Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Senate Select Committee on the Scrutiny of New Taxes
17/05/2011
Carbon tax pricing mechanisms

EVANS, Mr Gregory James, Director, Economics, Australian Chamber of Commerce and Industry

[11:34]

CHAIR: Would you like to make an opening statement?

Mr Evans : The view of the Australian Chamber of Commerce and Industry is that any unilateral carbon price will be detrimental to our national competitiveness, export jobs and economic expansion opportunities. Given the Australian economy’s dependence on fossil fuel and the nature of our open economy with some 58.5 per cent trade to GDP ratio and the high emission intensity of our industry, Australia has more to lose than any other major economy under carbon pricing. Without any qualification or ambiguity, ACCI remains opposed to a carbon price even in the form of a carbon tax or an emissions trading scheme in the absence of a legally binding agreement and concerted international action to reduce global greenhouse emissions. The imposition of a carbon price will not only affect the 1,000 big emitters that have a direct obligation to pay the carbon tax or for a carbon permit to emit; it will also cause pricing increases to cascade through the supply chain.

While the emissions-intensive trade-exposed will be compensated to some extent to protect their competitiveness, small and medium sized enterprises will bear the brunt of cost increases in the form of higher energy prices and higher input costs given their limited ability to pass on these cost increases to consumers. This is mainly because they are trade exposed as producers of goods and services. The unilateral carbon price also creates the following economic burdens on SMEs. They have little, if any, market power to negotiate the rate of carbon passed through from upstream suppliers. SMEs have few, if any, opportunities to cut costs. SMEs are thinly capitalised and unable to cope with even marginal cost increases. Additional costs diminish the already thin profit margins they have, and diminished profits would reduce the return on capital and labour.

In 2009 ACCI released independent economic research on the impact of the government’s proposed CPRS on small and medium sized enterprises. The study looks at a snapshot of SMEs in four sectors—food processing, plastics and chemicals, machine and equipment manufacturing industries. As manufacturers, each entity was trade exposed. The results were reported on an earnings before interest, taxation and depreciation basis, yet assuming even moderate levels of debt and capital intensity the final impact for many companies would see a shift from profit to loss making.

In summary, ACCI is also concerned that a carbon price regime will be in addition to, and not replace, other existing regulatory measures to address climate change, including the renewable energy target and other green policy initiatives. Therefore, ACCI considers that Australia’s response to climate change needs to be carefully considered to ensure that we do not unilaterally damage our economic performance and competitiveness while delivering barely discernible benefits to the environment. Instead, the immediate government focus and support should be directed at efficiency and the technology approaches and assessing the capacity of the economy to deal with changes in the energy fuel mix over time. This would deal with the question of certainty, encouraging investment in modern generating capacity, which does not preclude coal based power. In fact, the threat and likely adoption of a carbon tax is preventing investment in clean, modern coal-fired power stations, which remain our only realistic baseload power options for the next two decades.

CHAIR: Are you saying that we have more to lose than others? Can you talk us through that?

Mr Evans : We are clearly very fossil fuel dependent. Up to 80 per cent of our generation comes from fossil fuel, predominantly coal but also gas. We also have a very trade exposed economy relative to other countries, more so than Europe and more so than the US. Therefore, the imposition of a carbon tax or emissions trading scheme would have an adverse/detrimental impact on our economy, and we believe more so than any other country. Our view is very much tied to the issue that we should not act unilaterally. We do note that the US and now Canada have affirmed they will not be introducing a carbon price, nor have China and Japan. Although in the case of China, it may be a very nominal amount. If you look at where world growth has shifted to, the APEC region, the only economy in the APEC region which has actually introduced a carbon pricing regime is New Zealand, and we do not think that is an appropriate move or in our economic best interests to introduce a carbon tax or emissions trading scheme at this point.

