to price fluctuations that wind around with economic cycles such as we are seeing right now. That is crucially important to the success of these schemes. The reason why is that this policy can only be achieved by a massive and ongoing investment in infrastructure. It is not like tariff reform, as Garnaut likes to suggest; it is not like tariff reform at all. Tariff reform did not involve massive and ongoing investment to achieve its policy aim. If you want this policy to be successful, you have to create an environment in which investors are very certain. Highly unstable prices will not produce that, particularly in light of the fact that for some industries the cost of carbon will eclipse all of their costs now.

For example, in the electricity supply industry, the average cost of a generator is about $40 a megawatt hour. You will not get the shift that you need to achieve your target unless you have a carbon price of between $35 and $40 a megawatt hour. The carbon cost will be more than all their existing costs. That cost, potentially, will be the most variable cost that they face. It will be extraordinarily difficult to understand what drives that cost, because what will drive that cost is government policy and regulation. And it is a frightening prospect to have to invest in infrastructure worth billions of dollars that you cannot pick up and take away when that price can change because of a change in policy. I will leave it there. I will leave those slides to speak for themselves. You can ask me questions about those, if you like.

CHAIR —Thank you very much, Mr Price. This is all very interesting. I would like to kick off with some questions. You did some work for the New South Wales government in relation to the proposed CPRS.

Mr Price —Yes. We have done a lot of work for New South Wales and other governments.

CHAIR —So you prepared a report essentially assessing the impact of the CPRS across regional communities across Australia.

Mr Price —Yes. The New South Wales government, through the New South Wales Treasury and the Department of Water and Energy, commissioned us to undertake macroeconomic modelling to replicate what the Commonwealth Treasury modelling was doing. The modelling results that we produced on one scenario—the one that has been reported most widely—is in fact the same modelling result, as far as we can tell, as that produced by the Treasury.

CHAIR —But Treasury has refused to publicly release a breakdown by state or by region, whereas you have essentially come to the conclusion that the impact will be greatest on regional areas across Australia, have you not?

Mr Price —Yes. I heard some comments about the regional state effects not being robust, which I thought was curious. The model that they used is something called MMRF-Green, which is the same model that we used. We operated the model using the same people that the Treasury used. In fact, Brian Parmenter, who works for Frontier Economics, is one of the builders of that model, so he knows how to use it. That model in fact builds up a picture of the economy from a state level, so it is impossible to say that state levels are unreliable, because it aggregates those results. The use of these models to dig down into regional economies is pretty common practice. Governments all over Australia use this model to look at regional effects. So it is not true that these results are not robust. That is not to say that any macroeconomic model is perfect; they are far from it; they are a very gross simplification of how an economy works.

Senator HUTCHINS —Just on that—and my colleague will take back over—your report to the New South Wales government, as I understand it, was based on the green paper. Have you any reason to think that the conclusions should be different as a result of the information that has come out in the white paper?

Mr Price —When we did that modelling we were asked to model the green paper policy, because that is all that was available at the time, including the compensation package. I think there were some remarks by Greg Combet that we did not include any compensation arrangements. We did. We modelled exactly the green paper policy, and we got the same result at a macro level. When we benchmarked our model against what the Commonwealth Treasury produced, it was the same result.

CHAIR —Just on that point: Greg Combet said two things. He said (1) that you did not include the compensation package and (2) that essentially your information is outdated because it does not take into account the changes in the white paper. Have you had a look at how that has developed since then?

Mr Price —Yes. I think the most substantial thing that has changed is the arrangements that relate to LNG. That will affect the Kimberley region but that certainly will not change the national results at all.

CHAIR —So your conclusion under that scenario—that regional economies across Australia would contract by between 20 and 25 per cent—still stands, except for the Kimberley region?

Mr Price —Yes. Let us be clear about what is meant by the 20 per cent. We compare this against a base case. There is a base case that includes no emissions—

CHAIR —The reference scenario.

Mr Price —The reference case will be no emissions trading. So, when there is a 20 per cent reduction, say, it is 20 per cent as compared to the base case. Some economies continue to grow but far more slowly. Some regional economies contract because they were not going to grow very much anyway over that period. The 20 per cent is against a base case of no emissions trading scheme.

