Issue 49, March 2009
The Senate is where the fate of the Rudd government’s emissions trading scheme will be decided following Treasurer Wayne Swan’s bewildering decisions to first call a House of Representatives’ committee review of the measure and then to cancel it within days.
While industry representatives and political journalists continue to debate what the Swan manoeuvres mean, the stage has been set in the Senate for debate on the measure by the tabling of a report from Concept Economics.
Commissioned by the Senate select committee on fuels and energy as a peer review of the Treasury modelling of the impacts on the economy of greenhouse gas abatement, the CE report highlights the uncertainty of steps to impose charges on carbon emissions.
And it points out that the Treasury has snubbed the committee by ignoring its written request for supply of the background material the department used in its ETS analysis. Concept Economics warns senators that the Treasury’s lack of transparency is “unsatisfactory” and “regrettable,” not least because of the department’s habit of pushing others for openness about the information they use.
CE urges senators to call on the Treasury to provide updated GDP forecasts now that the global economic has slumped dramatically for comparison with the data used in its climate change modelling. The consultancy also calls for further analysis of the short and medium term impacts of emissions trading on electricity generation and trade-exposed, energy-intensive industries.
Concept Economics also proposes that the Rudd government get the Productivity Commission to review the ETS against its best practice regulation guidelines, a key point given that it is being claimed in Canberra that the regulations for the complex trading and compensation arrangements being planned will be “the size of a telephone book.”
Climate Change Minister Penny Wong has announced that she will release the draft ETS legislation on 10 March and has sought to push the Senate in to referring it to the standing committee on economics (rather than the one on the environment) as well as setting itself a deadline of 14 April for reporting.
The deadline is irritating business lobbyists because it is also the date she has set for their responses to the bill.
Wong has signalled that the government will seek to have the legislation passed in the winter sittings of Federal Parliament.
The Concept Economics study for the Senate fuel and energy committee highlights an aspect of the Treasury ETS modelling that is sure to be seized on by the Greens and environmental groups.
Under the scenarios on which the government has relied for its proposed scheme, CE points out power station emissions go up between 2010 and 2020, not down. The government is relying on end-use efficiency and its enlarged renewable energy target for most of the abatement it predicts, the consultancy says.
“By 2020 there will be relatively little shift towards gas-fired generation. Emissions in the electricity sector do not fall significantly until the mid-2030s – when (new) technology options become available.”
Electricity today accounts for 35 percent of Australia’s total greenhouse gas emissions.
Concept Economics also notes that electricity prices will rise by 50 to 130 percent in the short term as a result of emissions pricing and adoption of new renewables.
CE argues that the Treasury modelling relies on a set of assumptions that “together are likely to mean that the structural adjustment challenge of moving to a decarbonised electricity generation sector has been significantly under-estimated.”
One alternative possibility to the scenarios used by the Treasury, the consultancy suggests is that suppression of demand leads to excess baseload capacity, lower wholesale prices and “potential financial failure of some major emissions-intensive generators.”
Concept Economics – led by former senior Howard government economics adviser Brian Fisher – accuses the Treasury in its longer-term predictions of “appearing to have dramatically under-estimated the cost of transforming Australia’s current electricity generation capacity to one based on near-zero emissions technologies.” In some cases, it says, the costs used by Treasury are roughly half the current industry estimates.
Concept Economics claims that, contrary to the picture the Treasury paints of a “smooth, long-run transformation towards decarbonisation,” coal-fired generators face a “much more wrenching adjustment,” with a large part of it occurring before 2020 and the largest impact being felt by Victoria’s brown coal companies.
Credit ratings agency Standard & Poor’s has commented that the increased risks and costs of the emissions trading scheme will influence the perspective of debt providers to the Australian electricity industry. S&P suggest that investor-owned Victorian brown coal companies may have to bring forward debt refinancing.
According to a report in the Australian Financial Review the electricity industry estimates that $5.2 billion of generator debt needs to be refinanced between 2009 and 2012 and the Energy Supply Association fears that the $3.9 billion offered to power companies in the Rudd government’s white paper may not be enough to prevent their credit ratings being cut under accounting rules.
The Senate fuel and energy committee has been told by Concept Economics that Australia’s fast-developing liquid natural gas sector – a critical foreign income-earner as national imports of transport fuels soar over the next decade – is likely to be “significantly impacted” by emissions trading.
LNG is gas chilled to liquid form for transport by sea.
