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Rod Sims
Director, Port Jackson Partners Limited; and
Expert Adviser to the MPCCC
23 March, 2011
1,100
900
700
Immediate, large
On a BAU basis will be
change required from
500 1000 PPM before 2070
current trajectory
300
1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
100
90
Other OECD
Transition
80
EU
70
USA
60
50 Other
40 Developing
30
20
India
10
0
2000 2005 2010 2015 2020 2025 2030
China
Source: Garnaut Climate Change Review, Global emissions Trends, 2011, page 31
750
600
450
- 5% - 160
400
350 - 15%
1990 1995 2000 2005 2010 2015 2020
- 216
Kyoto - 25%
period - 272
Note: Trajectories to the 2020 target range are illustrative, they begin in 2011-12 at 108 per cent of 1990 levels (consistent with Australia’s Kyoto
protocol first commitment period target) and assume a straight line reduction to the target
Source: Australia’s emissions projections, Department of Climate Change and Energy Efficiency, 2010, page 8
• Unilateral action not in our interest • Change the way we produce or use steel, cement,
agriculture, etc
• Preventing a problem, not creating a gain
• Nuclear, hydro aside no feasible low emission, base
• Need to believe the economics and the science load electricity generation options yet available
– But large emission reduction gains possible by
• Likely harder eventual transition moving to gas-fired generation
Approach Comment
2. Have the Government determine where/how the • Someone must pay; either general taxpayers or
emission reductions will come specific sectors of community
• Government picks winners (e.g. solar panels)
• No greenhouse reduction action other than what the
Government decides
3. Use a market-based mechanism • Let the market decide on lowest cost emissions
• Requires belief in markets, much like the belief
needed for tariff reform
– And relative price changes usually drive larger
than expected behaviour change
Mechanism Comment
WHO PAYS?
Observation Conclusion
CPRS ISSUES
• A 5% reduction target is too “soft”, easy to reach • Around 25% reduction against BAU will be hard to
meet
• Allows free permits to the “big polluters” • Assistance mainly aimed at EITEs
(companies that make steel, cement, electricity, – See next page
…)
• Simply churns the money • It provides compensation while still sending the
appropriate price signal
• Means action by households simply helps “big • Fails to understand that we all benefit from least
polluters” cost abatement
– Aim is to transition the economy, not inflict pain on
Australian companies
• Allowing the overseas purchase of offsets • Also fails to understand that we all benefit from
removes the pressure for action in Australia least cost abatement, and that those generating
emissions still pay full carbon price and have strong
incentive to reduce emissions
– As Ross Garnaut says, trading is essential for
23 March 2011 Australia
Port Jackson Partners Limited 10
Perhaps the most heated debate was over compensation to EITEs
• Any compensation amounts to a return to • Does not recognise carbon leakage argument;
protectionism flawed position in economic logic
• Need a clear principle (Ross Garnaut); • Assumes world will move to significant reduction in
compensate to offset only for loss from world not emissions
having an equivalent carbon price to Australia – And does not want to encourage investment in
declining activities
• Help companies transition; either to new • Governments sometimes provide such assistance
technology or out of economy to “oil the reform wheels”
• Ensure Australian companies do not suffer • More cautious approach, until the actions of others
significant disadvantages against competitors are clearer
until others do act
Under any approach, EITE assistance should be
removed once other countries adopt commensurate
measures
• Government, Greens both want a carbon • Will Greens, Government agree on the
price but cannot agree on the targets that remaining issues to bring in a carbon price?
must underpin any ETS – E.g. EITE, electricity arrangements; level
of carbon price?
• Moving then to ETS i.e. a hybrid model • Raises investment certainty issue
INTERNATIONAL OFFSETS
• CPRS allowed access to international • Fixed price will not have regard to overseas
V
offsets which provided an effective floor to prices
the carbon price
– That is, the ETS carbon price would move • If allowed access to international offsets,
to match the international price and these were cheaper than domestic
– Most would, however, likely buy their price, most would buy overseas
permits off the Government – Government would then lose the revenue
needed for compensation; or need to
lower the “fixed” price
• Had banking and borrowing, and so clear • Know price for 3-5 years but what is the
forward price price after that?
V
– And had longer term target “gateways”
– Without knowing targets this may be very
• Had access to international offsets, so difficult to assess
could rely on being in line with overseas
prices
• Allow the 3-5 year fixed price to continue in • BUT this could see a price in Australia higher than
some way world prices; and a government-set price can be
changed
• Pre specify the future target as a default • BUT we have a hybrid model because the parties
mechanism cannot agree the targets
• After 3-5 years allow full access to international • Puts pressure on Government to set ETS targets
offsets whether or not there is an ETS • Has advantage that companies can invest based on
their interpretation of international events and so
likely world prices, rather than level of domestic
caps; but is this sufficient?
Key principle: Investment certainty comes NOT from a known price but from known
and trusted rules and institutions, and from having some reference to
international prices about which investors can form judgements
Goals Comment
• Make an economy-wide start to reducing carbon • If large change is ultimately needed it will be useful
emissions to begin now
• Allow a carbon price to substitute for most other “complimentary” measures; particularly the high cost
measures