CHAIR —Your report has never been publicly released, has it?

Mr Price —I understand it was released under FOI to News Ltd.

CHAIR —Is it your report or is it now property of the New South Wales government?

Mr Price —It is a report that we did for the New South Wales government.

CHAIR —Is it your report?

Mr Price —We wrote it, but it was for—

CHAIR —The reason I am asking is that this committee can insist on getting a copy of it, and that might put you into a contractual situation with the New South Wales government. But I would advise you that parliamentary privilege would of course protect you from any fallout in relation to this. If it is your report, we would like to ask for a copy of it. Are you able to provide us with a copy of your report?

Mr Price —I have not had a look at the details of our contract with the New South Wales government, but almost certainly it would be the case—it is pretty standard with most governments, with most clients—that any intellectual property created as part of a project that they pay for would be theirs.

CHAIR —Would you please—perhaps on notice—review this? If you do provide the report to the committee at our insistence, you will be protected by parliamentary privilege from any action for breach of contractual obligations. However, if it is a report that is the property of the state government, then obviously we would have to have another look at that.

Senator HUTCHINS —Mr Price, are you comfortable talking publicly here or would you be more comfortable in camera?

Mr Price —I am okay responding as to what we did—to certain questions—because it has been made public. The fact that we were doing this project was announced by the then Premier, Morris Iemma, and the then Treasurer, Michael Costa. It was well known that we were doing it.

CHAIR —I will just quickly wrap up so that my colleagues can ask some questions. Would you have any objection if the New South Wales government were to give us, as a committee, a copy of that report?

Mr Price —Not at all.

CHAIR —You might want to take these questions on notice. Given that you have done similar, or the same, modelling as was done by the federal Treasury, would you be able to provide us with a breakdown by state and territory of the impact of the CPRS proposal for minus five and minus 15 scenarios, the impact in terms of industry growth, output in millions of dollars, employment numbers, gross state products, emissions and household CPI changes? Is that something you would be able to do?

Mr Price —Most of that is actually in the report.

CHAIR —Would you be able to provide that to us? I am not asking you for the report; I am asking you for the information, I guess.

Mr Price —I could provide it on the basis of other modelling that we have done but not on the basis—

CHAIR —But, given what you know of the Treasury modelling, given your expertise, you would be able to give us the information that I have just asked for?

Mr Price —Yes.

CHAIR —Would you be able to break that data down on a region-by-region basis?

Mr Price —Yes.

CHAIR —Thank you.

Senator HUTCHINS —Thank you, Mr Price, for your frankness today. You may have covered this in your report, but I just want to get it on the record: what do you see as the impact on employment of the proposed CPRS, based on the modelling you have done? Are we going to create all these green jobs somewhere?

Mr Price —You said ‘on the modelling you have done’. It is a curious thing about these macroeconomic models that, because they are looking at the interrelationship between every aspect of the economy—

Senator HUTCHINS —Let me just elaborate, because my next question was going to be this: if you have used this modelling and, you are saying, the Treasury has used the same modelling, then isn’t it the case that they could only come to the same conclusion—the one you are about to give us?

Mr Price —I think they do come to the same conclusion. They have got the same data we have. So these models have to basically fix a point in space in the economy for the model to converge towards, and the point that almost certainly is used in most macroeconomic models is an assumption of full employment. So when one of these models has produced an outcome of full employment, it is a modelling assumption; it is not a modelling result. When the government came out and announced that their CPRS scheme would have little to no effect on employment, that was a modelling assumption. So when we do our modelling, on the same basis that the Treasury have done, we also get very little change—in fact, we achieve full employment, because that is the assumption. But the way the model seeks to achieve full employment is to adjust Australian industry, and the way it does that is to change, mostly, real wages.

Senator JOYCE —Can I just clarify that? The assumption, in your MMRF model is this: you have got to have full employment. They have got to be employed somewhere. If they are not in the coal industry then, for the assumption to hold, you have got to put them somewhere, so you put them into green jobs?

Mr Price —Yes, that is right. It adjusts each sector until full employment is achieved, and then you look at the modelling results to see how much real wages have adjusted in each sector. So, in the case of achieving full employment, you will see that in these models real wages declined quite rapidly over the period.

