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Environment and Communications Legislation Committee
27/05/2013
Estimates
CLIMATE CHANGE AND ENERGY EFFICIENCY PORTFOLIO

CLIMATE CHANGE AND ENERGY EFFICIENCY PORTFOLIO

In Attendance

Senator Farrell, Minister for Science and Research and Minister Assisting on Tourism

Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education

Executive

Dr Don Russell, Secretary

Ms Sue Weston, Deputy Secretary

Ms Patricia Kelly, Deputy Secretary

Dr Steven Kennedy, Deputy Secretary

Mr Robert Griew, Associate Secretary

Mr Terry Lowndes, Principal Adviser

AusIndustry Division

Ms Chris Butler, Head of Division

Ms Wendy Launder, General Manager, Business Development Branch

Corporate Division

Ms Vanessa Graham, Head of Corporate Division

Mr Brad Medland, General Manager Finance Branch

Mr Robert Twomey, General Manager Finance Branch

Ms Margaret Tregurtha, General Counsel Legal Services

Ms Ditta Zizi, General Manager Parliamentary and Business Services

Mr Graham Tanton, General Manager Facilities and Security

Land Division

Ms Shayleen Thompson, Head of Division

Ms Maya Stuart-Fox, General Manager, Carbon Farming Policy Branch

Mr Rob Sturgiss, General Manager, National Inventory and International Reporting Branch

Mr Hilton Taylor, General Manager, Land Policy and Programs Branch

Carbon Price and Marketing Price Division

Ms Jenny Wilkinson, First Assistant Secretary

Mr Gareth Prosser, Acting Assistant Secretary, Design, Coverage and Regulatory Branch

Mr Trevor Power, Assistant Secretary, Analysis and Projections Branch

Mr James White, Assistant Secretary, Market Linkages Branch

Energy Markets and Policy Coordination Division

Mr Brad Archer, First Assistant Secretary

Ms Beth Brunoro, Special Adviser to Energy Markets and Policy Coordination

Ms Lyndall Hoitink, Assistant Secretary, Energy Markets and Renewables Branch

Ms Jo Mulder, Assistant Secretary, Policy Coordination and Divisional Support Branch

Adaption and Science Division

Ms Benedikte Jensen, Head of Division

Ms Kushla Munro, General Manager, Domestic Adaptation Branch

Mr Anthony Swirepik, Acting General Manager, Science and International Adaptation Branch

International Climate Change Division

Mr Gary Cowan, Acting Division Head

Dr Justin Lee, Ambassador for Climate Change

Climate Change Legal Services Branch

Ms Kerrie-Anne Luscombe, Principal Adviser

Agencies

Clean Energy Regulator

Dr Christopher Branson, General Manager, Renewable Energy Target Market Entry Branch

Mr Ross Carter, Executive General Manager, Regulatory Division

Mr Andrew Livingston, Executive General Manager, Renewables and Carbon Farming Division

Mr John Trabinger, Acting Executive General Manager, Clean Energy Regulator Delivery Division

Mr Geoff Purvis-Smith, General Counsel, Clean Energy Regulator

Mr Chris Ramsden, Executive General Manager, Corporate Services Division

Mr Tas Sakellaris, General Manager, Regulatory Strategy and Intelligence Branch

Ms Mary-Anne Wilson, General Manager, Carbon Farming Branch

Climate Change Authority

Ms Clare Penrose, Acting Chief Executive Officer

Ms Rebecca Burdon, General Manager

Ms Kathleen Rowley, General Manager

Mr Michael Everett, Director

Committee met at 09:01

CHAIR ( Senator Cameron ): I declare open this public hearing of the Senate Environment and Communications Legislation Committee. The Senate has referred to the committee the particulars of proposed expenditure for 2013-14 for Climate Change, the Broadband, Communications and the Digital Economy portfolio, and the Sustainability, Environment, Water, Population and Communities portfolio, and other related documents. The committee must report to the Senate on 25 June 2013. The committee has set Friday, 26 July 2013 as the date by which answers to questions on notice are to be returned. Under standing order 26, the committee must take all evidence in public session. This includes answers to questions on notice. Officers and senators are familiar with the rules of the Senate governing estimates hearings. If you need assistance, the secretariat has copies of the rules. I particularly draw the attention of witnesses to an order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be raised, which I now incorporate in Hansard .

The extrac t read as follows—

Public interest immunity claims

That the Senate—

(a) notes that ministers and officers have continued to refuse to provide information to Senate committees without properly raising claims of public interest immunity as required by past resolutions of the Senate;

(b) reaffirms the principles of past resolutions of the Senate by this order, to provide ministers and officers with guidance as to the proper process for raising public interest immunity claims and to consolidate those past resolutions of the Senate;

(c) orders that the following operate as an order of continuing effect:

(1) If:

(a) a Senate committee, or a senator in the course of proceedings of a committee, requests information or a document from a Commonwealth department or agency; and

(b) an officer of the department or agency to whom the request is directed believes that it may not be in the public interest to disclose the information or document to the committee, the officer shall state to the committee the ground on which the officer believes that it may not be in the public interest to disclose the information or document to the committee, and specify the harm to the public interest that could result from the disclosure of the information or document.

(2) If, after receiving the officer’s statement under paragraph (1), the committee or the senator requests the officer to refer the question of the disclosure of the information or document to a responsible minister, the officer shall refer that question to the minister.

(3) If a minister, on a reference by an officer under paragraph (2), concludes that it would not be in the public interest to disclose the information or document to the committee, the minister shall provide to the committee a statement of the ground for that conclusion, specifying the harm to the public interest that could result from the disclosure of the information or document.

(4) A minister, in a statement under paragraph (3), shall indicate whether the harm to the public interest that could result from the disclosure of the information or document to the committee could result only from the publication of the information or document by the committee, or could result, equally or in part, from the disclosure of the information or document to the committee as in camera evidence.

(5) If, after considering a statement by a minister provided under paragraph (3), the committee concludes that the statement does not sufficiently justify the withholding of the information or document from the committee, the committee shall report the matter to the Senate.

(6) A decision by a committee not to report a matter to the Senate under paragraph (5) does not prevent a senator from raising the matter in the Senate in accordance with other procedures of the Senate.

(7) A statement that information or a document is not published, or is confidential, or consists of advice to, or internal deliberations of, government, in the absence of specification of the harm to the public interest that could result from the disclosure of the information or document, is not a statement that meets the requirements of paragraph (1) or (4).

(8) If a minister concludes that a statement under paragraph (3) should more appropriately be made by the head of an agency, by reason of the independence of that agency from ministerial direction or control, the minister shall inform the committee of that conclusion and the reason for that conclusion, and shall refer the matter to the head of the agency, who shall then be required to provide a statement in accordance with paragraph (3).

(Extract, Senate Standing Orders, pp 124-125)

The committee will begin proceedings with the examination of the climate change outcome of the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education. It should be noted that general questions of the department concerning corporate administrative matters should be addressed to the relevant area of the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education, which is scheduled to appear before the Senate Standing Committees on Economics next week. After general questions, proceedings will continue in the order as set out in the circulated program. I welcome Senator the Hon. Don Farrell, Minister for Science and Research, representing the Minister for Climate Change and Energy Efficiency and Minister for Industry and Innovation; and departmental officers. Senator Farrell, would you like to make an opening statement?

Senator Farrell: Thank you for the opportunity, but at this stage I do not have an opening statement.

CHAIR: Dr Russell?

Dr Russell : Yes, Chair, I would like to say a few things. As a result of the 25 March 2013 machinery of government changes that transferred the climate change function to my department, this is my first appearance before the environment committee. I note that the energy efficiency functions from the former department have been transferred to the Department of Resources, Energy And Tourism, who appear before the economics committee. Accordingly, and as disclosed in our portfolio budget statement, the department now has a new outcome 4, which is:

Reduction of Australia’s greenhouse gas emissions, adaptation to the impacts of climate change, and negotiation of an effective global solution, through the development and implementation of a national response to climate change; and bilateral, regional and multilateral engagement internationally.

This new outcome has an economic focus and complements the existing three outcomes. Outcome 4 will further strengthen the capability of the department to work towards the economic transformation of the Australian economy as we take advantage of the additional synergies that are now available. In particular, I see opportunities for closer collaboration between the department's existing science and research and industry responsibilities and our new climate change responsibilities. The portfolio also now includes the Clean Energy Regulator and the Climate Change Authority together with the secretariat supporting the Climate Commission. Some 456 staff associated with these policies and programs have been transferred to my department. The appropriate changes to systems and resources to accommodate the staff are well underway. Previous MoGs have improved the organisation's ability to streamline these processors. Along with my new colleagues from the former climate change department, I look forward to being of assistance to the deliberations of the committee.

CHAIR: I now invite general questions. Senator Birmingham.

Senator BIRMINGHAM: Good morning and welcome. Can I start with the machinery of government changes and what they mean? Dr Russell, of the former DCCEE’s staff, how many have shifted across to your department in just the departmental context, so ignoring the agencies like the Clean Energy Regulator?

Dr Russell : I might get Vanessa Graham and Sue Weston to address those matters.

Ms Weston : Are you after the number from the former department who came across to us?

Senator BIRMINGHAM: Yes.

Ms Weston : That number is 456.

Senator BIRMINGHAM: Thank you. The former department was forecast to have, based on the previous year's PBS, around 603 staff. So is it your understanding that the residual have been transferred to the Department of Resources, Energy and Tourism?

Ms Weston : It was getting close to that 600 mark when the machinery of government happened. So, yes, the residual did go to the Department of Resources, Energy and Tourism. But, staff are always moving and there is a bit of flexibility in those numbers.

Senator BIRMINGHAM: Are there any redundancies following from the changes?

Ms Weston : Yes, Senator. Because we have two corporate areas, including IT, that are merging it is expected that there will be redundancies. I will get my colleague to go through those.

Ms Graham : The number of climate change employees who were declared excess was 16 of the 456 that were transferred.

Senator BIRMINGHAM: What is the process for those who are likely declared excess?

Ms Weston : We will go through that process shortly. You need to know that of the group that came over, we were able to place some of them into positions that were free in our department that weren't necessarily in corporate areas or were in corporate areas in some instances. So while there were 16 made excess and who were subject to the voluntary redundancy process, which I will go through in a moment, we were fortunate to be able to place a large number of those staff into other roles.

Ms Graham : The process for staff who were declared excess is that they are formally declared excess and placed into a redeployment pool, which then gives them the opportunity to be redeployed across the department. But they are also included in the redeployment pool for the broader APS. They basically work out the period of their redundancy and are considered as a part of that redeployment process for positions that come up, as I said, both within the department and also within roles across the APS.

Senator BIRMINGHAM: Have any redundancies as yet been offered or paid?

Ms Graham : Yes. Of the 16 people who were declared excess, 10 have accepted a voluntary redundancy. I do not actually have any information as to whether they have all been paid but certainly they have accepted a voluntary redundancy.

Senator BIRMINGHAM: Are you able to tell me the value of those 10 redundancies?

Ms Graham : No, Senator, I do not have that. I would need to take that on notice.

Senator BIRMINGHAM: This is the first juncture where that has happened today, Ms Graham. That is not targeted at you; it is more for Dr Russell. If possible, with questions taken on notice during the day it would be appreciated if, when they are ones like that, we are able to get quick answers during the course of the day. Noting that the process of these estimates is such that with the known election date and otherwise, personal experience would suggest that quite often answers won't be seen until after an election. It would be nice for the life of this parliament to get answers within the life of this parliament. The quickest and easiest way for us to do that is to get them on the day that they are asked, if that is possible. Particularly when it is at the front end of the day.

Ms Weston : We will try to do that today.

Senator BIRMINGHAM: I would appreciate that.

Dr Russell : I note that the department will appear next week for the industry parts of the portfolio, so there may well be an opportunity to bring questions back that were asked here that relate to corporate matters to those estimates as well, even if we were unable to get it today.

Senator BIRMINGHAM: That is true, although it always becomes a bit of a juggle as well, particularly with other portfolio responsibilities next week. So if Ms Graham and Ms Weston are able to get the answers today that would be great. It won't always be possible but where it is possible.