One reason is that the production of gas and the processes required to transport LNG are emissions-intensive, according to CE, and the other is that the projects are highly capital-intensive and changes in costs, such as those imposed by emissions trading, “are enough to make many projects unviable.”
The consultancy asserts that it is “plausible” that Australia LNG output under emissions trading could be between a third and a half less than its potential by 2030. “This is the case whether or not the government offers to shield the industry with assistance for a period of time.”
Meanwhile Houston-based ConocoPhillips petroleum group says that the proposed joint venture with Origin Energy to develop an LNG plant near Gladstone using coal seam methane as feedstock is not affected by its operational cutbacks in response to the collapsed oil price and the global economic crisis. ConocoPhillips brought worldwide attention to the Queensland CSM industry when it agreed to pay Origin $7.52 billion to secure a 50 percent share of the the project – currently scheduled to deliver the first of four 3.5 million tonnes a year LNG trains by 2014.
ConocoPhillips already operates a conventional gas-based LNG facility near Darwin.
Petroleum giant Chevron has highlighted the potential for LNG to make a large contribution to greenhouse gas abatement overseas.
Giving evidence to the Senate fuel and energy committee in Perth, Chevron Australia adviser John Torkington has pointed out that exports of LNG, currently at 17 million tonnes a year, could exceed 76 million tonnes annually in two decades, displacing sufficient coal to deliver 200 million tonnes a year of emissions cuts.
The Rudd government, he argued, when assessing how to treat the LNG industry under emissions trading, should be paying attention to its impact on global greenhouse gases, not just what the producers emit in Australia.
He and Chevron Australia external affairs manager Peter Eggleston told senator that the large Gorgon project – a $23 billion joint venture between Chevron (50 percent), Shell and ExxonMobile (25 percent each) – should reach a final decision point later this year. Australian government revenue would benefit by $40 billion over the 40-year life of the project, if it goes ahead, Eggleston said.
They said the project would emit 5.5 million tonnes of greenhouse gases in Australia, but abatement 45 million tonnes a year (equivalent to two-thirds of Australia’s road transport emissions) overseas. The project is being designed to capture its carbon dioxide emissions and sequester them in deep reservoirs beneath Barrow Island.
Meanwhile ExxonMobil is reported to have cut a deal with PetroChina to sell it two million tonnes of Gorgon LNG annually for up to 25 years.
Virtually every media reference to energy-intensive, trade-exposed industries in the context of carbon controls refers to the companies as “big polluters.” One of the Concept Economics’ review commentaries puts the so-called “EITEs” in context. They account for 16 percent of current Australian business investment, CE says, 51 percent of exports and 15 percent of national gross value added. They employ one in 10 working Australians.
“The imposition of additional costs not faced by competitors,” the review adds, “is likely to constrain (EITE) employment, investment and growth, with the potential for economic activity to shift to locations without a carbon price.”
CE has told senators that the government’s proposed ETS “looks set to impose greater competitiveness imposts on Australian EITEs than will apply under any other current or proposed scheme, including the European one.”
While the Australian Industry Group’s call for introduction of emissions trading to be delayed has been headline news around the country, the full tenor of the leading lobby group’s views has been obscured.
AiG’s national executive sent a message to the Rudd government on 26 February that:
The two-pronged “delay ETS/get rid of RET” approach is bad news for the government as its girds itself for a rocky ride through the Senate to pass its carbon policies.
AiG chief executive Heather Ridout told the government its 2010 deadline to start the ETS is “unrealistic” because of the impact of the global financial crisis on business confidence, cash flows and the availability of credit. The crisis is undermining the capacity of business to invest in new processes, plant, equipment and trained, she added, and all are necessary for industry to tackle abatement.
Changes to ETS that the lobby group is seeking include broading business eligibility for permits, increasing the number allocated and ensuring the compensation system has a particulat focus on trade-exposed industries.
On the RET, the group remains resolutely opposed to the plan because, it says, it is too expensive, adds an additional layer of costs to business and contains no protection against its impact for trade-exposed industries.
Ridout adds that the 1 July 2010 starting date for ETS is “unfeasible” because of the sheer scope of the administrative task facing industry to prepare for the scheme and because of the extent of the impact on them of the global economic crisis. “Businesses,” she claims, “are being asked to submit data they don’t have on the emissions intensity of activities that are not clearly defined.”