CHAIR —But that is pretty scary in terms of its fictitiousness, isn’t it?

Mr Price —Well, the alternative way of doing it is to fix another point in space, and that might be—

CHAIR —That we do not know—unemployed, perhaps? You could put them in the unemployed category.

Mr Price —That could happen. You can set the model to, for example, achieve a certain trade balance, and unemployment would then rise or fall depending upon the relative prices and our interaction with the rest of the world. In all of these models there is what is called a closure rule. Senator Xenophon talks about it a lot. The closure rule is really critical in understanding the results of these models. You cannot just look at the results and say, ‘There is no unemployment.’ That is a modelling assumption.

Senator HUTCHINS —On that assumption: the assumption is that incomes will decline over time—that is in the assumption, is it?

Mr Price —No. In the model, real wages are allowed to adjust to achieve full employment. So, if you want to achieve full employment in the model, real wages decline because what is happening is that our costs are going up because of an emissions trading scheme. To remain internationally competitive, something has to give.

CHAIR —If something goes up, something has to come down.

Mr Price —That is right. That is how an economy works.

Senator HUTCHINS —So that is what you have based your assumptions on and so has Treasury—that real wages will decline?

Mr Price —That is not an assumption; that is a modelling result. Full employment is the so-called closure rule. That is the assumption, and everything else adjusts around that. And the key to achieving full employment, of course, is—

CHAIR —A reduction in real wages.

Senator JOYCE —That issue is very, very important, because ‘real wages decline’ is not an assumption; it is a result.

Mr Price —That is right—if you want to achieve full employment. Some regions, because they have got very carbon-intensive industries, have a much greater cost imposed because of that activity. It is the policy design. If carbon-intensive regions were not adversely affected, the whole scheme would not work. So it should not surprise anyone that that was a result. It surprised me that it surprised so many people. The whole policy is to reduce carbon emissions.

CHAIR —But I think you will find that the government is trying to understate the impact of it, for obvious reasons.

Mr Price —I think John Connor from the Climate Institute claimed that it is an antiquated, outdated view and that we do not account for green jobs. We do. The model actually has rapid growth in green jobs, because when we did the modelling the renewable scheme increased the requirement for renewable generation, which meant that there are more green jobs. To invest in reduction in carbon to maintain international competitiveness, there is a whole bunch of investment that is required. We take all of that investment into account. So it is not true that we do not take into account green jobs; we do.

Senator JOYCE —If we took away the assumption of full employment as one of the premises for the model—I do not know whether you could do that but let us say you could do that—would you still have the same increase in green jobs or would you, as has been pointed out, have another new category called unemployed people which definitely would start going up?

Mr Price —There is no doubt that there will be some green jobs but, if Australia did something and the rest of the world didn’t, I seriously doubt whether the green jobs would offset the unemployment that you achieve. It is important to understand that when Treasury did its modelling and when we did our modelling another key assumption was that the rest of the world introduced an emissions trading scheme at the exact same time and there is a uniform world carbon price. So the leakages that would otherwise occur in the absence of that assumption you do not see in the model. So that is why you get this very muted effect on GDP growth. But even then you are looking at trillions of dollars of cost.

CHAIR —BlueScope appeared before us yesterday in Wollongong and they said that if the CPRS is implemented as it is that all of the 4,000 direct jobs and the 12,000 to 16,000 indirect jobs, so up to 20,000 jobs in the Illawarra region, are at risk and could be gone. That is if the CPRS is implemented as it is at present. Do you think that there are 20,000 green jobs available in the Illawarra region?

Mr Price —These models do not assume and economics does not necessarily assume that these green jobs are going to be in the Illawarra. Green jobs could be building wind farms in South Australia—

Senator HUTCHINS —But the other 20,000 jobs exist.

CHAIR —There are 20,000 people and their families at present in the Illawarra region that are connected to the BlueScope steelworks. If those jobs are gone, are there going to be enough green jobs for those 20,000 people?

Mr Price —It is pretty clear that finding 20,000 jobs in the Illawarra is going to be very hard. I do not necessarily think that is what the government believes either, that jobs lost in one region will be created in another region. Most certainly new jobs will be created by the scheme—

CHAIR —So people from the Illawarra would be expected to shift.

