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Green light: Australia's climate future: address to the Committee for Economic Development of Australia State of the Nation Annual Conference, Canberra



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THE HON GREG COMBET AM MP

MINISTER FOR CLIMATE CHANGE AND ENERGY EFFICIENCY

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Green Light: Australia’s Climate Future

Address to the

Committee for Economic Development of Australia

State of the Nation Annual Conference

Hotel Realm, Canberra

21 June 2011

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Thank you Ms Pickard for your kind introduction.

First, I respectfully acknowledge the Ngunnawal people, the indigenous owners

of the land on which we meet and I pay my respects to their elders past and

present.

I would also like to acknowledge Mr Geoff Allen, the National Chairman of

CEDA.

It is an honour to have been invited to deliver the keynote address to the State

of the Nation Annual Conference today. The Committee for Economic

Development of Australia (CEDA) has a strong role to play in facilitating

discussion of the pre-eminent issues facing contemporary Australia, and I

acknowledge in particular CEDA’s ongoing contribution to the climate change

debate.

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My last outing to CEDA was just over two years ago when - not without a

measure of irony in hindsight - I spoke about global economic conditions and

climate change policy. In that speech, I described the Carbon Pollution

Reduction Scheme, which only a week before had passed in the House of

Representatives, as one of the most significant environmental and economic

reforms in the history of our nation.

It is sobering to recall how the dogmatism of the Greens and the opportunism

of the Coalition under its then new leader Tony Abbott combined to defeat

legislation that would have provided significant additional impetus to

Australia’s remarkable economic development over the past 18 months.

Here we are, two years later, attempting once again to introduce a carbon price

into the Australian economy. The benefits of doing this are no less than they

were in 2009. But the costs of delay are increasing. With each year that passes,

the costs of achieving any given reduction in Australia’s carbon pollution grows

higher.

So it is appropriate that I again address CEDA on the need to tackle climate

change, an environmental problem in search of an economic solution. Putting a

price on carbon pollution is a significant economic reform. It will help transform

the Australian economy to one based on low emissions energy. This, in turn,

will decouple economic growth from growth in carbon pollution. Achieving this

transition at least cost is a hugely significant challenge for all economies and it

is fundamental to our future well-being and prosperity. This Government is

determined to get this right.

Climate Change Science

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In talking about climate change as an economic reform we must never forget

why we are acting to reduce our carbon emissions. The foundation of the

Gillard Labor Government’s climate change policy is acceptance of the climate

science.

Globally, 2010 was the warmest year on record. The decade from 2001 to 2010

was the warmest decade on record. Last year, 2010, was the 34th consecutive

year when global temperatures were above the average for the whole of the

20th-century. In Australia, each decade since the 1940s has been warmer than

the preceding decade. A number of you no doubt have experience analysing

statistics: I think you will agree, that sounds like a trend.

Scientists tell us that with rising temperatures we can expect to see more

extreme weather events, including more frequent and intense droughts, floods

and bushfires. These environmental consequences translate into personal,

social and economic costs - extending from negative impacts on water security,

coastal development, infrastructure, agriculture and health to the social

upheavals that can also result.

This scientific reality means global action on climate change is not just

desirable, it is necessary. The coming century will be carbon constrained.

Countries around the world have realised this fact and have started putting in

place policies to make a transition to a low carbon future.

The Government’s approach to Climate Change

No responsible Government can ignore such threats to our national well-being

and prosperity.

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As a Government, we have a public policy responsibility to reduce pollution in a

cost-effective way, and to play our part in international efforts to tackle climate

change.

And as a Government, we have a responsibility to prepare the Australian

economy for the challenges of competing in a carbon constrained world.

The risks of inaction on climate change are too great to ignore. They are risks to

our economy and to our environment, risks to our prosperity and the

prosperity of our children. To meet this challenge we need to change the way

our economy grows. We need to introduce these changes deliberately and

carefully - but we also need to move expeditiously because the costs will rise

with delay.

Just as the economic reforms of the 1980s laid down the bedrock of our current

prosperity, so pricing carbon will lay the foundations for Australian economy’s

global competitiveness in this 21st century.

How we respond to climate change is a critical issue for Australia’s future

innovation, productivity and prosperity. With the right approach, we can

unleash the creative energies of our people, businesses and workers to find

solutions. Whether it’s through new electricity generation technologies, energy

efficiency measures which save money while lowering pollution, cleaner modes

of transport or new agricultural practices, pricing carbon will create incentives

for innovation throughout the economy.

The Government accepts that the market is a powerful force for driving this

transformation in the economy. That is why we are committed to using market

mechanisms to meet this challenge.

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The alternatives - to ignore greenhouse gas emissions and hope the problem

goes away or to regulate for emissions reductions - would stifle innovation.

Regulating for emissions reductions cannot efficiently create the incentives

needed to transform the economy for a clean energy future.