Meanwhile The Australian Farm Institute is claiming that agricultural input costs will rise “substantially” when emissions trading is in place. CEO Mick Keogh told a conference in Adelaide that farmers will be impacted by rising fuel, freight, electricity and chemicals costs.
The Clean Energy Council’s chief executive, Matthew Warren, has told the Senate fuel and energy committee inquiry in to emissions trading that the Rudd government’s proposed higher renewable energy target will lead to about $20 billion in new investment, mostly in regional Australia.
Warren told the committee that there are probably on three countries that have the capacity to develop a highly competitive, unconstrained renewable energy market – the US, China and Australia. European policy, he said, was heavily geared towards deployment of one or two technologies rather than creating a competitive environment where all renewables could compete with each other.
Activist group GetUp is campaigning strongly against the Rudd government’s “soft start” emissions trading scheme, arguing that Climate Change Minister Penny Wong’s frequent references to the target being five to 15 percent are misleading because the ALP is “locked in” to five percent. The government’s household and industry supports packages and the carbon price it is using are all based on a five percent target, the group argues. It accuses the government of not seeking “any meaningful structural adjustment” to a clean energy future and complains that allowing businesses to deduct the cost of permits they need against their taxable income will lead to lower Treasury revenue and “less money for schools, hospitals and public transport.”
The Energy Networks Association is campaigning for a “more flexible” energy market framework to enable transmission firms and distributors to meet national needs to expand, upgrade and maintain their systems.
Regulatory settings must ensure that networks can achieve full cost recovery and can attract the substantial funds needed to deal with growth in power demand and other pressures, says Andrew Blyth, ENA chief executive.
The network providers will be called upon to meet higher temperatures, more flooding and shifts in projected demand under the global warming scenarios now being contemplated by policymakers, he adds. They need to be able to pass full climate change-related price signals.
Blyth says increased regulatory risk is now “inherent in the sector” and its member businesses are encountering “adverse reactions” from capital lenders towards the weighted cost of capital decision for the next five years as recently proposed by the Australian Energy Regulator. The analysis on which the AER is relying is “fundamentally flawed,” according to the ENA.
The Queensland government, now pursuing another term in office at an election this month, says the coal seam gas industry has experienced “remarkable growth” un der its policy management in the past 10 years.
Coal seam gas drilling in Queensland numbered only 10 wells a year in the early 1990s, says the Queensland Department of Mines and Energy, and reached 600 last year. Proved and probabl reserves reached 10,680 petajoules in mid-2008 and annual production increased to 125 PJ, accounting for 80 percent of the State’s gas market. Production in 2000 was just 2 PJ.
Next year the government’s policies will require 15 percent of all electricity sold in the State to be sourced from gas-fired generation.
There’s not an awful lot of electricity in Brazil. In fact, South America’s largest economy is staring at power supply problems if it cannot muster enough investment to deliver 5,200 MW of new capacity every year for the next decade. (Australia has built a total of 5,000 MW of new capacity over the past 10 years.)
Brazil’s energy minister Edson Lobao described the need to add 51,000 MW of new generation to the country’s supply system between 2010 and 2020 as “an enormous challenge” and identified more nuclear energy as the key solution.
Eighty-five percent of Brazil’s current generation is hydro-electric and the the government actually wants to cut this back to 75 percent, seeking more supply from nuclear and wind. The country has two nuclear power stations at present, sited in a town 150 km from Rio de Janeiro.
The power need is driven by IMF forecasts that, despite the global financial crisis, Brazil’s economy will grow at three percent a year in the next 10 years compared with 4.9 percent average annual growth this decade.
The Cooper Basin in South Australia looks “extraordinarily promising” for geothermal power supply, Fiona Wain, chief executive of Environment Business Australia, told the Senate fuel and energy committee hearing in Sydney.
Wain said advice from the geothermal industry indicated that the sector expected to provide at 1,000 MW of power capacity for the NEM by 2020 and potentially as much as 2,200 MW. “Between 2020 and 2030,” she added, “the capacity for geothermal to really take off is quite considerable.”
Wain told senators that it appeared southern China may have similar geology and that a “fantastic” opportunity might exist to use Australian know-how to help China pursue a large alternative to coal power.
Australia’s Academy of Technological Science and Engineering (ATSE) has taken its arguments for a different approach to energy development to meet global warming objectives to the Senate.
In a submission to the Senate fuel and energy committee, Dr John Burgess of ATSE has again pushed forward the Academy’s proposal – first published in a report in January –for the Rudd government to increase its contribution to energy innovation from $1.25 billion at present to $6 billion between now and 2020.