CHAIR: I am not sure about bringing some of the questions from this committee back to the economics committee because the economics committee will be dealing with different aspects of the portfolio. I am just wondering how you expect that to work.

Dr Kennedy : I am referring to your earlier remarks about corporate matters being addressed as part of the other part of the portfolio next week. You referred to that in your opening statement. These are corporate matters that could be addressed as part of those corporate questions. I wasn’t referring to climate change matters.

CHAIR: Those questions probably should not be asked here. They should be asked, I assume, next week then. I don’t think that it is appropriate to be using this committee to pre-empt questions that should actually be the property of the economics committee. That is my view. We can have a chat about it during the break.

Senator BIRMINGHAM: Sure. These are all very specific to the integration of the DCCEE staff. To that point, if I can go to an answer to a question on notice from the climate change and energy efficiency portfolio. Question number 4 deals with redundancies that had been offered during the financial year up until 1 March. It indicates that the cost of redundancies within the department in 2012-13 as of 1 March 2013 was $9.4 million. It goes on to say that 58 employees had been declared excess and 14 had secured positions in other departments. Does that mean that we can take from that that it is 44 employees who were subject to the redundancy payments worth $9.4 million?

Ms Weston : I remember looking at the question in preparation. I know that the former department was taking steps to reduce its staff numbers to fit in with its budget, and I would expect that there would be quite a number who will have taken voluntary redundancies under that process. But if you want clarification, we can try to do that for you today as well.

Senator BIRMINGHAM: Again, if you could provide an answer for me of how many staff were made redundant prior to the machinery of government changes and the value of those redundancies, please.

Ms Weston : So you are asking for an adjustment beyond the answer you received. So from 1 March, for instance, on to 25 March?

Senator BIRMINGHAM: On until the machinery of government changes. Obviously we have dealt with post-machinery of government changes, being those 16 who were declared excess and ten who are taking packages. And you are looking into the value of those packages for me.

Related to that, question on notice number 1 outlines the number of new employees engaged by the department during the course for 2012-13. As at 14 February 2013, 62 employees had commenced in the department. There were 45 ongoing positions and 17 non-ongoing positions. Can you explain to me why it is that the department was paying, it would seem, 40-odd redundancies but employing 40-odd new individuals.

Dr Kennedy : The Department of Climate Change and Energy Efficiency had been through a redundancy exercise. But it had important skills and abilities dimensions, as I understood it. In particular, it had been reducing the number of staff associated with program and corporate responsibilities. But it had not been reducing or offering voluntary redundancies to staff with what you might call strong policy capabilities, and it was needing to maintain its capabilities in those areas. So where possible, of course, where staff with some assistance could move between positions, it was seeking to do that through a redeployment pool. But really it reflects just a different mixture of abilities and requirements of the department. For example, I would imagine there were people engaged because there was a skill set that was still required and that was not able to be filled by people whose positions where no longer required.

Senator BIRMINGHAM: Thank you. I will not dwell on that, because time is going to be tight for this section. I come to the logistical impacts, I guess, of the department’s abolition and those machinery of government changes. Are all of the former DCCEE staff still in the Nishi building?

Ms Weston : The bulk of them are, although we have moved some people. For instance, some of the enabling staff in corporate and IT have come to join their team mates in Industry House and our associated buildings. So the bulk are there.

Senator BIRMINGHAM: How many staff are still in the Nishi building?

Ms Graham : Approximately 650 APS staff and contractors are still located in the Nishi building. But that includes staff who were transferred to the Department of Resources, Energy and Tourism as part of the machinery of government change. So the building still houses, in fact, the staff that came to both those different departments.

Senator BIRMINGHAM: How does that vary in terms of numbers prior to those changes? It was about 740, wasn’t it?

Ms Graham : I understand that there were about 680 prior to the machinery of government changes.

Senator BIRMINGHAM: What are the intentions with regards to the staff localities and the use of the Nishi building?

Ms Weston : We are working through that at the moment. We need to come to some agreements with the Department of Resources, Energy and Tourism in relation to their people and whether they have some designated floors, for instance. We are taking the opportunity where we need to with the old department to take advantage of accommodation there. For instance, we are in the middle of a capability review. The team that is doing the work on that will be housed in the Nishi building. We are still working our way through that.

Senator BIRMINGHAM: How many work spaces or terminal in Nishi are currently vacant?

Ms Graham : There are 738 work stations in the building, so as I said, there are approximately 650 people, so 88.

Senator BIRMINGHAM: Indeed. That is a significant number for a building that we are paying $158 million worth of rent on over the life span of its lease. Are there particular plans in place as to how you are going to properly and fully utilise the building? And is the department able to, given its other rental commitments?

Ms Weston : We are, as I said, in the process of negotiating with the Department of Resources, Energy and Tourism. I am not sure of their pressures in that existing building. We are a very large department. We have lots of changes happening all the time, so we are working through that process to see what we can do to take advantage of all of the spaces in Nishi house.

Senator BIRMINGHAM: Are any of the famous coffee machines that we talked about in previous estimates being underutilised?

CHAIR: I do not think they are famous, are they? You have tried to make them famous. They have not quite made it.

Senator BIRMINGHAM: Or infamous.

Ms Weston : There have been no changes to the arrangements that were in place in that respect.

Senator BIRMINGHAM: So some staff have moved out of the Nishi building. Predominantly, though, the old team is still together, basically. Both departments' staff are still in there. The Department of Climate Change and Energy Efficiency no longer exists by name, but in terms of working locality it still looks and feels much the same for those who are there.

Ms Weston : I think that is right.

Senator BIRMINGHAM: At present there are no specific plans to shift those who are in the Department of Resources, Energy and Tourism out, or your department out or anything of that sort?

Ms Weston : There are not any plans of that nature. As I said, we are working with Resources, Energy and Tourism to work out how we best fit with them.

Senator BIRMINGHAM: Okay. In terms of the executive facilities in the Nishi building, how are they being utilised? Obviously there is no longer a departmental secretary. What vacant facilities exist there?

Ms Weston : We do have a departmental secretary in Dr Russell.

Senator BIRMINGHAM: Indeed! And I assume Dr Russell has not moved into Nishi.

Ms Weston : No, he has not. But from time to time, I guess, he will be spending some time with people over there. We are working out plans to use the executive suite when our deputies go over, because we still have our staff over there. Also, we will be able to utilise that area. We will also be moving some of the senior executive service people up onto that floor so that they are able to utilise it. There is space on the other floors to be utilised as well.

Senator BIRMINGHAM: Of the executive facilities, how much of that space is vacant? I had assumed, obviously, that Mr Connolly's old office is vacant. Are there others as well?

Dr Kennedy : I spend at least a couple of days a week at Nishi in that space. My colleague at the Department of Energy, Resources and Tourism, Dr Subho Banerjee, also spent some time there. But, as Ms Weston said, we are working through the rest of these facilities to see how to best use those and make them available to other senior executives where we are under office space pressure in other parts of the portfolio, which we are.

Ms Weston : As I mentioned, we have a capability review of the department underway. So part of that area is being filled by the Australian Public Service Commission team.

Senator BIRMINGHAM: How long are they in place for?

Ms Weston : The length of the capability review is from 20 May—so it has started—through to about 30 August, which I think is the wrap-up.

Senator BIRMINGHAM: How many people does that involve?

Ms Weston : Fifteen.

Senator BIRMINGHAM: Are they included when you tell me there are 650 APS staff and contractors present?

Ms Weston : Yes.

Senator BIRMINGHAM: In terms of your department, how many staff do you have physically in the Nishi building?

Ms Weston : Are you talking about the former department or are you talking about the Climate Change people who are now part of our department?

Senator BIRMINGHAM: I am asking specifically about the Climate Change people who are now part of your department. If you are able to give an answer on the former department in totality, that would be useful as well.

Ms Weston : Obviously it is a proportion of the 456. I just do not know how many that is, but we can certainly find out for you.

Senator BIRMINGHAM: But it would be the vast majority of the 450.

Ms Weston : Yes.

Senator BIRMINGHAM: Of the 650 APS staff and contractors, are you able to tell us how many are former DCCEE?

Mr Tanton : It would be 650 minus the 15 from the APSC. That would be the remaining total for the—

Senator BIRMINGHAM: So is 635 are basically RET and your department. I assume that is the agreed acronym or terminology for your department nowadays. It is easier than anything else. Can I quickly ask about Mr Combet’s travel to speak at the Towards a Global Carbon Market conference in Paris, Brussels and Berlin?

Ms Weston : Before you go on, we do have the number on the redundancy amount paid out, if I can give that to you.

Senator BIRMINGHAM: Certainly.

Ms Weston : It is $496,968.62.

Senator BIRMINGHAM: Excellent. That was for the 10, was it?

Ms Weston : That is correct.

Senator BIRMINGHAM: In terms of those prior to the machinery of government changes—

Ms Weston : We are working on that.

Senator BIRMINGHAM: Thank you. Regarding Mr Combet’s travel to the Towards a Global Carbon Market conference, did the department develop his official program or visits to Paris, Brussels and Berlin?

Dr Kennedy : The department contributed to the minister’s program. It also worked, of course, with DFAT and relevant posts in Europe to develop an appropriate program. But, yes, it made that contribution to his program.

Senator BIRMINGHAM: How many days was this trip?

Dr Kennedy : I can tell you when the minister left the country and returned to the country. He left the country on Friday, 5 April and returned on Sunday, 14 April. So he would have arrived in Europe on the Saturday and left on Friday evening.

Senator BIRMINGHAM: In addition to the minister’s official program, did the department assist in the preparation of Ms Phillips’s official program?

Dr Kennedy : The department would have worked with the relevant DFAT posts to contribute to a program for Ms Phillips.

Senator BIRMINGHAM: Are you able to tell us what the official engagements that the department contributed to for Ms Phillips were please?

Dr Kennedy : I can note a couple. I note from memory that Ms Phillips was invited by the German minister for climate change to attend the climate change conference that the minister was speaking at and a reception that evening. I cannot provide any more details about the rest of the program. That, as I said, was worked up in consultation with DFAT. I can consult with my colleagues in DFAT and take on notice other aspects of the program for you. But I can note those climate change dimensions.

Senator BIRMINGHAM: Just to be clear here, when you say 'to attend the climate change conference that the minister was speaking at', are you referring to Minister Combet or the German minister?

Dr Kennedy : The German minister invited Minister Combet and his partner to that conference. Minister Combet was obviously speaking at it, and I know that his partner attended the conference.

Senator BIRMINGHAM: In terms of this department's engagement in Ms Phillips’s program of engagements, as far as you can recall it was an attendance at a conference that Minister Combet was speaking at in Berlin—I am assuming it was in Berlin, given that it was the German minister?

Dr Kennedy : I am only speaking to part of the program that I know of that the department was involved in preparing. I understand that there was a broader program that DFAT would have been involved in, but I do not have the details of that with me.

CHAIR: On that point, Dr Kennedy, is there anything unusual about a minister being accompanied by his partner or wife?

Dr Kennedy : No. I would note that all aspects of ministerial travel are dealt with by the Department of Finance and Deregulation. So questions around the appropriateness or otherwise should properly be addressed to them. But I know from experience that there is nothing unusual about a minister’s partner accompanying them on ministerial travel approved in the usual way.

CHAIR: Thanks.

Senator BIRMINGHAM: Has this department picked up any of the outstanding debts of the former Department of Climate Change and Energy Efficiency?

Ms Weston : No. When you are asking that question—

Senator BIRMINGHAM: Outstanding debts with a duration of greater than six months, shall I say.

Ms Weston : Are you talking about under the administered programs?

Senator BIRMINGHAM: Yes.

Ms Weston : Okay. The answer to that is no.

Senator BIRMINGHAM: They have all gone to the Department of Resources, Energy and Tourism?

Ms Weston : That is correct.

Dr Kennedy : They were associated with the energy efficiency functions.

Senator BIRMINGHAM: You must be very happy with that, Dr Russell.