CHAIR: When you talk about a nominal price on carbon in China; that is not through an emissions trading scheme either; is it? That is through a similar system to that we have in Australia—a renewable energy target? It is much less aggressive than the Australian one, but there is no proposition that China would have an emissions trading scheme, either; is there?

Mr Evans : That is how we understand it. We note that the Chinese authorities express their commitment to renewable energy and the like, but the reality is their economy is very much based on coal-fired power and they are actually constructing ultra, supercritical coal-fired power stations as the best means to reduce emissions. As I have noted, it is actually the very existence of the threat of a carbon tax on an emissions trading scheme which is perversely preventing the construction of newer, modern coal-fired power stations in Australia. In fact, it is actually encouraging the use of older technology and older generation in respect of coal-fired power stations.

CHAIR: In a perverse way, all the debate we have been having for the last three or four years about a carbon tax and emissions trading scheme, and a price on carbon is actually resulting in a circumstance where we are doing less well environmentally; our coal-fired power stations are not as efficient and environmentally clean as they could be, right?

Mr Evans : That is our view. If you look at the coal-fired fleet in Australia, it is 20 to 30 years old on average, if not more, and it is old technology. There are some new supercritical plants, but they are not the new ultra, supercritical, which can reduce emissions by up to 40 per cent over the top of the current average generating fleet in Australia at the moment.

CHAIR: People often talk about the European emissions trading scheme, but we do not have the same options to go to other baseload energy sources here in Australia; do we?

Mr Evans : That is correct. We think the characteristics of the European economy are far different from ours. We are an energy intensive, expanding economy, geographically well spread out with population centres well spread out. As I have indicated, we are on the doorstep of Asia and the expansion opportunities associated with Asia, our economic outlook is far different from Europe. As you say, they do have the option of nuclear powered stations, which is not currently an option in Australia.

CHAIR: Of course, the only baseload power options that we have are coal and gas, essentially?

Mr Evans : We believe so.

CHAIR: What else is there as to baseload power?

Mr Evans : Within the next two decades there is very little apart from coal and gas. Our view is that there will be marginal shifts to gas. If you look at where our energy mix is going to be in 2020, I think one reason we have not seen the energy white paper for example is that the only way you are going to get a substantial change in the energy mix is to ramp up the carbon price to a level which would not be sustainable in Australia. The outlook for 2020 which is only eight-and-a-half years away is that we will still have a reliance on coal. We will have marginally more gas in our generation mix. We will not have met the renewable energy target because that is not sustainable economically and therefore our overall energy mix will change very little but in the interim, under the current policy settings, we would have prevented the construction of lower emitting coal-fired power stations.

CHAIR: It would be seen as a waste of money to invest in coal-fired power stations given the current baseload—

Mr Evans : I think given the uncertainty in the investment environment it will be bankers which will determine our energy mix because of the uncertainty associated with it. Until there is a very clear statement from government that we are not going to pursue an ETS or a carbon tax until there is world agreement and a legally binding international agreement on carbon pricing.

CHAIR: We have discussed the study which showed that in order to make gas competitive with coal the carbon price would have to be $60 to $70 a tonne. Are you aware of that study? It relates to the Victorian production and also in Western Australia.

Mr Evans : I am aware of the reports of the study that were released today—

CHAIR: They talked about $40. That is the Deloitte study, yes. What would that sort of carbon price do to—

Mr Evans : We think that around those figures may well be the case. Therefore, it would also depend upon—

CHAIR: What would that do for our competitiveness internationally if we are paying a price at that level?

Mr Evans : Such a price would clear-fell the Australian economy. We do not believe that we could sustain $40. We do not believe we could sustain $25. Our view is, as I stated, there should be no carbon price. It is an incremental cost burden on Australian business which we cannot afford at the moment, especially given the current economic circumstances we face. We hear about the strength of the Australian economy in terms of minerals and energy, engineering, construction and professional services related to that. However, the great swathe of Australian small business is currently facing very difficult economic circumstances and we do not believe within a 12-month period they can endure the additional costs of a carbon price.