ATSE says its is concerned that there is a “major gap” in the government’s emissions trading white paper in “the way it all but ignores the need to accelerate the use of technology.”
It adds that the proposed price of carbon, at least initially, will be too small to justify business investment in new technologies. ATSE argues that much more of the funds available from selling carbon permits should go on encouraging investment to reduce emissions rather than compensation for increased costs. This, it says, will reduce emissions, make Australian industry more internationally competitive and create jobs.
Burgess told senators that ATSE had initially estimated in its report that some $60 billion would need to be invested to meet the government’s 2020 emissions abatement goals, but subsequent work has shown that this needs to be $85 billion.
Burgess also told senators that the proposed carbon capture and sequestration approach would require Australia to bring in to being a “massive industry.” By 2050 Australia would need to be sequestering more than 200 million tonnes of carbon dioxide emissions from energy production – five times as much as current oil extraction. “This will require a massive technological advance, with pipelines going all over Australia, heading out to basins to inject carbon dioxide at very high pressure,” he said.
He pointed out, too, that siting a large solar capacity in central Australia would involve large line losses using conventional transmission systems. “You may have to go to new technology for transmission from remote sites, both for geothermal and solar.”
While President Obama is trying to place the US at the forefront of the international global warming policy negoatiations ahead of the UN’s December’s summit in Copenhagen, the Indian government is saying bluntly that it will not accept any form of legally-binding national emissions cut as part of a post-Kyoto treaty agreement.
As India is predicted to increase annual coal burning for power generation from almost 400 million tonnes today – eight times the coal burned each year in New South Wales and Queensland – to 750 million tonnes a year by 2030, this represents a major barrier to success at the Copenhagen talks.
Shyam Saran, the Indian prime minister’s special envoy on the issue, has dismissed criticism by the industrialised nations that India is undermining the hopes of a new treaty by resisting calls to take on any target. “We expect the Copenhagen outcome to provide us with the space we require for accelerated social and economic development in order to eradicate widespread poverty," he said in New Delhi. India would commit to not allowing its per capita emissions to exceed the average of the developed countries.
Saran said any agreement at Copenhagen would be “difficult” if the developed countries insisted they would accept reductions in emissions only is countries like India also took them on.
Saran added that India’s strategy, like that of America under Obama’s leadership, would include pursuit of renewable energy to reduce reliance on fossil fuels and to create new industries and new jobs, but he made it clear that only a two (or more) tier abatement outcome at Copenhagen would be considered.
India is the world’s third largest greenhouse gas emitter, exceeded only by the US and China. Its per capita emissions today stands at 1.1 tonnes. The developed world average is estimated to be 10 tonnes.
Through Saran, India has once again emphasized the issue that soured the Poznan summit last December: the developing nations want the industrialised ones to spend big to transfer technology to them and to support their clean energy projects.
The stark disagreement over this issue and widely differentiating commitments by the “haves” and the “have nots” is seen as an ominous sign for the Copenhagen talks.
Meanwhile the Indian government is embarking on a major nuclear power program that is expected to see it install 15,000 MW of new uranium-fuelled generation by 2015 and to build capacity to about 60,000 MW by 2030. Construction is under way on 2,600 MW of nuclear plant.
Only 2.5 percent of Indian electricity is produced by nuclear generation today – compared with 69 percent coal generation. Although the country has 4,000 MW of nuclear power plant today, its production of electricity from this source has fallen away because of an embargo on supply it fuel and because its government could not make a fist of opening new domestic mines.
Never a month goes by in the Australian carbon debate without some advocate of green policies invoking the magic name of Denmark as the example of all things good.
Here is reporter Olga Galacho in the Melbourne Herald Sun (in an article on 5 March headlined “Kevin Rudd’s green pledge was all hot air”):
“In nuclear-free Denmark, a nation of just 5.5 million people, there are 2,500 clean energy companies employing 33,000 people. The Danes, who will host the next round of the UN climate talks in December, began transforming their energy sector away from coal decades ago.”
And here are a few facts (based on 2007 data, the latest available):
Official Danish statistics show that, measured in terajoules, 71.7 percent of electricity produced in the country is derived from coal, oil and natural gas while 18.3 percent comes from wind farms.