CHAIR: I think we might now move to outcome 4, which is the reduction of greenhouse gas emissions, et cetera. If we could have the officers for outcome 4 and program 4.1.

Senator BIRMINGHAM: Thank you, Chair. Can you talk me through what role this department played in the revisions and settings of the new estimates for carbon prices in the budget?

Dr Kennedy : As you know, Treasury is responsible for the forecasts of the carbon price in the budget. They consult with other relevant agencies in the preparation of all their forecasts. In that case that would be us. So there were discussions among officials in preparation for those forecasts, but ultimately they are the responsibility of Treasury.

Senator BIRMINGHAM: ‘Discussions with officials.’ Was there any formal advice given by this department to Treasury in relation to those estimates?

Dr Kennedy : I am not aware of any formal minutes or advice in that form being passed from the department to Treasury.

Senator BIRMINGHAM: What were the matters discussed in relation to the setting of the price?

Dr Kennedy : The Department of Treasury would normally ask us questions around the tracking of international prices in preparing their forecasts and general international conditions. I might ask Miss Wilkinson to elaborate.

Ms Wilkinson : Because we have responsibility for monitoring carbon markets and monitoring analyst’s estimates of future movements in carbon markets, Treasury would talk with us from time to time about what sort of information we had gleaned from that work.

Senator BIRMINGHAM: What is the department's current assessment of the state of international carbon markets?

Ms Wilkinson : There is a distinction that it is important to draw in the international carbon markets between the price which is being received in the European emissions trading scheme and other carbon markets, like the CDM market. Within the European emissions trading scheme, the price at which those allowances have been received has fallen quite markedly in the last year or so. That largely reflects the fact that in Europe there has, as everyone knows, been a fairly significant downturn in economic activity. As a result, European emissions that are covered by the European trading scheme have fallen. So this means that the targets which underpin the European emissions trading scheme out to 2020 are now in some sense easier to achieve. So there is less effort that the European emission trading scheme has to give in order to actually meet the targets that Europe is committed to. The European Union is committed to reducing emissions by 20 per cent on 1990 levels by 2000. They are currently sitting with emissions at around 17 per cent below 1990 levels. So the lower carbon price is in a sense exactly what you would expect to occur when you have had emissions that have fallen, and therefore the level of effort that is required to meet the nominated targets is less.

Senator BIRMINGHAM: What is the European price roughly at present for their primary auction market?

Ms Wilkinson : The December 2013 futures price is currently sitting at about $4.75. That increases out to about $5.42 once you get to the December 2016 futures.

Senator BIRMINGHAM: Does the futures market trade beyond that—out to 2020 as well?

Ms Wilkinson : The futures trade gets very thin. The most trade in the futures market is in the December 13 futures, and after that it really drops off quite dramatically. So there is very little trade in the 15 and 16 futures. Certainly I have not seen a price for prices in the futures market post 2016, but there are of course a number of analysts who provide estimates of what the likely movement in prices are all the way out to 2020.

Senator BIRMINGHAM: So the current trading price for 2013 is operating in Australian dollar terms at around $4.75. So far as the market extends for the European price through to December 2016, that is looking at about $5.42.

Dr Kennedy : There are alternative forecasts out around 2016 from market analysts, if you like, who are advising on carbon markets. If you are interested I could ask Ms Wilkinson to talk to those as well. If not, we can move on.

Senator BIRMINGHAM: I might come back to some of the other analysis, but let's stick with where we are at present—that is, they are currently trading at a little under $5 and are expected to trade to a bit over $5. I have been through this many times previously with Dr Comley and others. The linkage between the Australian carbon price and the European carbon price is expected to see the Australian carbon price converged towards the European price, isn't it?

Dr Kennedy : Correct.

Senator BIRMINGHAM: How is it, then, that we have a budget that is expecting a price in 2015-16 of $12.10 per tonne but the European futures market is currently forecasting a price of $5.42? How does that work as a credible estimate? In fact, that is in the 2016-17 year so presumably it is a little lower than that for the 2015-16 year.

Dr Kennedy : There are two aspects to respond to that question. One goes back to the remark I made a moment ago about what the market experts best forecasts out to that period are, and I will get Ms Wilkinson to elaborate on that in a moment. The second is the nature under which Treasury produces its estimates for the budget. I will just outline these generally and ask that any further questions go to Treasury because they are responsible for them. This methodology is outlined in the budget papers. Treasury, for a range of prices, typically forecast the first two years and then applies a projection methodology, because frankly forecasting out at years three and four is a very difficult exercise. Using transparent and clear technical assumptions has been the method that Treasury has determined is the most appropriate for preparing estimates. So the budget estimates in those last two years in the budget forward estimates should be regarded as projections not forecasts. There is a distinction then between the second two years and the first two years. On the markets estimate of what prices might be, I might ask Ms Wilkinson to elaborate.

Ms Wilkinson : I think that the most important thing is to note that the futures market is not regarded as a particularly good indicator of where the prices might move when you are looking out to a period in which there is very little trade within the futures market. There are a range of analysts who are estimating the likely carbon price. It is under a range of different scenarios and those scenarios depend on some of the decisions that the Europeans might make over the course of this year, both with respect to backloading and with respect to other structural adjustments to their climate change policies that they are talking about. Those sorts of estimates range for the 2015-16 year from a low of around A$7 up to a high of around A$22 for that year. The Bloomberg estimates, for example, range between $12, in a world in which there is no structural changes made to the European emissions trading scheme, up to a range of about $22 if the sorts of adjustments to their scheme that have been talked about in Europe and will be debated over the course of this year do get through.

Senator BIRMINGHAM: Thank you. The Europeans have attempted to make adjustments to their scheme already, haven't they?

Dr Kennedy : They have.

Senator BIRMINGHAM: And those attempts through the European parliament have been unsuccessful to date.

Dr Kennedy : There was a vote on a backloading proposal that has been unsuccessful to date, and they are continuing to work on that issue.

Ms Wilkinson : That matter has to come back before the European parliament. It was not rejected out of hand; it was sent back to the environment committee that has to report back to the European parliament. Two different processes are taking place at the moment: there is the backloading proposal, which is the one that was voted on on 16 April and, as I said, was sent back to the environment committee; then there is the discussion paper being actively discussed within the European Union on structural measures. There are six different structural adjustments to the European emissions trading scheme which have been discussed, which is really trying to address in the longer term what the level of ambition of the scheme is. The backloading proposal was really designed in the short term just to remove some units from the market, and these were going to be brought back in the last two years of this phase of the European emissions trading scheme. The structural measures debate is going to be taking place in the last quarter of this year.

Senator BIRMINGHAM: Is this the type of information the department provided to Treasury as part of the carbon forecasting analysis?

Dr Kennedy : Most of the information we are discussing is publicly available and is being reported on and discussed around carbon markets. Certainly the broad settings of the market and likely future developments were discussed with Treasury. From memory, although I do not have it in front of me, Treasury noted some of these discussions, or at least the uncertainties associated with them, in the budget papers themselves.

Senator BIRMINGHAM: Regarding those uncertainties, what risks would you anticipate there being as to the likelihood of the EU making these changes required to its market?

Dr Kennedy : Would you mind if I asked you to clarify the question? Are you asking us to comment on, if you like, internal EU conversations that we might be aware of or uncertainties surrounding—

Senator BIRMINGHAM: No, I am asking you to look at the Australian policy context, which is significantly impacted by—almost completely impacted by—the decisions the Europeans will make, in terms of: where their price goes our price will follow. What upside and downside risks are there in the likelihood of the Europeans making any changes to their policy?

Dr Kennedy : In terms of the integrity of both the European and the Australian mechanisms, I would not regard there being a risk to the integrity of the Australian mechanism. As Ms Wilkinson outlined earlier, the price that flows from the level of ambition or the caps that are set in these large global schemes, to which it is foreshadowed the Australian scheme will be linked, will reflect both economic conditions and the caps that are set. The architecture around the integrity of the European scheme is strong and remains so, as is the Australian scheme. So I do not think price variability, as such, creates any risks for the integrity of the mechanism. I would agree with you that there would be some uncertainty about what future prices might look like. That is what Ms Wilkinson went through earlier when she outlined the $12 price from Bloomberg without the backloading measures and the higher price. If you like, these sorts of variations in commodity prices are the sorts of variations firms have to deal with a range of prices that they have to build into their businesses. The mechanisms are designed to allow firms to deal with those risks in making their judgments.

Senator BILYK: Chair, I have a comparative question. What was the European carbon price prior to July 2011?

Ms Wilkinson : My recollection is that it averaged around A$25 for the previous two or three years.

Senator BILYK: Thank you.

Senator BIRMINGHAM: Obviously, discussions are ensuing between Australia and the European Union regarding the linkage of our schemes and the finalisation of those agreements. The specifics of that are obviously things we can touch on later today. But, in those discussions, is Australia pursuing with the Europeans issues of what changes they might be contemplating or seeking to make to their scheme?

Dr Kennedy : In the discussions, both parties seek to understand both the full set of current arrangements and any expected future changes, as you would in the normal course of any arrangements, were it a tax treaty or any arrangements, where you are linking these types of arrangements. But both parties know that it is a matter for each jurisdiction as to whether changes are made or not. Certainly we seek to inform each other of our current arrangements and any future expected changes.

Senator BIRMINGHAM: Did you seek to be informed by the Europeans about prospective changes to their scheme to inform your advice and information that this department was providing to Treasury as part of this forecasting?

Dr Kennedy : I probably have to be a little careful here. We are in the early stages of having discussions with Europe about both the current, if you like, one-way link and then the subsequent two-way link, which will be backed by a treaty. It would not be appropriate for me to go into those international discussions. To be frank, the interplay of the potential policy measures and what they might mean for prices is a discussion that is being had in the public domain and is as much informed by market watchers and market experts into how the different mechanisms that are also in the public, which Miss Wilkinson spoke about, would impact price. With Treasury forecasting and then developing their projection methodology, really it is about the known proposals to changes in the European schemes and what impact they likely to have on price. I do not think that there is much more to it than that.

Ms Wilkinson : The European debate about these structural measures has been a very open debate. It was back in November of last year that they released this discussion paper, which really elaborated on each of the options which could be considered if they wanted to withdraw some of their allowances from the market. I think Dr Kennedy is absolutely right: we would rely as much on other analysts in Europe and the information that they are pulling together about likely outcomes as we would from direct discussions with the commission.

Senator BIRMINGHAM: So at no point do you sit down with the European policymakers and say, 'Hey, look, your policy decisions here are going to impact on pricing in Australia, which has a direct impact on our budget in Australia. Can you give us a heads-up beyond what is in the public domain of where your thinking is at, what the likelihood of things are and so forth’?

Dr Kennedy : As I said, we do have good discussions with the European Commission around developments in their scheme, as they do with us around developments in our scheme. We seek to understand how changes might affect the price. But, to refer back to Ms Wilkinson's earlier answer, the commission, as far as I am aware, does not publish its own forecasts of price. It simply works to ensure its mechanism continues to be appropriately implemented, and through these reforms is looking at the possibility of increasing ambition in the light of the fall in emissions. We do not, if you like, have competing price forecasts which we confront. In fact, they explicitly do not go down that route. That is something that is left to the markets.

Senator BIRMINGHAM: So they do not budget their forward revenue at all?

Dr Kennedy : It is a somewhat more complicated arrangement in Europe because they will in the future and maybe now—but I will ask my colleagues to clarify that in a moment—distribute revenue from carbon price auctions back to member states. So certainly member states would have an interest in what the likely carbon price might be in the future for what it means for their revenue implications. But it would be no different from the arrangements that we have here. They would know the allocation based back to them on units, and in terms of the prices they would be looking in the very short instance in markets and using their own budget-based estimates for the longer term estimates.

Mr White : In phase 3 of the European emissions trading scheme there is a progressive move to auctioning a far greater proportion of emissions units than has been the case in the past—that is, through the first two phases where the majority of those units were grandfathered under national allocation plans. There is public information that there has been a series of auctions in the European emissions trading scheme this year. Most of the parties are on a common auction platform and three parties are operating an independent auction platform. The revenue from the emissions trading scheme goes back to the member states. There are certain conditions on how the revenue can be used. I think more than 50 per cent of it needs to be used on climate change measures, but presumably the member state treasuries would make some assessment of what that revenue amount might be and where it will be allocated.

