In her speech to CEDA on 1st February 2011, the Prime Minister set out a vision for Australia to be "manufacturing more and exporting more and regaining comparative advantage".
Perhaps paradoxically, the vision was set out in the context of establishing a pricing mechanism for greenhouse gas emissions that could make it harder for Australia's import competing and export industries to prosper. I say 'perhaps' because there are ways to design an emissions pricing mechanism that minimises damage to that vision and yet still enables those industries to play their part in reducing Australia's emissions. The framework released by the Prime Minister on 24 February gives little insight as to whether or not the Multi-Party Committee is on the right track.
A successful design needs four key elements.
The first is to fully offset the competitive disadvantage imposed on Australian industry until there is a commensurate price impacting on our competitors. This will be necessary not just to maintain growth through the existing manufacturing, mining and mineral processing industry drivers of the economy, but also for the growth of the new industries in low emission technology manufacture and adoption. It is in all these industries that the Prime Minister should seek new jobs to be created.
A major shortcoming of the CPRS was that it did not take full account of the impact on competitiveness for industry. AIGN estimates that trade-exposed industry accounted for about 45% of emissions in the CPRS, and that the EITE program would have covered less than 65% of those emissions, imposing a cost disadvantage on Australian industry of over $20 billion to 2020.
For Australian industry, the Government was proposing to recognise just 42 activities as being at risk from the emissions price, whereas the EU recognises 166. Further, those Australian industries qualifying for assistance remained exposed to significant costs. Assistance to trade-exposed industries is not a subsidy; it is a reflection that these industries are unable to pass on these costs.
The second key element is to deliver on electricity security at a competitive price, a combination that has been a proven contributor to Australia's comparative trade advantage. In the past, major changes to energy systems have proceeded over periods of 50 years or so. A compressed and radical change to Australia's electricity supply will require transitional assistance to the industry.
It is important that the mechanism design fully restores confidence in investing in Australia's electricity supply. If some investors incur large losses at the hands of government, they will not be investing in new capacity and the new investors will be looking for higher risk weighted returns. The end result is higher electricity prices than are necessary.
The third key element is that the pricing mechanism design must provide businesses with the confidence needed to undertake long-term investments in low emissions technology and infrastructure. Without it, the necessary mobilisation of hundreds of billions of dollars of private capital will not take place in a way that delivers a least-cost outcome for the economy.
Major investment in low emissions technology requires an institutional framework that is stable, transparent and incorporates the ability for businesses to manage uncertainty over 15 to 20 year 'bankable' periods. The details of the framework so far released of a fixed price, for perhaps 3 to 5 years, which 'could' be followed by a cap-and-trade scheme, leaves a lot of very important questions unanswered.
Governments must learn from the mistakes made with the design of the renewable energy targets (RET) and associated subsidies including feed-in tariffs for renewable generation across jurisdictions - a repeat of the constant direct and indirect interference by Federal and State governments in a new emissions pricing mechanism must be avoided at all costs.
How well the mechanism meets the first two key elements will also be a significant determinant for investment confidence in the trade-exposed sectors and the electricity supply sector.
(AIGN members account for over 90% of emissions in mining, minerals processing, manufacturing and energy transformation industry)
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