CHAIR: There has been a lot of talk about compensation to help people deal with the impact of a carbon price. But the debate has focused on emissions-intensive trade-exposed industries and around households. You have talked to us this morning about the SME sector. Are you aware of any compensation measures being mooted for the impact of a price on carbon in the SME sector?

Mr Evans : We are not aware of any and there was not any last time around with the CPRS. It was just, ‘This is the cost burden. Business will have to accept it and adjust their circumstances.’

CHAIR: Then pass it through the remainder of the economy?

Mr Evans : That is correct. But our view is that they cannot pass it through, a small business, for two reasons. If they are manufacturing, they are trade exposed. Secondly, they have less market power. Take the example of a small retailer that has high refrigeration costs. He has significant energy price increases associated with the carbon price. However, he has limited options to buy more energy efficient equipment and he faces the relative disadvantage to a larger company that does have the ability to buy new equipment and the like and reduce his overall energy consumption or become more efficient. The other point about small business is that they quite often do not own the premises in which they operate. Therefore, they have less capacity to deal with cooling and heating their businesses than perhaps a large business. In summary, we do not think it is possible to have an efficient compensation arrangement for SMEs even if you wanted to, just given the diversity of the small business sector and the various impacts it has on different types of small businesses.

CHAIR: Are you saying there has not been a compensation scheme in place for small business so far because it is just too hard?

Mr Evans : That is correct.

CHAIR: You have also said that a price on carbon, as was proposed with the CPRS and as is emerging with a carbon tax, would shift many small- and medium-sized enterprises from profit to loss. Have you done some assessment or modelling—

Mr Evans : We did at the time of the CPRS and we are currently updating that study. We looked at three sectors—food processing, plant and equipment manufacturing/metal manufacturing, and also plastics and chemicals. We found that in those three sectors, which are middle-ranking businesses, those that have a reasonably high level of energy intensity are trade exposed and would suffer a major deterioration in their earnings before interest, taxation and depreciation. If you accept only fairly low levels of gearing and capital intensity, if you look at the final profitability on those particular enterprises, they did move from profit making to loss making. The only conclusion you can draw from that is that to deal with those costs there would be an employment impact in those sectors.

CHAIR: Did you quantify the employment impact? Did you quantify how many jobs may be lost as a result?

Mr Evans : This was a financial modelling exercise rather than a macro exercise, but we did show in those particular enterprises the deterioration in earnings.

CHAIR: How many employees are potentially impacted by that?

Mr Evans : These were small and middle-ranking businesses that may have only employed 50 people.

CHAIR: But how many of those businesses are there around Australia that would be impacted that way?

Mr Evans : This is the great bulk of Australian small business manufacturing-type enterprises, where they do have a reasonably high energy cost.

CHAIR: Roughly how many people would work in this part of small and medium sized business today?

Mr Evans : As we know from a more general observation, SMEs employ up to 50 per cent of the private sector labour force.

CHAIR: How many people is that?

Mr Evans : Total employment is about 11 million.

CHAIR: So 5½ million roughly.

Mr Evans : I will point out, though, that there are small businesses of different characteristics. Some of them are energy intensive, and others are service related with lower energy costs.

CHAIR: But what percentage of that 5.5 million workforce would be impacted?

Mr Evans : I would have to come back to you on that.

CHAIR: You said that you were updating your assessments that you have done previously. When do you expect to finalise that?

Mr Evans : Within the next seven days.

CHAIR: Would you be able to provide a copy to the committee?

Mr Evans : Certainly.

CHAIR: If I were to summarise your position, though, what you are saying is that in the absence of an appropriately comprehensive global move to pricing emissions it does not make sense to put a price on carbon in Australia which would then reduce our international trade competitiveness? Australia would be worse hit than others because of our dependence on fossil fuels and because of our significant trade exposure. Then there is a particular issue for small business, which has not been taken into account as part of any discussions on compensation so far. Is that a summary of your evidence?