Senator BIRMINGHAM: So the European Union itself may not be forecasting what the overall revenue from its scheme is. But the Germans, the Spanish or others would presumably, in their budgetary context, see that they have an allocation of x number of permits in 2015-16 and would make their own estimates as to what the price is likely to be there?

Dr Kennedy : I presume so, but I should say at this point that it is not something I have discussed with the member states. So there is a bit of presumption going on here about how it would be built into their budget estimates. We could seek further information in this area if you are interested in how the member states are preparing their estimates in the light of carbon price forecasts and those future options. Beyond these sorts of framing comments I have made, I cannot offer you any more detail on that. But certainly we could seek it for you, if you are interested.

Senator BIRMINGHAM: Perhaps if you are able to for the big countries—Germany, Spain, France and Italy—and how they account for it, and also to check as to whether any of that has been taken into consideration in our own assessments of forward prices. It would seem surprising, if European member states are making assessments of forward prices for their budgetary purposes, that we would not at least be considering those, given the impact they have on our forward estimates of prices. If you can take that on notice, that would be great. Coming back to the policy changes that would need to be made to sustain a higher European price, given the deferral or failure of the European Parliament to successfully implement those changes to date, what chance does the department think that there is of those measures being approved, firstly. Secondly will there be any back loading of those measure.?

Ms Wilkinson : The first thing to note is that when you look at the analysts projections of carbon prices out to 2020 in the European scheme, even without back-loading and without any cancellation of units, it is still the case that the European carbon price is projected to pick back up again. For example, Bloomberg’s forecast for carbon prices in Europe at 2019-20, without back loading and without cancellation, are still sitting at A$45. That is because there is an expectation that in the normal course of events, as European economies improve and there is therefore an economic recovery and a recovery in emissions growth, you would expect there to be increasing demand for allowances. That is also wrapped up in the fact that by the time you get towards the end of the decade there will be much more clarity about what the post-2020 arrangements will be. In order for Europe to be on track to meet their 2050 targets, it is going to require further significant reductions in emissions. While the debate over the structural measures is a really important debate, I think it is worthwhile keeping in mind that the sorts of carbon prices that analysts have in mind at 2020, even without these structural measures, are significantly above the current spot prices in the European emissions trading scheme.

Senator BIRMINGHAM: That is all driven based on presumptions and hopes of economic recovery. If Europe is currently 17 per cent below 1990 emissions levels and their commitment to 2020 is to be 20 per cent below, if they do not have a big economic recovery then they will meet that in a canter and the price will stay low.

Dr Kennedy : It will not just depend on 2020. It will also depend on what future targets are for Europe beyond 2020, because these schemes allow units to be banked, if you like, to meet future liabilities. So the market is forming an expectation of not only that target of 2020 but the trajectory beyond. Secondly, on the analysts' expectations, they are the analysts' expectations for the markets. This is not to quibble with your earlier language, but it is not on a hope of recovery and that things turn out okay. It is based on their best expectations of what is likely to unfold, so they can advise their clients appropriately of how they should be preparing for future carbon prices. So I would call it at the very least a sober assessment of what future carbon prices might be.

Senator BIRMINGHAM: Okay. Can I go back to my previous question and single out issues of back-loading. How live is the option of back-loading of measures in terms of the debate occurring in Europe, and what is the impact should that back-loading not occur?

Ms Wilkinson : The proposal to backload 900 million allowances remains the proposal which is on the table. It has gone back, as I said, to the environment committee, and they need to come back to the European Parliament again to vote on that or to take further instructions before the European Council would decide what action it wanted to take. But the European Council has expressed support for backloading and the environment committee of the parliament continues to express support for backloading, so that is a matter which remains a live option.

Senator BIRMINGHAM: But when it was put to the European Parliament it was sent back to the environment committee.

Ms Wilkinson : That is correct.

Senator BIRMINGHAM: So at that time there clearly was not support to pass it.

Ms Wilkinson : It was not supported in the European Parliament but it was still, at that point, supported in the council. Any legislative changes have to get the support of both the parliament and the council. The European Parliament could have actually rejected the backloading proposal entirely when it was brought forward on 16 April, and they did not do that. They sent it back to the committee and they asked the committee to continue to consider ways in which this proposal could be modified, but it could still give effect to backloading.

Senator BIRMINGHAM: Do Australia's price estimates make any assessments or judgments on whether this backloading is or is not likely to occur?

Dr Kennedy : As I said earlier, carbon price forecasts are a matter for Treasury and should be rightly addressed to them. As I said, they rely on the market for the first two years for market forecasts and thereafter use a projection methodology. Beyond that, really, further questions about the specifics of the carbon price forecasts should rightly go to Treasury; they prepare them.

Senator BIRMINGHAM: Is there any assessment of what would happen were the backloading not to occur?

Dr Kennedy : Treasury prepares those price forecasts with the full knowledge of the range of outcomes. Ms Wilkinson has outlined analysts' expectations with and without backloading. I do not think there is much more that we could add to that.

Senator BIRMINGHAM: Sorry, I missed the last part of what you said.

Dr Kennedy : Ms Wilkinson, for example, gave you Bloomberg's estimates with backloading and without backloading. All of that information is publicly available. It all would have formed part of the considerations in preparing any forecasts.

Senator BIRMINGHAM: In terms of this department's understanding of how Treasury has done the assessments, to 2020 it is still the $38 per tonne figure that is and was based entirely on the previous modelling—clean energy or whatever it is called.

Dr Kennedy : Its approach is outlined in the budget papers, yes, and I believe that it refers to the $38 in 2020.

Senator BIRMINGHAM: Working backwards, what is the earliest year for which estimates have been set, in terms of pricing as against revenue?

Dr Kennedy : I will just go to what is in the budget papers and again ask that further questions go to Treasury. Treasury have set a projection methodology after the first two years, so that is from the third year of the forward estimates onwards. They have used a methodology that moves from the prices in the forward market, as I understand it, to the price that you just outlined—the $38 in 2020.

Senator BIRMINGHAM: So they are using the 2013-14 forward market as a base to then get to a price of $12.10 in 2015-16, and they get to that purely by drawing a straight line from five bucks in the forward market to the $38 that had been assessed a couple of years ago.

Dr Kennedy : Their projection methodology is, as I understand it, a straight line methodology. To be frank, when one is making projection assumptions, one will use trends, some sort of average or some sort of anchor point. But, again, that is a question that you should really ask Treasury. They developed that methodology and I would not like to be answering questions on the pros and cons of it; it should go to them.

Senator BIRMINGHAM: Sure. I will desist on that. In terms of the revenue impact of the decision, though, what is the revenue write-down for carbon pricing revenue that has been experienced?

Dr Kennedy : Again, I fear that I am about to disappoint you. The revenue estimates are, again, Treasury's responsibilities. We can certainly tell you what they are as published in the budget, but questions around the details of the revenue estimates should rightly go to Treasury. Ms Wilkinson, do you want to note the numbers published in the budget?

Ms Wilkinson : Yes. I can note the numbers that were published at the time of the budget, which is that the revised permit price reduces carbon price revenue relative to those numbers published at MYEFO by around $6 billion over the four years to 2015-16. I would also note that, given that a large part of the expenditure funded by the carbon price revenue is provided in free permits, the cost to the budget of industry assistance programs fell commensurately. Those together fell by about $3.9 billion as a result of the change in the carbon price assumptions.

Senator BIRMINGHAM: Are you able to give me the year-by-year reduction in revenue?

Dr Kennedy : Is it published in the budget?

Ms Wilkinson : Those are published in the budget. If we can come back to that, we can give them to you.

Dr Kennedy : We will find the relevant table for you.

Senator BIRMINGHAM: Thanks, Ms Wilkinson and Dr Kennedy. How many permits are on sale, once we get to the floating price period in 2015-16?

Ms Wilkinson : There are around 338 permits, which would be auctioned in—

Senator BIRMINGHAM: Is that 338 million?

Ms Wilkinson : I am sorry—338 million permits, which would be auctioned in 2015-16.

Dr Kennedy : Perhaps we should refer to the auction schedule here. This was noted in budget measures, I understand. Three-eighths of any year's permits to be auctioned as part of that compliance year will be auctioned ahead of the compliance year and then the rest bar one-eighth, which is auctioned a year after. It is anticipated that there will be forward auctioning, if you like. So, with those 2015-16 auctions, there are auctions taking place in that year that reflect the allocation for that year and other years based on this 'three-eighths, four-eighths, one-eighth' schedule.

Senator BIRMINGHAM: Three-eighths the year before, half in the year of and one-eighth in the year after.

Dr Kennedy : Three-eighths across—

Ms Wilkinson : The two years before.

Dr Kennedy : the two previous years.

Ms Wilkinson : Yes. The number that I quoted was, if you like, the total number of units associated with that vintage year. So, in the 2015-16 year, if you take the carbon price revenue as published in the budget and divide it by the carbon price as published in the budget, there would be 338 million units associated with the 2015-16 year.

Senator BIRMINGHAM: If I take the $4.09 billion from the 2015-16 year and divide it by $12.10, I will get to 338 million permits.

Ms Wilkinson : You will indeed. I hope so.

Dr Kennedy : I should point out that there is this difference between accrual and cash estimates here. When we speak from the accrual tables or the fiscal estimates, you are able to do that calculation because the money is booked to the year to which it is attached; and, as you know, that auctioning schedule that I outlined means that, for the cash estimates, the numbers are different because they are booked for when the cash comes in.

Senator BIRMINGHAM: For any variance up or down in that $12.10—a $1 variance up or down has a $338 million hit to the budget, up or down?

Ms Wilkinson : Not exactly, because of the fact that there—

Senator BIRMINGHAM: At least to budget revenue.

Ms Wilkinson : 'Potential revenue' is the way to think about it, because those units are not all auctioned. There are a significant number of those units which are freely allocated. If you wanted to look at what the net impact to budget is, you would have to be looking at just the auctioned units.

Senator BIRMINGHAM: In terms of the $4.09 billion in 2015-16 that is reflected in the budget—table 9, page 5-26 of Budget Paper No. 1—a dollar variance up or down in the $12.10 estimate of pricing would result in a $338 million variance up or down to that $4.09 billion.

Dr Kennedy : Ms Wilkinson will confirm your estimates; you might be thinking about the gross revenue impact. But, as she said, permits that are allocated freely as part of this exercise mean that there is a net impact, so not all those units are auctioned. If you are trying to understand the hit to the budget, you have to net off the things that automatically move with the carbon price.

Senator BIRMINGHAM: I understand what you are saying there. If we can shift to that impact of the equation then, what is the impact of a $1 price movement in net terms?

Dr Kennedy : I do not think we have that in front of us. It is a question that you should, frankly, rightly take to Treasury because they are responsible for preparing those revenue numbers and we are working through the numbers that are published. But we will check to see whether we can help you. We can certainly talk to the net impact that was published as part of these numbers.

Ms Wilkinson : Absolutely. If you look at the net impact of moving the carbon price estimates over the four years to 2015-16, there was a $6 billion reduction in revenue; there was a $3.9 billion reduction in industry assistance, which was automatically linked to the carbon price. Roughly two-thirds of the carbon price impact is offset by automatic adjustments to payments in the form of free permit allocations.

Dr Kennedy : Those numbers may change over time as the proportion of free permit allocations and overall permits changes as well. But Ms Wilkinson is right; it was noted at the time, in fiscal balance terms, that the net cost to budget compared to MYEFO was $2.1 billion. If you like, that is net of the $6 billion gross change. As to how those movements might change in the future, again, I would ask you to address those questions to Treasury. We are simply reading through their published numbers at the moment.

Senator BIRMINGHAM: I will ask about a couple of the more explicit revenue changes that have been recognised in the budget and, in particular, those that relate to the adoption of the second Kyoto commitment period and new greenhouse gas global warming potentials. An additional $240 million is recognised in the budget as a result of those measures. How and why does that additional $240 million come about?