Mr Price —Yes. In fact, these models assume that people will shift at no cost—

CHAIR —No cost?

Mr Price —I think the previous speaker was dead right in saying that the actual transitional pain that we see from any structural change in industry is in fact completely assumed away in these models. That is why I have always said that—

CHAIR —It is a very bureaucratic way of looking at real-life circumstances.

Mr Price —These models are very useful if you know how to use them and if you do not misuse the results. You can actually add some stickiness of these transitional effects on the model, but as far as we can tell that is not what the Treasury did in their modelling. We did—

CHAIR —At the end of the day it is about people, isn’t it? It is about human beings, it is about families, it is about communities, it is about real life.

Mr Price —You should be very careful using economic models. For the uninitiated they can be horribly misused, and I think it has been in this case.

Senator JOYCE —The Illawarra is one region but I think it is something we clearly get on the record. Which are the regions that are most likely to be affected the same way as the Illawarra, which will obviously have mass loss of jobs by reason of an ETS? We have got BlueScope saying 20,000 people in the Illawarra. What about Mackay, Gladstone and Townsville? What about these regions?

Mr Price —This is from other modelling, this is not the New South Wales modelling, so it is more or less the same result. Basically Central Queensland, South-West Queensland, the Hunter-Illawarra, Gippsland, which is the Latrobe Valley, pockets of South Australia—very severe effects on South Australia because they have so little industry. The Kimberleys before—they will still be affected but not as badly as our initial results.

CHAIR —That is assuming that the gas hub is not going to be stopped by Peter Garrett.

Senator JOYCE —That means that we are going to go to these areas, to the people of Maitland, Gladstone, Emerald and Mackay, and say: ‘Well, it’s all right. You will have a job building wind chimes down in Nimbin.’

Senator HUTCHINS —How is the wind chime industry, anyway?

Mr Price —I do not know that we specify the wind chime industry in the models.

Senator JOYCE —What I am saying is that it is ridiculous and nebulous concept that we are going to get working families out of an area who are boiler makers, fitters and turners, plant operators, and just upload them, move them to another part of the country, buy them a new house, sit them down, get the kids into a new school, create an industry that is not even in existence and is unlikely to ever be in existence because it is based overseas, and say the world will go on as it did before because of a government policy.

Mr Price —There is no doubt in my mind that there will be very severe structural adjustment. I guess it is a parliamentary policy decision as to whether that is a cost worth bearing. My own view is that, done right, I think an emissions trading scheme is an important policy response to climate change. I think there should be as much emphasis on mitigation and adaptation as emissions trading, but people are tricking themselves if they do not think this is going to come at a high cost. Given the potential cost of not doing something, on that score I agree with the government that the cost of not doing something is potentially huge. To indicate how careful you need to be with these models, when we take a model where Australia does something and at the same time the rest of the world is doing something, and then we take the exact same assumptions but only have Australia do something and the rest of the world does nothing in terms of emissions trading scheme, we get more or less the same result. That is just illogical. The reason why we get the same result is that these models have the economy seamlessly adjusting. Instead of a coal industry you’ve got a new insurance industry, a windmill industry or something else—

CHAIR —It does not work that way in practice, though.

Mr Price —No, it does not work that way, but that is how guarded you need to be about the use of these models.

Senator JOYCE —I want to go to the other thing which I think is a complete paradox, which is the efficiency of moving money out of the sector into the government treasury, holding it there and then spraying it out in some sort of nefarious eclectic out into the community to have without creating disjuncture. Now, you are saying that we are going to be collecting $10 billion or $11 billion a year. I want to pose two questions to you. Have you done any modelling as to the efficiency of government’s capacity to find the holes in the economy where this money should actually head off to so as to not create either, as you say, pet projects or ridiculous little castles of ideals in certain areas of the economy which may actually be detrimental to our economy rather than assist it. The second thing is that I have received evidence in other committees where they say, this is going to be done, the department told us, employing only an extra 300 people. Do you think we can do this by employing only 300 people?