The Government’s most recent emissions projections show we will have to

reduce per capita emissions by nearly one-third against business-as-usual

projections to meet a 5 per cent cut over 2000 levels by 2020 reduction target.

To reduce emissions by 25 per cent by 2020 will require per capita emission

reductions of 50 per cent against business-as-usual.

The scale of this challenge requires an economy-wide response. And it requires

a response which creates incentives for firms and households to make efficient

investment and consumption decisions that will reduce the carbon intensity of

our economy.

Economic Benefits of a Carbon Price

The economics of climate change has been widely analysed for a generation.

Some of the best minds in the economics profession have turned their

attention to the problem. The single most important conclusion from this

analysis is that putting a price on carbon is the most cost effective way to

reduce emissions. This proposition has been demonstrated by economic

theorists for years. It has been confirmed through economic modelling time

and time again. And, in the last couple of weeks, a new report from Australia’s

Productivity Commission reached the same conclusion after a thorough

analysis of real-world policies amongst Australia’s top trading partners.

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By contrast, relying on regulation, or “direct action” as our political opponents

call it, will cost much more than a carbon price. It won’t generate any revenue

to help households or businesses with the economic transition.

It imposes direct costs on the budget by seeking to pick winners without

delivering commensurate carbon abatement benefits. It isn’t cost effective nor

is it environmentally effective. It isn’t fiscally responsible nor is it equitable.

Usually, policy makers struggle to balance the tradeoffs between these

objectives. Only Tony Abbott - who has confessed economics is not his forte -

could have devised a policy which throws all of these objectives out the

window.

A credible policy will find the least cost abatement in the economy; it will put in

place economy-wide incentives for changes in behaviour and it will generate

revenue for transitional assistance. Only a market-based system can do that -

and that is why we intend to place a price on carbon and move to a market

based carbon trading system without delay.

I know that, to this audience, I do not have to sell the power of markets to

transform industries and economies.

But I should respond to those voices who argue that Australia must choose

between economic growth and environmental protection. This is a false choice.

A carbon price will still see jobs created, industries prosper and strong

economic growth maintained.

Preliminary modelling released by the Treasurer reinforces this. Based on an

assumed carbon price of $20 per tonne:

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 Real national income will continue to grow strongly under a carbon price,

at an average annual rate per person of around 1.1 per cent until 2050

instead of 1.2 per cent. This means a carbon price would only reduce

annual growth in gross national income per person by about one-tenth

of 1 percentage point.

 Real national income per person would be 16 per cent higher than

current levels by 2020, an increase of more than $8,000 in today's

dollars.

 Aggregate employment is approximately the same with or without a

carbon price. By 2020, national employment is projected to increase by

1.6 million jobs, while at the same time growth in domestically-produced

pollution slows. Demand for low-emission goods and services increases

dramatically with a price on carbon pollution - so there will be stronger

growth in sectors like services, renewable electricity and less emissions-intensive parts of manufacturing.

 Gas-fired electricity is projected to increase by between 150 and 300 per

cent over the period to 2050, with the renewable electricity sector

projected to be 600 per cent bigger than it is today.

We Are Not Acting Alone

It is important to note that this approach is commensurate with action being

taken on climate change around the world.

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The recent report of the Productivity Commission supports this view. The

Commission examined action taken in seven of our top ten trading partners -

China, Germany, Japan, New Zealand, South Korea, the United Kingdom and

the United States. It found that while not all countries are taking the most cost

effective action, all the countries examined had adopted major policies to

reduce pollution and support the move to clean energy.

The Commission identified over 1,000 policy measures to reduce pollution,

showing yet again that the world is moving towards a cleaner energy future.

For electricity generation, the report finds Australia is now significantly behind

the United Kingdom and Germany in terms of the resources devoted to policies

to reduce emissions, and the effectiveness of those policies.

The Commission emphasises that its report is a snapshot in time, and the

countries studied are planning further action on climate change. Importantly,

countries are increasingly coming to recognise the efficiency and effectiveness

of pricing carbon, and carbon pricing policies feature prominently in planned

policies by other countries. Examples of planned policies include:

 China - the world’s largest emitter - is trialling carbon trading in key

cities and provinces and has set a target of lowering its carbon emissions

per unit of GDP by 40-45 per cent by 2020, compared to 2005 levels.

 The United States is taking action at a national level, as well as at a State

level.

 The US is progressively introducing regulations covering carbon

pollution from large industrial facilities under its Clean Air Act.

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 President Obama has also announced a new Clean Energy

Standard, which will double the share of clean energy sources in

the electricity supply mix to 80 per cent by 2035.

 California - the world’s eighth largest economy, and with a population

almost twice that of Australia - has legislated to commence emissions

trading on 1 January 2012.

 India has just commenced an energy efficiency certificate trading scheme

that covers facilities that account for more than 50 per cent of the fossil

fuel used there. It also has a coal tax levied on both imported coal and

coal produced in India.