Dr Kennedy : You are probably interested in both the changes as a result of the global warming potentials and the election of article 3.4 activities. There are two measures that I think you are referring to. One will refer to the changes as a result of adopting the greenhouse gas global warming potentials and the other is the election of additional land based activities. I will ask Ms Wilkinson to talk to the global warming potential changes that have had a revenue impact and then Ms Thompson can talk to the election of additional land based activities. Would you like to hear about both?

Senator BIRMINGHAM: Yes.

CHAIR: I would just indicate, Senator Birmingham, that I intend going to Senator Singh after one more question.

Senator BIRMINGHAM: Okay.

CHAIR: Have you got much to do to finish it?

Senator BIRMINGHAM: We will see how we go. The nature of this answer will probably dictate that.

Dr Kennedy : We will start with global warming potentials.

Ms Wilkinson : Two measures were identified in the budget. The first measure was the measure that was associated with the government signing up to a second commitment period under the Kyoto protocol. That was the decision that was taken ahead of the conference of the parties meeting last November. As part of signing up to the second commitment period of the Kyoto protocol, the government had to be prepared to take on board the new global warming potential numbers, and they also had to adopt forest management activities within their commitment. The combined impact of taking on board the new global warming potential numbers and signing up to and adopting forest management activities had a revenue benefit of $240 million.

Senator BIRMINGHAM: So the revenue benefit of $240 million is realised because the number of allowable permits in 2015-16 and 2016-17 that can be sold or auctioned has increased?

Ms Wilkinson : Yes. Two things are happening here. Adopting the new global warming potential numbers increases our historic emissions and also our projected emissions because the new GWPs increase the emissions factor that is applied to a range of different emission sources with things like nitrous oxide emissions. That pushes up the whole base—the 1990 number and the 2000 number. So, when you are calculating either your QELRO from 1990 or your target from 2000, you have a higher level of ambition. The adoption of the forest management activities involved—Ms Thompson might add in here—the adoption of a baseline in order to work out the sequestration or emissions you could count from forest management activities into the future. Current estimates are that, given the baseline, this will lead to a lower level of uncovered emissions over the forecast period—over the period to 2020—which would mean that you can have a higher cap. A higher number of permits will be issued under the scheme in order to meet the same minus-five trajectory—or any given trajectory, to be honest.

Senator BIRMINGHAM: So the accounting change we will see in terms of the volume of emissions Australia is reporting in 2020 will be higher to achieve the five per cent cap than was previously the case.

Dr Kennedy : That is one effect; and the second effect that Ms Wilkinson was talking to was when you are setting caps for the covered sector—the sector covered by the emissions trading scheme—you do that to achieve your overall objective, but understanding what the uncovered sector is doing. The forest management change that Ms Wilkinson was talking about means that emissions in the uncovered sector will now be lower, and so covered sector emissions or the amount you auction for firms or distribute can rise. So there are two impacts: one is lifting the whole base you referred to earlier—emissions are higher—the other is the split between covered and uncovered emissions. Ms Thompson, do you want to elaborate on that?

Ms Thompson : Just to add to what Dr Kennedy and Ms Wilkinson have been saying, in effect, the government decided to broaden the coverage of the Kyoto target. The forest management decision was announced in December last year and, at the time of this budget, the government also announced that it intended to broaden the coverage still further to include two new article 3.4 activities known as grazing land management and crop land management. The impact of that was that, because we had more abatement coming into coverage of the Kyoto target, more activities were able to be covered by the Kyoto QELRO, which in turn meant that more was available to be auctioned. So, not just the forest management abatement but also abatement from grazing land and crop land fed into that additional revenue.

Senator BIRMINGHAM: So does expanding the inclusion of covered activities to include grazing land management and crop land management in any way expand the inclusion of those activities within the carbon pricing mechanism?

Ms Thompson : Yes, it does, because it means that projects under the Carbon Farming Initiative that relate to activities on crop land and grazing land can now also be eligible for meeting carbon price liabilities in much the same way as the previous Kyoto eligibilities were able to be used.

Dr Kennedy : I should clarify that people will not be liable for emissions in those activities under the carbon price mechanism. It does not expand as a liability under the mechanism, but it expands people who are liable under the mechanism to purchase offsets generated by these activities now in the Carbon Farming Initiative. So it broadens the range of offsets available for liable parties in the carbon price mechanism. But, to be crystal clear, the election of these activities will not mean that we will now have people who are liable for those emissions. If they have approved, for example, Carbon Farming Initiative projects, they will simply be able to generate offsets and permits which they could sell back to liable entities. So it expands our overall coverage but not the liable entities.

Senator BIRMINGHAM: Can you tell me how the inclusion of these covered activities and the impact it has changes, by specific numbers in 1990, 2000 and 2020 projections, Australia's covered emissions?

Dr Kennedy : I might have to take that on notice. With the chair's permission, could I break your question up a bit so that we can go through each part? Perhaps Ms Thompson can start with the election of the optional 3.4 activities and talk about how we expect those to unfold and how that would affect future emissions and then we will step through the other parts of your question. I think you are seeking to understand how the election of, say, article 3.4 or adopting these global warming potentials changes the emissions profiles that were published last year.

Senator BIRMINGHAM: I am. I am not necessarily seeking lengthy answers on how it changes those profiles, but rather, specifically in terms of the reportable numbers of emissions, what the change is.

Dr Kennedy : Right.

Senator BIRMINGHAM: So, in terms of going from 548 million tonnes in 1990 terms or 558 in 2020 terms, what are the relevant figures for Australia now and how does that vary to 2020? If you need a few minutes to look that up perhaps we can take Senator Singh's questions while that occurs.

Dr Kennedy : As to the overall impact, there are many moving parts around our emissions projections. Typically, they have been published by the government in the latter part of the year. I should foreshadow that one should be careful about simply taking the numbers that we expect to arise out of these changes and then adding them to existing numbers because we would go through a process where we review all numbers and how they would change. But perhaps I could take up your suggestion and go to Senator Singh's questions while my colleagues, as concisely as possible—without long answers—outline for you how these detailed changes affect emissions.

Senator SINGH: I have some specific questions in relation to King Island in Tasmania, where the King Island Renewable Energy Integration Project is being rolled out with the support of the Australian government. Can you comment on the progress of this project as a test site for innovative technology, including managing intermittent power generation?

Mr Archer : I must admit that I do not have a lot of detailed information about that particular project in front of me here today. I am aware that King Island represents possibly the best wind resource we have in Australia and that, if the proposed wind farm project—which I understand is being put forward by Tas Hydro—were to proceed, it would also be the biggest wind farm project in Australia. My understanding is that the project is at a reasonably early stage. I recall hearing something recently in the media about a vote that Tas Hydro was going to put to the population of King Island as to whether they thought the project should proceed. That, roughly, is the limit of my understanding of that project at the moment.

Senator SINGH: I am interested specifically in that proposal by Tas Hydro. There is a broader kind of level of Australian government support in this. There have already been developments in the Clean Technology Innovation Program operated by this department. For example, Saturn South developed a product to monitor and remotely control energy use in buildings on that island. But I want to specifically go to Hydro Tasmania's construction of that new network of wind farms on King Island—which is called TasWind. I understand that some landowners have retained the services of Wells Haslem, which is co-directed by ex-coalition staffer John Wells, to campaign against Hydro Tasmania's TasWind proposal. Are you aware of that?

Mr Archer : No, I am not.

Senator SINGH: One of the arguments in this very slick campaign is that 'there is strong anecdotal evidence'—that is their quote—'that wind farms threaten human health'. Is the department aware of any substantiated adverse health effects resulting from wind farms?

Mr Archer : Not to my knowledge. I am aware that in 2010 the National Health and Medical Research Council issued a peer-reviewed paper which at that time stated that there was currently no published scientific evidence to positively link wind turbines with adverse health effects. Obviously, that is a few years ago now. Reports this year from both the South Australian Environmental Protection Agency and the Victorian Department of Health have concluded that, at least, very low frequency sound levels around wind turbines are no greater than in urban and rural environments. The National Health and Medical Research Council is updating its study, but the results of that are not due to be completed until the second half of this year.

Senator SINGH: Are you aware that the 'No TasWind' group engaged a well-known anti-wind farm activist, Sarah Laurie, to present on the health impacts that she attributes to wind farms and that Sarah Laurie has been examined by the national peak body for medical research over claims that she breached codes of conduct of ethical research?

Mr Archer : I have no specific knowledge of those matters.

Senator SINGH: I want to ask generally: how much has renewable energy output increased in the first nine months of the carbon price being in place?

Mr Archer : That is a good question. I think we have a figure.

Senator SINGH: Just a percentage would be fine.

Mr Archer : It looks like renewable generation has increased by just under 30 per cent over the first 10 months of the financial year 2012-13 compared with the same period in the year prior.

Senator SINGH: So there has been an almost 30 per cent increase in renewable energy output in the first 10 months of the carbon price being in place?

Mr Archer : That is correct.

Senator SINGH: That is quite an increase, isn't it?

Mr Archer : Yes.

Senator SINGH: How much have emissions in the electricity market fallen since 1 July?

Ms Wilkinson : Emissions have fallen over the first 10 months of this year by 7.3 per cent relative to the first 10 months of last year. So that is equivalent to just under 11 million tonnes of emissions.

Senator SINGH: Eleven million tonnes have fallen.

Ms Wilkinson : Yes.

Senator SINGH: We will go back to Senator Birmingham, if he is ready.

Dr Kennedy : Senator, we shall return to your earlier question.

Senator BIRMINGHAM: Thank you.

Dr Kennedy : We will attempt to keep it short. I will ask Ms Wilkinson to take you through a few numbers.

Ms Wilkinson : Okay. Senator Birmingham, the adoption of the new global warming potential numbers increases the 1990 base from 548 million tonnes to 571 million tonnes. Were you after the abatement challenge at 2020 or were you after the—

Senator BIRMINGHAM: Yes, the abatement challenge.

Ms Wilkinson : The abatement challenge at 2020? It increases it from 155 million tonnes to 162 million tonnes.

Senator BIRMINGHAM: I can dig out the figures and no doubt do the maths as to what that means but if you have there what the revised emissions totals for 2020 are, assuming the challenge is met, that would be great, thank you.

Ms Wilkinson : The revised emissions total would be 558 million tonnes.

Senator BIRMINGHAM: The revised emissions total would be 558—

Ms Wilkinson : At 2020.

Senator BIRMINGHAM: As against what? Was it 600, sorry?

Ms Wilkinson : No. As against previously it was 537.

Senator BIRMINGHAM: Okay.

Ms Wilkinson : Then the adoption of the forest management and the additional article 3.4 activities contributes abatement of about 12 million tonnes at 2020. So that takes the abatement challenge down to about 150 million tonnes.

Senator BIRMINGHAM: The old challenge was 155 million tonnes; the recalculation of that challenge makes it 162 million tonnes. But because we have the land sector activities included, it takes it back down to about 150 million tonnes?

Ms Wilkinson : That is correct.

Senator BIRMINGHAM: That is fine. Throughout the life of the variable price period, the government will be able to auction more permits every single year until 2020, won't it?

Ms Wilkinson : That is correct, based on current projections for uncovered sector emissions.

Senator BIRMINGHAM: So there will be another 21 million permits on offer in 2020 than there would have been previously, based on the 537 increasing to 558?

Ms Wilkinson : No, that is not quite right.

Dr Kennedy : We will confirm that number for you.

Ms Wilkinson : The movement from 537 to 558 is just a function of adopting the new global warming potential numbers. Then you also have to take into account the additional abatement that you would receive in the uncovered sectors, from forest management and article 3.4 activities. You have to take that together to work out what the additional number of units that could be auctioned would be.

Dr Kennedy : This is, if you like, what we were talking about before. You are lifting the base. So that is that lift-up with the total number. But if the uncovered sector emissions are lower, you can auction more permits in the covered sector. Your cap is effectively less tight in the covered sector.