Mr Price —I doubt it. It is a really interesting question. We did a little exercise doing exactly what you said, and we took the government’s CPRS and their reallocation, so they reallocate all of this money back through the economy in different forms of compensation. So we implemented their compensation package in the model. Then what we said was, ‘Okay, we think there are some distortional effects in that compensation package,’ which highlights a problem of giving such a huge quantity of money to the government to hand out how they like every single year, although that is what they do in the tax system. In this case it is meant to compensate for the adverse effects created by the policy.

Instead, we let the actual price mechanism allocate it through the intensity scheme we are suggesting. The only thing we changed was the scheme design. We ended up with a result that was $300 to $400 billion cheaper—that is, by not using the government’s compensation package and instead using the price mechanism to compensate itself, if you like, using the intensity based scheme. That tells you that already the government’s compensation package and the way they allocated that money have distorted the economy by $300 to $400 billion over that modelling period.

Senator JOYCE —There is a $300 to $400 billion economic aggregate saving in the economy by not going forward with the ETS in its current form. That would almost pay for the stimulus packages!

Senator XENOPHON —Mr Price, you are saying that for the sake of comparing apples with apples you use the same modelling as Treasury. But you are in effect saying that that is overly optimistic in terms of its economic impact.

Mr Price —Yes, for the reasons that we have been talking about. The cost of all the friction that causes the economy not to adjust as seamlessly and costlessly is not included. None of the actual social costs of dislocating communities are included. I think that is going to be pretty severe. It is unlike any other policy in that it comes along and almost overnight changes the relative economics of industry. If you take an industry like agriculture, which has been going through a good 50 or 100 years of structural adjustment pain—and, being a farmer myself, I can see how difficult that is for local communities—it still has not seamlessly adjusted. If I took an agricultural adjustment policy in this model, it would have all happened in the space of a year. But the reality is that it does not happen that way. There are a lot more costs than these models reveal.

Senator XENOPHON —Secondly, one criticism from green groups is that the current CPRS is not ambitious enough in its targets in order to get down to the IPCC recommended levels of 450 parts per million. Are you saying that, because of the different price effects—and the price effects are not as severe in the intensity based proposal that you put to the committee—you could actually with your intensity based proposal go for deeper costs with a lesser economic cost compared to those of the current scheme?

Mr Price —Yes. To go back to the differences in the macroeconomic modelling between the CPRS as a scheme and an intensity based scheme, where the cost differences were some hundreds of billions of dollars: if the government is prepared to bear the extra costs of $300 or $400 billion with their scheme, one interpretation would be that, if you could get a more efficient scheme, logically you could impose a tougher target to achieve a better outcome. If you impose more costs on the economy, of course that would diminish the likelihood that those schemes will be put in place. An alternative interpretation is that you get a scheme up and running with a more moderate target with a more moderate cost. You can think of it different ways.

Senator XENOPHON —Finally, overnight we saw news about what is being proposed in the US. I think Congressman Waxman from California has put forward a bill in relation to a cap and trade scheme. Have you had a chance to look at that and to compare it to both what the CPRS is proposing and any other alternative schemes?

Mr Price —I have not in detail. I had a look at a summarised version of it, so I might be incorrect. They talk about a cap and trade scheme, but that could mean any number of things. What is interesting is that the bill also provides for about two billion tonnes of offsets, like credits, and renewable and gas credits.

CHAIR —Just to clarify, this is in fact a private members’ bill we are talking about; it is not an administration sponsored bill?

Mr Price —No, it is another one in a very long line of bills.

CHAIR —Of private members’ bills?

Mr Price —Yes, exactly. But I think this has taken on a bit more prominence because of the election of Obama. He is probably more inclined to accept that. But as far as I can work out, with some rough calculations, it is a target. In fact there is a little table at the back of that slide presentation that I gave you that does a comparison of the different targets of the different schemes and, as far as I can work out, it is making sure that it is on the same basis—that is, it takes account of land use. By 2020 there is about a 40 per cent cut as compared to business as usual—business as usual being no emissions trading scheme. So it is a pretty big cut.

CHAIR —Are you happy to have your presentation incorporated into Hansard?

Mr Price —Yes.

CHAIR —One final question: can you quickly touch on the issues associated with international trading of permits?