Mr Evans : It has been left out, because it is too difficult. It has been left out of the formal compensation arrangements, because it is too difficult. I do not think it is widely understood that for small business there is an impact of higher energy prices. It is only seen that in the energy-intensive trade-exposed it has a significant impact. But clearly manufacturing enterprises that are using energy will suffer. They will have higher energy bills, both electricity and gas.

The other point I would make, though—and this might be as much again—is that higher energy prices are associated with higher input costs for those businesses, particularly feedstock for plastics and chemicals, for example, in the plastics and chemicals sector. It is not just about direct energy costs, it is also about the indirect costs on inputs, which can be as significant as the direct energy component.

CHAIR: I guess for you to ensure that it is better understood across the community it would help if you were able to quantify some of the impacts in terms of how many people in which particular parts of the small business sector, and to what extent cost pressures are going to go up for those particular small businesses.

Senator CAMERON: You were a coalition adviser before you took up this position, were you?

Mr Evans : That is correct.

Senator CAMERON: What was your position?

Mr Evans : I was a chief of staff to a federal minister.

Senator CAMERON: Who was the minister?

Mr Evans : Peter McGauran, the Minister for Science at the time.

Senator CAMERON: For how long did you work for the coalition?

Mr Evans : Two years.

Senator CAMERON: I have no further questions.

CHAIR: I would just remind you, Senator Cameron, that I of course gave him a bit of courtesy. But there were some people who appeared with some other industry bodies who have of course worked on both sides of politics. I am not sure that that is in any way relevant as to the merits of the argument.

Mr Evans : Can I also point out that I was a Treasury and finance official, and worked for both governments.

Senator CAMERON: Do you know about the market, then?

Mr Evans : That is correct.

CHAIR: Do you have questions now?

Senator CAMERON: Given that he knows the market, I might have. Can you explain to me how government grants can be a market based mechanism?

Mr Evans : In any economy, for example the Australian economy, I am sure there are clearly grants provided to all sorts of people in the community. That is a feature of a modern democracy.

Senator CAMERON: But is a government grant a market in the neoclassical economic approach when you were a departmental person?

Mr Evans : A grant to whom?

Senator CAMERON: A grant.

CHAIR: It is competitive tendering.

Senator CAMERON: Chair, I love how you always try—

CHAIR: You did not have any questions, Senator Cameron.

Senator CAMERON: According to the standing orders, you have got to give me this point of order. My point of order is that it is not appropriate when I am asking a question and there is a response coming from the witness for the chair to try to influence the answer continually, as you do. That is not appropriate from the chair.

CHAIR: Senator Cameron, there is no point of order.

Senator CAMERON: It is not appropriate.

CHAIR: I am asking a follow-up question. To what extent is competitive tendering a market based approach?

Mr Evans : The question is too narrow really to provide a proper answer, but the imposition of a tax or a regulation is not necessarily the creation of market circumstances, either. The question here is not what we regard as a market mechanism but whether or not it is imposed on the Australian economy unilaterally or with other countries. The question is how it is affecting our competitiveness, not so much the nature of that intervention. A tax and a regulation is an intervention.

Senator CAMERON: But you know there are ideological approaches taken in terms of economics in this country and there have been arguments about markets. The role of market and the role of government is as old as the Constitution in this country. You know that.

Mr Evans : With respect to this debate, we are not advocating a grant scheme to deal with the reduction of emissions. We are actually saying to leave it to the market, and for the government to provide the circumstances where the investment can be made in lower emitting technologies through efficiency in technologies.

Senator CAMERON: So, you say leave it to the market.

Mr Evans : That is correct. Until there is an international agreement, when we should then consider our position. I am saying the market has been corrupted to date, because of the on-again, off-again speculation with regard to whether we have a carbon tax and an emissions trading scheme. That has actually prevented a market outcome.