Senator BIRMINGHAM: Let us bring it back because it would probably be easier, at least in the first instance, to talk in the years that we know. You told me earlier that, in 2015-16, there are 338 million permits expected to be auctioned.

Ms Wilkinson : Yes.

Senator BIRMINGHAM: That 338, I assume, is after adjustments have been made to the assumed scheme cap?

Ms Wilkinson : In 2015-16 there is no scheme cap because that is—

Dr Kennedy : Yes, there is.

Ms Wilkinson : I am sorry, yes, there is.

Senator BIRMINGHAM: That is the first year.

Ms Wilkinson : Yes, that is the first year. I am sorry, my apologies; that is the first year. So that is the adjustment to the cap as both of those effects are taken into account, global warming potentials and the additional activities. Both of those are taken into account in working out what the number of permits that would be auctioned in that year would be.

Senator BIRMINGHAM: Again I guess I could do the maths, if you are not able to tell me. The fact is that an extra $100 million in revenue is realised in 2015-16. If I divided that by $12.10, it would tell me what the increase in the scheme cap has been. Are you able to tell me what the increase in the scheme cap has been, or should I just do the maths?

Ms Wilkinson : Sorry, I do not have that in front of me.

Senator BIRMINGHAM: Okay. What is the assumed scheme cap for 2016-17?

Ms Wilkinson : Again, the implied scheme cap from the budget numbers is 329 million tonnes.

Senator BIRMINGHAM: How far out is the assumed scheme cap projected?

Dr Kennedy : There is a cap that sits behind the forward estimates. In the legislation, there are default caps built in to how the cap will evolve. But there is a process underway. The Climate Change Authority is running a caps and targets review and is due to provide advice to government in early February 2014, I think, for the government to set future caps for the scheme. But for the purposes of the budgets estimates in front of us, the cap are as has been outlined by Ms Wilkinson and are consistent with a five per cent reduction in emissions to 2020.

Senator BIRMINGHAM: My 21 million figure may or may not hold up there. The reason for the difference in covered emissions under Kyoto, which are sort of somewhere in the 500 million-odd tonnes at present, and the assumed scheme cap being in the 300 million-odd tonnes is those areas that are included in the carbon pricing mechanism versus those that are not, but all of them are included within the Kyoto cap?

Dr Kennedy : That is correct.

Ms Wilkinson : Exactly; that is correct. When calculating estimates of coverage under the carbon pricing mechanism, you also have to estimate how many entities are, for example, going to opt into the carbon pricing mechanism as a function of the opt-in arrangements which have been put in place for liquid fuel users, for example.

Senator BIRMINGHAM: So the inclusion of these extra activities will have an effect of increasing the assumed scheme cap across the foreseeable life—the life to 2020—of the carbon pricing mechanism?

Dr Kennedy : Correct.

Senator BIRMINGHAM: So you would expect increased revenue to be realised each and every year because the inclusion of these additional activities will facilitate the auctioning of additional permits, hence the 100 million extra in 2015-16, the 140 million extra in 2016-17 and presumably even more in the forward years if it is increased over those two years?

Ms Wilkinson : That is correct, although every year you would have to make an assessment as to what your latest estimate of uncovered sector emissions is. So based on our current estimates, that is correct, but they will be reassessed every year in the budget process.

Senator BIRMINGHAM: Can I look then at where emissions are going. Firstly, there are the government's reports on Australia's emissions projections for 2010 and 2012, 2012 being the latest of those reports?

Dr Kennedy : That is correct.

Senator BIRMINGHAM: The answer to question on notice No. 71 stated that the 2010 projections of forecast emissions in 2011 and 2012 are 595 million tonnes, a slight decrease on the previous year; the 2011-12 value published in the September quarter is 573 million tonnes; and a number of changes in economic conditions since the preparation of the 2010 projections have contributed to lower than projected emissions—and it goes on to talk about the high dollar and that is forcing the closure of several high-emitting industrial facilities et cetera. Is this a change that the department would expect to have an impact through the life of the scheme, this lower level of emissions that had been forecast in the earlier years?

Ms Wilkinson : We always projected emissions in the presence of a carbon price. So it depends on whether you are talking about emissions projections with or without the carbon price. But emissions projections with the carbon price were expected to come off soon after the scheme was introduced. That is correct.

Senator BIRMINGHAM: This answer, however, is not exactly highlighting the carbon price as a factor; it is highlighting economic conditions, currency valuations and so on as a factor in them being less than anticipated.

Ms Wilkinson : We have had a look at our emissions projections from the last three years, and the emissions projections have been higher in some cases and lower in some cases. And it varies sector by sector. Would you like us to talk broadly to you about what our findings are from looking at our emissions projections over the last couple of years and how they are correlating with outcomes?

Senator BIRMINGHAM: What I am particularly interested in here is that emissions conditions have changed such that they are less than had been forecast. Does that reduction between 2010 and the September quarter of 2011-12 at least reflect itself in reduced emissions forecasts through until 2020?

Ms Wilkinson : I think the answer is that that depends on the source of the emissions reductions. Mr Power, would you like to talk to this?

Mr Power : We monitor these things, as you would expect. The department works on an annual cycle of updating its emissions projections. I think it is fair to say that there is a fair amount of commentary around what is going on in the electricity market at the moment. The department continues to sort of analyse that information and would come to a final view on updated emissions projections in the course of its annual update of emissions projections, and the department has not completed that process as yet.

Dr Kennedy : Senator, I think I might understand what you are getting at. When we lower our numbers because the actuals have turned out to be a little less than what we thought, do we flow that right through? Is that the question you are asking?

Senator BIRMINGHAM: Is there an impact right through? Yes, that is the question that I am asking.

Ms Wilkinson : The answer to that is that there could be but there is not necessarily. So it depends. This is exactly the process that we go through every year when we are updating our emissions projections, to look at what the latest data is and then to reassess what the forecasts look like. It varies. It depends sometimes on, if you like, the source of the variation in projections from where we have been expecting; so where has that occurred? We are still in the process of looking, for example, or analysing at this stage whether the lower than expected emissions from the electricity sector over the last, say, 12 months or so would be expected to flow through or whether we expect some sort of reversion towards the sorts of levels that we had previously projected. That will be exactly one of the focuses of our 2013 projections report.

Senator BIRMINGHAM: I might pick up on one point. I want to come back to the broader issue.

CHAIR: Senator Birmingham, I draw your attention to the time. We are just about to break.

Senator BIRMINGHAM: Sure. Just on that one point about the electricity sector, the Grattan Institute, for example, has been quoted as saying that the conclusion that the carbon price is a major factor in reducing emissions is almost certainly wrong; there has almost certainly been a fall in demand in the industrial and manufacturing sectors due to exchange rates. This seems to reflect the answer in No. 71 that the department provided as well. Is that a fair assessment—that at present reductions in expected levels of emissions seem to primarily be a result of economic circumstances?

Ms Thompson : Maybe I can assist with a response to this question. One of the important inputs for the projections work that Ms Wilkinson and Mr Power do is the national greenhouse gas inventory. The most recent findings from the national inventory show that, over the first two quarters of 2012-13, seasonally adjusted, the normalised emissions were 0.2 per cent lower compared to the same period in 2011-12. The sector is coloured by the carbon pricing mechanism being one per cent lower, largely reflecting lower electricity emissions; while stationary energy—excluding electricity, industrial processes and fugitive emissions—showed some growth. I think the complexity of the picture is that some of these declines were temporary and others appear to be due to longer term demand-side and supply factors.

Some drivers, such as the June-September flooding event at the Yallourn power station, were temporary, whereas there are other drivers, like reduced electricity demand and changes to the fuel mix, that have been influencing trends in electricity emissions over the last three years. These trends continued and in some cases accelerated, including the shift away from coal generation—and that has happened since the introduction of the carbon price. I think the picture overall in terms of what is happening on the energy side is complex. There are some short-term drivers and some longer term drivers, and some of those seem to have accelerated since the carbon price was introduced.

CHAIR: Thank you. We will now suspend for morning tea. Could I just remind senators that we are having a short private meeting; thank you.

Proceedings suspended from 10:47 to 11 : 01

CHAIR: We are ready to continue. I go to Senator Birmingham.

Senator BIRMINGHAM: Thank you, Chair. We were just at a response to what the causes for reductions in emissions may currently be. The short answer was that it is complicated and that there are certain short-term factors at play and some potential long-term factors at play. Has the department been able to undertake any analysis of how it would apportion those reductions in emissions?

Dr Kennedy : The department has not undertaken any specific modelling style analysis to apportion results. I could draw your attention to a couple of other studies that we are looking in this area, though, if that is helpful. One is some analysis by Pitt Sherry. There is also some analysis by Deutsche Bank which was published just last Friday. You would probably be aware of MYEFO having published some analysis of at least movements in electricity emissions and the likely significant role of the carbon price. These are analyses that we have looked at. In addition to the one you noted from the Grattan Institute, we would be happy to pass those on. Ms Thompson is right; there are a range of factors in play. We have not attempted, in any detailed, modelled way, to decompose those factors.

Senator BIRMINGHAM: If current reductions in emissions translate into sustained reductions in emissions and sustaining them at a lower level than had previously been forecast, that obviously will make the abatement challenge easier to achieve?

Dr Kennedy : That is correct.

Ms Wilkinson : That depends a little on what the reason for the reduction in emissions is. Dr Kennedy is absolutely right that at least some of the analysis suggests that the reduction in emissions, at least the supply side factors, is being driven by the carbon price that is in place. The carbon price is part of what actually meets the abatement challenge. When you think about the abatement challenge, it is really about what is the level of emissions that you would expect to have in the absence of policies and measures compared with what the actual target is.

Dr Kennedy : I should clarify my response. I interpret your question as the general question of: if we think emissions without a carbon price are lower than what we otherwise would have expected them to be, then the amount of effort required to get to our reductions in emissions is less. Ms Wilkinson is right; there would be a range of factors working their way through the system. But, in general, the challenge that we talk about of the 155 megatonnes that was previously published—if we now think of it this way, as 'business as usual; emissions are projected to be lower than previously', then that challenge logically is less.

Senator BIRMINGHAM: Because of the accounting changes that we talked about before, the abatement challenge is already slightly lower than had previously been forecast—is that right?

Ms Wilkinson : Slightly lower; that is right.

Senator BIRMINGHAM: Should that not flow through to having some impact on 2020 price estimates in that the $38 had been based on an abatement challenge higher than is now known to be required, which is potentially higher than even will be required?

Dr Kennedy : The price estimates in Australia are actually—to go back to some of your earlier discussion—global price estimates. They really reflect the global challenge and how those markets are setting prices in responding to global ambition.

Senator BIRMINGHAM: So even that $38, which was part of the package that was done prior to the agreement being struck with the EU and the terms of the linkage being established, is what you would describe as a global price estimate rather than a domestic price estimate?

Dr Kennedy : The domestic price in Australia, as you said before, will in the current scheme architecture go to the European price. The price in Australia in 2020 with the existing architectural arrangements will reflect those global settings. We will be a price taker in the same way we are a price taker in many other markets.

If the scheme were not open to, if you like, importing abatement or purchasing abatement from other countries , then you would be correct. If it were entirely set domestically, if ambition w ere greater, the price would be higher; if ambition were lower, the price would be lower. It would be purely set by domestic factors. In an internationally open scheme your price is set by the global arrangements and then, if you like, your caps may move depending on how your emissions move, but the price in those arrangements gets set globally.

Ms Wilkinson : I might just add that the government's policy has always been to have a scheme that links to other countries' schemes. The modelling that was undertaken by the Treasury incorporated the fact that Australia would be a price taker. Australia is always going to be a price taker if we are in an openly linked arrangement. The previous estimate was just an estimate of the international price. That is the estimate which is still being used within the budget forecasts.

Senator BIRMINGHAM: Regarding the second change, which we have not touched on to quite to the same level, in relation to the Kyoto protocol and the budget papers, the addition of those land based activities—this will mean that across grazing land management and crop land management, which are the two areas to be included, any new efficiencies that can be achieved, or any efficiencies that increase the carbon storage in those soils or the carbon capture in other land management practices, will now contribute to Australia's five per cent reduction target, whereas they previously would not have contributed. That is it in a nutshell?