 South Korea has had a trial emissions trading scheme in place since

January last year involving 14 cities and provinces, including Seoul.

Legislation to commence economy-wide mandatory emissions trading

from 2015 will soon be introduced into its Parliament.

 An emissions trading scheme has operated across Europe since 2005,

including in conjunction with a carbon tax in a number of countries.

The Productivity Commission report found that, although the policies in place

across the world vary tremendously, they all have one thing in common: they

all impose costs. The Commission found that the costs of these policies ranged

from below $10 for every tonne of greenhouse gas abatement to above $400 a

tonne.

The report shows that inefficient policies end up imposing costs without

significantly reducing emissions. Crucially, the most ineffective and expensive

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policies identified are direct taxpayer funded interventions where the

government chooses the sources of abatement and the technologies to be

used. These are the very policies which not too long ago would have been

associated with leftist political views. It says a great deal about the irrationality

of our political opponents that today it is the Liberal party which is advocating

government regulation and picking winners and it is the Liberal party which is

making dire claims that relying on the market forces will destroy jobs, destroy

industry and destroy the economy.

Assistance to the Community and Industry

Clearly, industries and communities will have legitimate concerns about

economic reforms.

The Government does recognise that some industries and some communities

will be more strongly affected by a carbon price than others. As a Labor

government, we are committed to helping these sectors make the transition.

That is why the Government has made it very clear that every cent raised by a

carbon price will be used to assist households; support jobs in the most

affected industries and regions; and to encourage the transition to a clean

energy future. Assistance for pensioners and low and middle income

households will be a priority.

Under the Government’s carbon price:

 More than 50 per cent of the carbon price revenue will be used to assist

households;

 Millions of households will be better off under the carbon price; and

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 The assistance will be permanent.

Much debate also centres on the impact of the carbon price in the trade

exposed parts of the economy and the potential for carbon leakage through

the loss of production and jobs to overseas competitors. Let me make it clear

that the government regards products like steel, cement, aluminium, plastics,

LNG and glass as crucial to building a clean energy economy. We will need steel

to build the renewable energy power generators, the energy efficient new

buildings and the transport systems of the future.

Carbon leakage is an environmental as well as economic problem. If the

imposition of a carbon price led to production being moved offshore to a

country without a comparable carbon constraint, we could end up with a worse

environmental outcome as well as the loss of Australian jobs. That is why

considerable effort was expended by industry stakeholders and the

Government in developing assistance to such industries under the former

Carbon Pollution Reduction Scheme (CPRS). We are using this framework as the

basis for our current consultation with business.

The Government is committed to transitional assistance to our emissions-intensive, trade-exposed industries to avoid carbon leakage, to provide for a

transitional adjustment and most importantly to protect jobs in these sectors.

The CPRS framework provided very substantial assistance that is best

demonstrated with some practical examples using a hypothetical carbon price

of $20 per tonne.

At the 94.5% assistance rate, a relevant steel, cement or paper facility

operating at average efficiency would only have carbon costs of around $1 for

every tonne of pollution from their core activity. Those facilities which are

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already highly efficient or which implement changes which reduce their

pollution levels could have even lower costs.

This would mean the net impact on those highly emissions-intensive activities

whose prices are set by international markets would be generally reduced to

significantly less than 1% of their revenue, protecting jobs and competitiveness

in these industries. It would also provide rewards to those businesses which

invest in clean technology and energy efficiency.

I do not underestimate the competitive pressures faced by emissions-intensive

trade-exposed industries - particularly steel-making - driven by the high dollar,

high commodity prices and the fallout from the global financial crisis.

The Government will continue to work with the business community, especially

on the important issues facing the emissions intensive, trade exposed sector,

the coal industry, and the energy sector and we will ensure these industries

have a strong and prosperous future in Australia.

This future and a price on carbon are not mutually exclusive. In fact in the 21st

century they are complementary.

Conclusion

Pricing carbon is a significant economic reform - no less significant than any of

the economic reforms we have faced since federation. But it is also a necessary

reform, a reform which will ensure our economy stays at the forefront of global

trends and doesn’t become a relic of a time gone by.

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It is the significant economic reforms that are the most worthwhile. When it

comes to a carbon price, this is certainly the case.

What passes at present as a political debate denigrates both politics and

debate. What the Coalition has on offer is a retreat into the narrow

mindedness that distinguished the economic policy-making of the 1950s and

1960s - the mindlessness of protectionism, oppositionism and fear.

What Australia needs now the confidence which has underpinned our economy

prosperity since the reforms of the 1980s - not a reversion to fear and

inferiority complexes about our ability to prosper. With this confidence in our

own abilities, we can understand that cleaning up carbon pollution will not only

protect the planet our children will inherit, it will also create the new

opportunities which will drive growth and prosperity in the future.