Mr Price —Is there something in particular?

CHAIR —Just give us an overview of the issues.

Mr Price —I will speak about something that is relevant to what we are proposing. It is important to understand that any number of different schemes are totally compatible on an international trading platform. A lot of people think that you have to have the same scheme design to create an international trading platform for permits. It is not true at all. In fact, we can go through the theory of it but you only need to have a look at what happens in practice in Europe between the trading of permits from the cap and trade scheme and trading of credits from the claim development mechanism scheme. They have increasingly converged over time and are now traded compatibly on the same platform.

Similarly, the fact that America, or any other country, adopts a particular scheme should not mean that we should naturally follow the same scheme for the purposes of being consistent. That seems quite ridiculous. In fact, I would be very surprised if it would be economically efficient for countries around the world to have exactly the same scheme. In fact it is more likely to be the case that different scheme designs will produce a more efficient outcome, depending upon the nature of your emissions problems.

CHAIR —But if you can import permits from overseas it is conceivable that we will end up not reducing emissions domestically at all.

Mr Price —That is true.

CHAIR —In fact, it would increase emissions.

Mr Price —Yes. I know it would pain people, but it may actually be efficient, from an environmental point of view, to increase emissions in Australia.

CHAIR —We might actually reduce emissions globally but increase them domestically.

Mr Price —That is right. That is abhorrent to some people. And, from a welfare point of view, because we can do things so much more efficiently and convert raw energy into electrical energy so much more efficiently than other countries, it may be far more sensible to have an increase in emissions.

CHAIR —Isn’t that the basic problem with this emissions trading scheme? It is does not actually allow for the proposition of increasing emissions domestically where it can contribute to a reduction in emissions globally.

Mr Price —The Australian government faces a difficult problem; it wants to show policy leadership—and I support that—but it is very difficult to get support for that by having a scheme that increases emissions. If you are leading the charge you have got to demonstrate that a scheme is capable of reducing emissions.

CHAIR —The LNG industry has put the proposition that for every tonne of emissions domestically in Australia they could contribute to a reduction of five and a half to nine tonnes of emissions in China and four and a half tonnes of emissions in Japan. Are you aware of that argument?

Mr Price —No, I am not. I am aware of the logic, but I do not know of those numbers.

CHAIR —If that were the case—and they have presented us with modelling that substantiates that proposition—surely our scheme should be encouraging such expansion, even if it means increased emissions locally, to assist the world in addressing greenhouse gas emissions globally.

Mr Price —Yes, and I think that is the sort of thing that will come through time and increased international trade, which is why—

CHAIR —But the current scheme is making it harder for the LNG industry to expand?

Mr Price —The problem of course is that you have got to start somewhere. Somebody has to start a scheme to develop an international arrangement.

CHAIR —So we are actually making it harder to reduce emissions globally.

Mr Price —One of the costs of policy leadership is that you have to demonstrate that these schemes can operate, and they can. But one of the big costs is that initially at least you may end up creating an economic distortion for a longer-term gain.

CHAIR —But do you think the government has demonstrated that its scheme as proposed is going to make it easier to reduce emissions globally?

Mr Price —No. That is why I am here. I think that this scheme will be a catastrophe. I do think that it will not work, it is high cost and it will give emissions trading a bad rap.

CHAIR —It will not work, it is high cost and it will not reduce emissions globally?

Mr Price —It will reduce emissions in Australia, but the broader concern is that because it is so clunky and it will come at such high cost that it will allow other people to be able to point to an Australian failure as a reason for not doing reforms in their own country. That is my concern.

CHAIR —It would be counterproductive. But will it reduce emissions globally?

Mr Price —It depends on what happens. I cannot answer that question.

CHAIR —Will what we do in Australia have a net positive effect?

Mr Price —It may be that as a transitional thing, to the extent that it encourages carbon leakage—and I do not think that that is allusion—then, yes, it could potentially for a period.

CHAIR —Make things worse?

Mr Price —Emissions trading, if in the longer term it can be demonstrated that it can be done effectively without destroying an economy, then I very much support policy leadership in that regard.

CHAIR —Thank you for your contribution to this committee.

[10.36 am]