Ms Thompson : That is correct, Senator.

Senator BIRMINGHAM: Ms Thompson, in terms of the range of activities that you would see, are you able to take us through what those potential activities are and the extent of known abatement that has been brought in as a result of that measure?

Ms Thompson : One of the facets of the Kyoto accounting approach is that the land based activities are actually very broad. When we talk about grazing land management and crop land management, we are really talking about activities that happen on that land that are enhanced by sequestration. It is things that establish or retain vegetation that are not actually already covered by the existing article 3.3 on forestry activities. That is particularly relevant on the grazing land management activity. Similarly, crop land management is also a very broad activity. That would encompass action to build soil carbon and things of that ilk—the general approaches that draw potentially broader areas of the Australian land mass and a different suite of activities into the accounting framework.

Senator BIRMINGHAM: Thank you. I think that clarifies what I needed there. I just ask a question about Australia's emissions projections 2012 document--

Senator MILNE: Chair, are you happy for me to follow on with article 3.4?

CHAIR: Just briefly because Senator Birmingham has limited time.

Senator MILNE: Thank you. On article 3.4, in the budget you announced that the government had decided to go with the grazing land, cropping and reveg Kyoto rules. Why was there no consultation about that? It was just suddenly announced in the budget that you were signing on.

Ms Thompson : There was, in fact, a considerable amount of consultation that was done from the latter part of 2012. Officers from my division talked to a number of the environmental NGOs and also a number of the industry and other stakeholder organisations. Their views were canvassed and fed into the government decision-making process around the article 3.4 activities.

Senator MILNE: How are you calculating the baseline?

Ms Thompson : In terms of the difference between—

Senator MILNE: Grazing land, cropping, reveg: how are you going to do it?

Ms Thompson : The actual accounting approach is specified in the accounting rules. As Ms Wilkinson said earlier this morning, Senator, before you joined us, the approach for forest management, which is one of the article 3.4 activities, is calculated against an agreed reference level or baseline. How that works is that during the--

Senator MILNE: What is the baseline for this?

CHAIR: Just allow Ms Thompson to finish. You just cannot rapid-fire questions at her all the time. Your time is nearly up—I am going to go back to Senator Birmingham in a second—so perhaps you can finish that.

Ms Thompson : In effect, the forest management calculation is against an agreed reference level. Essentially, if more emissions are experienced during the commitment period than the reference level, then those are captured against the target commitment. If there is more sequestration against the reference level, then that is captured. For crop land management and grazing management the approach is a little bit different. The counting there is that you look at net emissions in 1990 and compare that to net emissions or sequestration across the eight-year target period from 2013-20. In fact, if you are looking at the difference between 1990 and 2000 with respect to calculating the QELRO, there is not any difference between the two as a result of these activities, in effect.

CHAIR: Senator Birmingham.

Senator BIRMINGHAM: Thanks, Chair. I was going to ask about the publications on Australia's emissions projections, the 2010 publication versus the 2012 publication. The 2010 publication, at table 4 on page 23, identifies greenhouse gas abatement from policies and measures. It breaks that down across a range of certain state based measures as well as identifying the abatement achieved over the Kyoto period average and in 2020 as a result of the renewable energy target. It identifies that 29.9 million tonnes of abatement would be achieved under the RET by 2020.The 2012 document does not appear to discuss the achievements of the RET at all. It does identify abatement from other measures, such as land-clearing legislation, WA smart travel, GGAS and the CFI, but nowhere in a similar way does it identify the RET. Is that because the contribution of the RET is wrapped up in the carbon price impact in the way it is presented in this 2012 document?

Mr Power : The 2012 projections did not do a decomposition of all of the measures that you refer to, of which the RET is one, which effectively operate in sectors covered by the carbon price. There is a little bit of a discussion about that on pages 35 and 36 of the 2012 summary document. Essentially, what those pages say is that it is quite difficult to unravel, for example, where you have got two significant measures in a sector, exactly which policy measure the abatement is attributable to. Essentially, in net abatement terms, because those sectors are capped under the carbon price, the final outcome is effectively the same as is set by the cap under the carbon pricing mechanism. Essentially, the reason why those things are not broken out is because of the inherent difficult y in undertaking that analysis.

CHAIR: Last question, Senator Birmingham.

Senator BIRMINGHAM: You are saying that, because the carbon price will fix an allowable emissions level anyway, the abatement will be achieved anyway, and there is no capacity to be able to break out from that how much of a contribution the RET makes within that?

Mr Power : The point I was trying to make was that certainly it is the case that electricity sector emissions are within the cap under the carbon price, so all the covered sectors will, in net terms, reach that level. It is certainly possible for the analysis to be done. It was not done in the case of the 2012 projections. It is a difficult analysis to separate what is driving those emissions reductions in those sectors.

To go also to your earlier question, it is not the case, for example, presented in this document that the impact of the RET is in the carbon price impact, partly because there are two projections in the 2012 document. The first is one in place without a carbon price and a CFI; the second projection is with a carbon price and a CFI. The RET is already built into the first baseline projection. The difficulty becomes simply separating out the abatement attributable to each measure when both policy measures are acting on the same sector.

Senator BIRMINGHAM: But it would be possible without a carbon price and CFI to identify the impact of the RET, as had previously been done?

Mr Power : Conceptually that is possible. Previously it was done where there was not a carbon price. These are the first projections with a carbon price. So it has not been done to date.

Senator BIRMINGHAM: Are there plans for it to be done next time?

Mr Power : We are looking at that question in the context of our annual update of projections which, as I mentioned earlier, we are working on at the moment. Partly we will come to an answer on that in the updated projections, and it will depend on how robustly we can put those estimates.

CHAIR: Pitt&sherry produce the CEDEX index. Is anyone aware of that CEDEX index?

Ms Wilkinson : Yes, we are aware of that.

CHAIR: Pitt&sherry say that there can be little doubt that the carbon price is strongly affecting the supply side of the electricity market. Is that consistent with your department's analysis?

Ms Wilkinson : Pitt&sherry are certainly looking at emissions intensity, so when they look at the supply side of the national electricity market they are looking at the emissions intensity of the national electricity market. They were noting the switch in supply from coal generators towards gas and renewable generators. Certainly, that is borne out by the evidence that we have independently got from the national electricity markets review data, for example.

CHAIR: I am looking at a speech by the Hon. Greg Hunt MP on 18 April 2013. Are you aware of that speech?

Dr Kennedy : We are aware of the speech.

CHAIR: I have got a couple of points on this. It really poses the challenge, I suppose, that a direct action approach is more effective than a carbon price. Has the department changed its view after reading this speech in terms of a direct action approach as against pricing carbon as the most effective way to deal with carbon pollution reduction?

Ms Wilkinson : The department has not done any further analysis on that question since the speech.

CHAIR: What is the department's view in terms of the most appropriate way to deal with carbon reduction?

Dr Kennedy : The department would still continue to draw on, for example, the analysis undertaken by the Productivity Commission which examined a very large number of programs—from memory, 1,000-odd—which said that a broad-based, market-based carbon price was the most efficient way of reducing emissions.

CHAIR: The speech talks about the leakage of manufacturing to countries with higher emissions profiles and the loss of Australian jobs and investment. Is there any evidence of significant job losses as a result of the implementation of a carbon price?

Dr Kennedy : The department is not aware of any evidence of a significant loss of jobs as a result of the carbon price. But it is always worth noting that, for emissions-intensive trade-exposed firms, the net carbon price is significantly lower than the headline carbon price. I will get Ms Wilkinson to comment on what it is. I believe it is about $1.30 for the most emissions-intensive trade exposed. Given that, one would not expect a significant impact. Would you like to elaborate?

Ms Wilkinson : That is correct. The effective carbon price facing the most emissions-intensive trade-exposed industries is around $1.30, if you look at the 94½ per cent assistance rate that they receive in the first year of the scheme.

CHAIR: The recent announcement by Ford has again focused on the issue of the cost of the carbon price on producing a car. The figure I saw reported in the press was $400 per vehicle. What is the real cost of the carbon price on a car?

Dr Kennedy : Ms Wilkinson might comment on that. This is an issue that the department had looked at in the past.

Ms Wilkinson : The Federal Chamber of Automotive Industries back in May 2011, before the carbon price had started, commissioned PwC to estimate what the impact of the carbon price would be under a range of different scenarios. For example, they included a $20 scenario and a $30 scenario. They had a range of estimates. The range of estimates that they provided was that the cost could be between $220 and $412 per tonne, but they also acknowledged that part of those cost increases was because of cost increases or potential cost increases for upstream materials or inputs into the car manufacturing process. They acknowledged that if assistance was provided along the lines of the assistance that had been at that stage foreshadowed but had not yet been introduced under the jobs and competitiveness package then that would reduce the implied cost.

It is always difficult to be definitive about these sorts of estimates. If you look at the data that is publicly available about emissions and electricity use by the automotive manufacturers and you compare them with the number of cars that are produced in the most recent years—2011 -12—that would suggest that the direct emissions and electricity related costs and gas related costs for these manufacturers would amount to somethi ng in the order of $50 per car.

CHAIR: Fifty dollars, not $400?

Ms Wilkinson : Not based on the direct emissions costs and the electricity and gas costs that they would face, at least according to the published numbers from the National Greenhouse and Energy Reporting Scheme.

CHAIR: Mr Hunt talks about some international realities. He states:

"No country currently imposes an economy wide tax on greenhouse emissions or has in place an economy wide ETS."

Not China, not India, not the USA, not even the EU.

The impression that is left there is that we have an economy-wide ETS. That is not the case, is it?

Ms Wilkinson : Our emissions trading scheme is assessed as covering about 60 per cent of national emissions and then another six per cent or so are covered by equivalent carbon pricing arrangements. Together, the carbon price directly affects around two-thirds of Australia's emissions.

CHAIR: In this speech Mr Hunt goes to the issue of China and India. He says:

The Indian coal tax is $1 per tonne. By comparison the State royalty on Queensland coking coal is $20 per tonne right here in Australia.

Can you clarify this for me: in all the economics hearings that I attend, a royalty is a payment for the use of Australia's natural resources. It is a payment for an input. The Indian coal tax of $1 per tonne, as I understand it, is a tax on the pollution that may apply. What is the situation? Why would you compare a royalty with the Indian coal tax?

Dr Kennedy : We cannot pretend to understand all the aspects of the comparison. In broad terms you are correct. Royalties or other forms of taxation around licensing use of resources are one set of instruments. Carbon taxes, either based on the emissions embodied in things or some other form, are another set of instruments. So they tend to be used for different purposes. That is not a specific comment on the comparison. I am not aware of the broader context. You are correct in that they are different instruments used for different purposes.

CHAIR: In this speech Mr Hunt says:

The rest of the world has overwhelmingly rejected the Australian model of a deep punitive electricity and energy tax.

I assume that he is describing the carbon price as a punitive electricity and energy tax. What are the key components in the rest of the world? What is happening in terms of carbon prices in the rest of the world?

Dr Kennedy : I will ask my colleagues to comment. Just to start it off, there are a range of mechanisms, including renewable energy targets, feed-in tariffs and carbon pricing arrangements, being used across the world to set carbon prices. I will ask Ms Wilkinson to give you a flavour of some of those arrangements.

Ms Wilkinson : From this year, from 2013, our understanding is that emissions trading schemes are expected to be operating in 35 countries and 20 subnational jurisdictions. That includes 33 existing country schemes in Europe, Australia and New Zealand, two new country schemes in Kazakhstan and Croatia, and 20 subnational jurisdictions in the US, Canada, Japan and up to seven in China.

There have also been commitments which have been made in the last year or so about extending schemes and establishing schemes in jurisdictions but with the appropriate time lines for actually developing those schemes. By 2015 our understanding is that emissions trading schemes are expected to be operating in 38 countries, 13 subnational jurisdictions and including, of course, the Chinese national scheme. By 2015 that would mean that around 35 per cent of global emissions would be covered by emissions trading schemes and almost half of global GDP would be covere d by emissions trading schemes.