Senator CAMERON: You do not agree with Professor Garnaut and other economists who have said the quicker we move on this issue the cheaper it will be to the economy overall? Do you not agree with that?

Mr Evans : No, not necessarily. First movers do not necessarily make the most efficient steps in this regard.

Senator CAMERON: Most of the eminent economists I have seen in Australia would not agree with that.

Mr Evans : I do not think that is an economic question. That is a technology question, as to whether you have actually got available technology. The trouble with the Treasury analysis of this is that it said that we could seamlessly move and change our energy mix overnight without any cost. That is because economists were dominating the argument rather than energy experts. They do not actually understand that you cannot suddenly shift from coal based generation to an energy source that actually does not exist. With regard to the very notion of clean energy and low carbon, we actually do not have that option in Australia at the moment. It would be good if we did, but we do not.

Senator CAMERON: When you were a Liberal staffer—

Senator HUTCHINS: I think you were a National Party staffer, weren’t you?

Senator CAMERON: You were a National Party staffer, were you?

Mr Evans : Peter McGauran was a National Party member, yes.

Senator CAMERON: The McGaurans jump across, don’t they?

Senator HUTCHINS: Only one of them.

Senator CAMERON: Only one of them?

CHAIR: You are straying well beyond the terms of reference. This is not relevant.

Senator CAMERON: When you were a National Party staffer, or a coalition staffer, and the hallowed government determined that it wanted to place a price on carbon, did you provide the advice that you are providing to this committee to your minister then?

Mr Evans : Actually I worked for ACCI at that point. We were opposed to an emissions trading scheme moving ahead of the world. That was the view of the Australian Chamber of Commerce and Industry. At that time we had a voluntary scheme known as Greenhouse Challenge Plus, and we thought that was actually doing quite a good job. It covered 70 per cent of Australia’s emissions and it actually had companies participating to reduce their emissions in a market way, because they saw there was a good market advantage in actually being efficient and showing their shareholders, investors and the like that they could actually reduce their energy consumption.

Senator CAMERON: Have you been consistently opposed to government taking any steps—

Mr Evans : That is correct.

Senator CAMERON: to reduce carbon pollution?

Mr Evans : In the absence of an international agreement, that is correct.

Senator CAMERON: Do you have any idea how much carbon pollution your members emit?

Mr Evans : We span the great bulk of Australian business. We represent 350,000 businesses from large to small. But in this debate, because there are other representatives, we represent the interests of middle-ranking and smaller businesses.

Senator CAMERON: Do you believe in the science? Do you accept the science in relation to global warming and climate change?

Mr Evans : The view of the chamber is that we should move to reduce our overall greenhouse footprint.

Senator CAMERON: What you believe you should do is not what I am asking. I am asking: do you believe the overwhelming scientific consensus that climate change is real?

Mr Evans : The view of the chamber is that we should mitigate greenhouse emissions.

Senator CAMERON: The chamber does not have a view; is that right?

Mr Evans : I just gave you a view. But we are not the Australian Academy of Science. We are business people and our view is that we accept the scientific consensus on this.

Senator CAMERON: That is good.

Mr Evans : That is the reason we should move to reduce emissions, but through efficiency and technology.

Senator CAMERON: So, you accept the scientific consensus that there is an issue to deal with? You do not go down the Tony Abbott line that it is crap?

Mr Evans : I just told you what our view was.

Senator CAMERON: I think that is enough from me.

CHAIR: Again, in summary, you are in favour of action on climate change—to use that terminology—but you are in favour of action that is actually going to make a difference and not going to make things either worse economically and worse environmentally by shifting emissions to other parts of the world because of taking action in isolation of an appropriately comprehensive global agreement on greenhouse gas emissions? Is that essentially your—

Mr Evans : We are concerned about carbon leakage as a possible outcome, yes.

CHAIR: Thank you very much.