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Greens-Government climate policy: inherently contradictory?

By Geoff Carmody - posted Tuesday, 26 July 2011


In addition, as the Productivity Commission has already suggested, the large 'direct action' elements in the Greens-Government policy will very likely be very cost-ineffective. They should not be implemented and, where they already exist, they should be abolished.

Measures such as renewable energy targets magnify threats of 'carbon leakage' and job losses offshore from Australian trade-exposed sectors.

They thereby magnify the global cost-ineffectiveness of the Greens-Government policy.

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It would be ironic if the government's policy, ostensibly promoting a sustainable climate, proves financially unsustainable, just like the raft of existing State-based household rooftop 'feed-in tariff' incentives, now being wound back.

For example, the 'commercially oriented' Clean Energy Finance Corporation (CEFC) has funding of $10 billion spread evenly over fiveyears from 2013-14. But if it is really 'commercial' why is the taxpayer involved? The whole point of governments setting an emissions price is to give the private sector an incentive to deliver emissions-reducing innovations.

Strangely, the CEFC is 'to invest in the commercialization and deployment of renewable energy and enabling technologies, energy efficiency and low-emissions technologies', but it 'will not invest in carbon capture and storage technologies', where there seems a stronger case for government intervention.

The CEFC is to 'invest' $2 billion of taxpayers' money per year from 2013-14. The Budget impact in the Forward Estimates is shown as only$467 million in 2013-14, and $455 million in 2014-15. Where's the other $1.5 billion (plus) each year?

If CEFC funding is used for commercially viable investments, I think public sector accounting conventions allow 'off-Budget' treatment. However, if such investments are not commercially viable they appear as 'on-Budget' expenditures.

The Budget impact estimates above suggest two possibilities. First, CEFC investments are all assumed to be non-commercial but take-up of the available $2 billion per year is expected to be dramatically lower in the first two years. This seems unlikely, given the $2 billion per year spending assumption. Alternatively, something less than 25% of CEFC investments are assumed to be non-commercial (and therefore recorded, plus borrowing costs, 'on-Budget'). The rest, assumed commercial, are 'off-Budget'.

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What if more CEFC investments turn out to be non-viable? This raises financial sustainability concerns. Adding up to $1.5 billion (plus), plus compounding borrowing costs each year, is a sizeable hit to the Budget bottom line.

Emissions price outcomes under the 'carbon' tax and ETS, and the viability of CEFC investments, are another source of policy tension.

Lower emissions prices mean less emissions cuts, but probably more Australian permit revenue. But fewer commercial renewable energy and other projects will ensue, with more government spending classified as 'on-Budget'. If emissions prices are higher, there might be more

emissions cuts, but less emissions revenue. Against that, more commercial ('off-Budget') CEFC investments might be found.

The danger is that the Budget bottom line will be worse than claimed, and all for little if any global environmental gain.

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This article was first published in The Australian on July 19, 2011.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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