Mr White : In addition to emissions trading schemes, the Republic of South Africa has announced plans to start, in 2015, a carbon tax, which would be a broadly based carbon tax across its sources of industrial and energy emissions.

CHAIR: One of the major points Mr Hunt makes in this speech is that Labor' s carbon tax does not work, hurts families and sends jobs and emissions offshore. He said :

It hurts families and will send jobs offshore as the tax rises continuously to $350 per tonne by 2050 according to the Government.

Senator Birmingham has spent a lot of time here actually arguing the counterpoint to this—that the carbon price will not be high enough for some budgetary implications. What is your comment about this $350 per tonne by 2050? Will it send jobs offshore as the tax rises? It will not be a tax by that time anyway , I thought .

Dr Kennedy : In the existing arrangements you are correct. It is an emissions trading scheme from 2015-16 onwards.

CHAIR: So Mr Hunt has got it wrong? It is not a tax?

Dr Kennedy : I am not making a comment on Mr Hunt's arrangements.

CHAIR: I should not have asked you.

Dr Kennedy : I just describe what the actual arrangements are. It is an emissions trading scheme with a fixed price in the first three years and then an emissions trading scheme with a cap in the period after that. The prices you are referring to tend to come out of the global modellingthesorts of carbon prices that would be required to achieve the global ambition that is put down in the light of global arrangements. If you like, that is a shared global response to the need to decarbonise the economy in order to achieve those emissions reductions. In that sense—and I am not actually across the detail of what the price would be—it is a shared global response to achieve the shared global emissions reductions that are foreshadowed. In that sense, assuming global cooperation is working effectively, that is a shared price around shared global action.

CHAIR: In this speech, Mr Hunt describes the carbon price as a 'complex, punitive, money churn'. He says they will use the classic market mechanism of a reverse auction. Is there any evidence, first of all, that a reverse auction is a classic market mechanism when it comes to government subsidising or payin g for a carbon price reduction?

Dr Kennedy : When economists typically talk about these issues and about broad based carbon prices, they talk about a price applying broadly across the economy or , in the manner that Ms Wilkinson described earlier , around emissions trading schemes. I w ill be careful about going any further than that. I do not want to be seen to be interpreting in one direction or another the comments Mr Hunt has made publicly. For example, to go back to my earlier comment about the Productivity Commission's report, typically economists conceive of a broad based market mechanism in the fo rm of either a tax or a cap-and- trade system applied broadly across the economy, which is consistent with the government's current arrangements.

CHAIR: Mr Hunt quotes the Productivity Commission in his speech. He says:

… my view is that the Productivity Commission will still be right about there being no comparable system and impost to that in Australia.

I think that is being a bit cavalier with the Productivity Commission report. What did the Productivity Commi ssion report say on that issue?

Dr Kennedy : I apologise; we do not have that in front of us.

CHAIR: Would you take that on notice so you can put it in the context of what the Productivity Commission said.

Dr Kennedy : We would be very happy to. We will get that for you.

CHAIR: Mr Hunt goes on to say that the reverse auction approach will be used to reduce emissions. There is quite a deal of analysis out there, including analysis from the department of climate change, as to some of the major problems with the Direct Action approach. There has been external analysis by the Australia Institute which argues that, to reduce emissions by 160 million tonnes of CO2 in 2020, it would require planting trees over an area of 265,600 square kilometres—more than the size of Victoria. It goes on to say the trees would also require 96,944 gigalitres of water per year. That is more than 27 times the volume of water proposed to be cut from the Murray-Darling Basin. Is that a reasonable analysis?

Dr Kennedy : I cannot make a comment—and I am not sure other officials are able to do so—on the Australia Institute's studies, but I can make the following comment. To the extent that one focuses the cuts in emissions into one sector—in other words, it is not broad based—then you are almost, by logic, led to those sorts of analyses.

CHAIR: Is that analysis a logical analysis?

Dr Kennedy : I just do not know it, so I cannot make any detailed comments. But w e were talking about broad based approaches earlier. To be frank, I do not know the details of the analysis, but , if one focused the need to reduce emissions into a very narrow set of activities , then clearly the exercise becomes very difficult and it would start to lead to the types of conclusions that were foreshadowed in that report. But I can make no comment on the veracity or otherwise of that report. I have not read it, nor have I studied it. I will just check if the other offic ials at the table have seen it.

Ms Thompson : No.

CHAIR: On soil carbon, the coalition's Direct Action scheme relies on 60 per cent of the proposed abatement coming from this source. We have had CSIRO here in other hearings talking about the problems with soil carbon—those being the untested source of the abatement, soil variability, the maintenance of sequestered carbon over time and the huge problems with the measurement methodology. If you rely on 60 per cent of your abatement coming from soil carbon, I assume that someone has taken a view that these problems have been dealt with. Have they been dealt with?

Dr Kennedy : Perhaps the best way to answer that question is to —very briefly, being mindful of the time—u pdate you on where the department is up to around potential soil carbon methodologies for the Carbon Farming Initiative and any estimates of abatement that might arise from that.

Ms Thompson : The department has been working with a technical working group on a methodology for soil carbon. The last time we appeared before this committee we talked about some of the challenges associated with that. We have been partnering with the CSIRO and other experts on the technical working group to develop a sampling protocol which would actually help support a soil carbon methodology that is based very much on actual measurement. The idea is that you would measure a baseline of the area to be part of the project and then measure the abatement after the end of the project period. We are, we think, making some progress on those issues. A technical workshop was held fairly recently that was quite supportive of the approach the department is planning to take.

In terms of the abatement estimates, it is absolutely the case that estimates do vary quite markedly as to how much abatement one could expect to get from CFI projects on the soil. Some of this difference of view , I think, turns around what the actual technical carrying capacity of the land is—that is, how much carbon could you physically build up under any circumstances and then what might be amenable to project activity under an offsets mechanism like the CFI. One of the things people have to think about quite hard is what is known as the opportunity cost. If you change management practices on the land it means you will be forgoing some of the other uses of the land, and you need to factor that into the actual return of your project. As to our own estimates of abatement, we are still looking at in the order of three megatonnes a year on crop land , so w e are still expecting a fairly modest abatement return from soil carbon at this stage.

CHAIR: To say that soil carbon could deliver 60 per cent of Australia's challenge to have a five per cent reduct ion by 2020 is very optimistic?

Ms Thompson : As I say, p eople's views do differ quite markedly on these points. One of the things that the department has maintained consistently is that the CFI mechanism will provide a testing ground for some of those claims once we have the methodology developed. As I say, w e feel that the work on that is going quite well.

CHAIR: Is there anywhere else in the world that has delivered a more robust methodology on this?

Ms Thompson : There are approaches that are being used under, I think, the Alberta offset scheme in Canada and also some approaches in the Californian scheme. They take a bit of a different approach to what we need to do in Australia. They basically rely on a more strongly deemed approach that is associated with—

CHAIR: A deemed approach?

Ms Thompson : A deemed approach. You apply certain activities on the land and then, basically, some default ab atement numbers flow from that.

CHAIR: It is n ot a scientific approach ; it is a deemed approach , is it?

Ms Thompson : I think there is science to support the approach they are taking. One of the challenges in Australia is that our soils are a bit different to the Northern Hemisphere. They tend to be what is known as very friable. They are much older than they are in the Northern Hemisphere. Some of the approaches that have been tested elsewhere we believe would not necessarily work very well in Australian conditions.

CHAIR: Thank you .

Senator MILNE: I come back to the issues I was raising earlier about the decision to sign on to 3.4. I particularly want to know : what is the likely impact of Campbell Newman's decision to change the laws with regard to land clearance in Queensland to allow the clearance of shrubbery revegetation ? What impact is that going to have on Australia's compliance to date and into the future?

Dr Kennedy : I will just confirm at the table. We have not undertaken a formal analysis of the proposed changes by Premier Newman. My understanding is that they are proposed and they are before the Queensland—

Ms Thompson : My understanding is that that legislation has been passed by the Queensland parliament. As Dr Kennedy says, we have not sought to do a formal analysis of what those changes would mean. My understanding is that the legislative changes would mean that more of Queensland, and in particular regrowth clearing, would now be able to be done. Clearly, to the extent that you get more land clearing you will get more emissions. Those things tend to flow from each other. The Queensland legislation, as we understand it, removes the high - value regrowth regulations from freehold and Indigenous land but retains it on leasehold land and along water courses. So, yes, this in effect takes the legislation back to what it was before 2009.

Senator MILNE: Given that a large part of Australia's ability to meet its first Kyoto commitment period was because of the changes that were made to prevent land clearance, how much does this set us back and how much extra cost is that going to impose on the rest of the economy to meet the greenhouse gas reduction targets?

Ms Thompson : One of the issues that are a little unclear at the moment is how much actual land clearing that you will get as a result of these changes to the Queensland legislation. To answer questions around the quantum of emissions, you would need to know how much land is actually being cleared and when that land was being cleared. At the moment we do not have a good insight into those things.

Senator MILNE: Does that not effectively mean that essentially Queensland is cost-shifting to the rest of the economy to do the heavy lifting in terms of reduction and emissions?

Ms Wilkinson : First of all, I just add: as part of the 2013 projections update, we would be taking into account these sorts of decisions and coming up with our best estimate as to what impact this will have on land sector emissions over the period from now until 2020. It is also the case that the Climate Change Authority will be taking this into account as part of its caps and targets review.

You are right. To the extent that there are greater emissions in Queensland as a result of these changes in legislation, then the mechanics, if you like, of the way the emissions trading scheme works is that that would lead to a higher level of uncovered sector emissions which would mean that the cap that you would set under the emissions trading scheme would thereby be lower. That is how the total abatement commitment, the national commitment, would still be met.

Dr Kennedy : Apologies, Senator, for my earlier confusion about the legislation. What I was confused about was: we are still to look through the full details of the proposed arrangement so that we that can do a full analysis. We can only talk in general terms. Everything the officials have said is correct but once we are apprised of all of the details of the arrangements that have passed through the Queensland parliament, then we will be in a better position to incorporate them into projection estimates and answer in detail these questions you are asking.

CHAIR: Senator Milne, this is your last question. Then we will call the regulator.

Senator MILNE: Thank you. I will follow up on some of these tonight at the land sector questions. I wanted to ask in particular about the treatment of drought under 3. 4, with grazing and cropping in particular. How are you going to account for that? Is that a particularly physical area or how are you going to deal with that?

Ms Thompson : Do you mean the effect of drought on emissions and/or regrowth?

Senator MILNE: Exactly, driving emissions. If you are going to cover grazing and cropping you are going to cover emissions, in terms of drought, of what is a force majeure. I presume that is what you are talking about. Over what area are you going to declare it in terms of a baseline?

Ms Thompson : This has actually been one of the issues that Australia has been very concerned about over the years in the negotiations, finding a way to ensure that emissions and indeed sequestration that resulted from things like climate factors were not factored into the accounting for the target. There have been a number of changes to the rules in recent years that have enabled Australia to have confidence in terms of drawing more activities in land areas into the accounting for the target.

A few things have happened in that regard. One of the first is that the second commitment target period is actually eight years long. That means it allows for some smoothing of these natural variability effects across the target period. In addition, we have, as you noted, what was called the force majeure arrangement, which is actually an accounting treatment that means that most of the emissions from bushfires will be able to be, in effect, not counted towards Australia's target. That is with respect to the forestry activities in particular.

In addition, Australia has done some improvements to the way that it does its own accounting towards the target in terms of dealing with these natural effects. We put these changes into the report to the UN FCCC in the inventory that was submitted last year. Those changes were reviewed by the international review team and were seen as acceptable improvements as part of the continuous improvement we do to our estimation approaches.

You are right. What happens with the 3. 4 activities is that the drought effects will be part of what happens on the landscape, but the result of these changes will mean that the accounting for the emissions and sequestration is much more closely tied to the impacts of human action rather than to the effects that happen just as a result of the climate.