Most wonderfully of all in this Nordic saga, the Danes, according to no less an authority than Greenpeace, are the world’s fifth largest importer of coal, which they buy in from South Africa, Colombia, Russia, Poland and – yes!! – Australia. As part of their publicity-seeking antics during the UN conference at Poznan last December, Greenpeace blockaded a vessel delivering South African coal in to a Danish terminal.
Denmark, complains Greenpeace, behaves “outrageously” in importing more than eight million tonnes of coal a year and creating 19 million tonnes of carbon dioxide emissions in burning the fuel. “It’s time to take Denmark away from the coal age,” it declaims.
But wait, there’s more.
The Danes have had a carbon tax for industry since 1993, but energy-intensive companies can get a lot of it refunded by entering in to an agreement with the government to undertake energy audits and savings and “to take energy aspects in to consideration when buying new plant and equipment.”
As well, the Danish government has been in a long-running argument with the European Union buraucracy in Brussels over the country’s abatement target. Under the EU collective Kyoto commitment, Denmark must cut its emissions to 21 percent below the 1990 level in the period 2008-12. Actual Danish emissions in 2007 were four percent above 1990. “Unfair,” howl the Danes. “Our emissions in 1990 were exceptionally low because we imported record levels of hydro power from the Swedes and Norwegians that year.” Brussels so far hasn’t wanted to know.
With wonderful hypocrisy, the Danish official publications proclaim that nuclear power has not been an issue since a 1985 parliamentary decision against building such plants in the country. Of course, the nuclear power it consumes is from plants outside the country! About nine percent of its electricity use is estimated to be nuclear.
At bottom, the key to the Danish power situation is strong high voltage interconnection enabling it to act green while depending on three of the environmental movement’s big hates in electricity supply -- large-scale hydro dams, nuclear power plants and coal-fired generation – to keep the lights on. The greens don’t like big HV interconnectors either – witness how they fought against Basslink between Victoria and Tasmania.
In order to to deliver this electricity supply system, the Danish government also imposes the highest residential power prices in Europe – currently about three times the Victorian household tariff. It has been calculated that, through their subsidisation of domestic wind production, the Danes contribute about $300 million a year in power cost support to other countries. There are occasions where the wind power is priced in to the interconnected markets at zero simply to ensure that it is taken.
Coolibah’s Keith Orchison now has a blog, entitled PowerLine, on the Business Spectator website at www.businessspectator.com.au.
In the years that I was manager of the Electricity Supply Association I used to say frequently that the key issues for the power industry could be summed up in two four-letter words. Today I think we need three four-letter words.
Time. Cost. Risk.
Nowhere is this more starkly obvious than in the Rudd government’s key carbon abatement policies – emissions trading and mandatory use of renewable energy.
The Swan committee referral fiasco, diverting as it was for the media and other observers, really served only to betray the uncertainty gripping the government over this policy – and that throws up major problems for those who have to provide energy supply.
Senator Penny Wong doing her imitations of Margaret Thatcher – “this lady is not for turning” and “there is no alternative” – is sounding less convincing by the day because why, other than it fears that there may be real problems with the impact of the emissions trading policy, did the Federal Treasurer word the riding instructions for the House economics committee as he did?
Why, other than panic at the highest levels when the predictable media and political reaction was heard, did Swan promptly withdraw the referral, an unprecedented action in the Federal Parliament, after the Climate Change Minister threw what looked to some like a public hissy fit? In exerting pressure, was she joined behind the scenes by the Treasurer’s department?
The behaviour of the Treasury in this area and others has been raising eyebrows for some time now.
The fact that it has simply ignored a request from the Senate fuel and energy committee – see above – for access to the full data it used for its emissions trading analysis speaks volumes. When last was a committee of the Parliament treated with such contempt? Is the action, in fact, not contempt of the Senate?
Policymaking in the global warming area is not helped by the iron grip that the Treasury has on Wong’s stripling Department of Climate Change where a number of its senior people are installed at the top. One comment doing the rounds of business in Canberra at present is that DCC would be bettered titled Department of the Treasury (Climate Change branch).
When will it occur to the Prime Minister that a part of the political problem he has with this issue might lie in the way in which it has been captured by a hubristic Treasury --overseen by a not specially-strong Treasurer -- aided and abetted by an intransigent junior minister?
The Treasury behaving arrogantly is nothing new. It has done so for decades, not least because it has attracted a great many talented people to its ranks who have considerable ability to challenge the views of others – but even the very clever are not always right.
Even the smartest bureaucrats can be very politically dumb.
And no public servant, however smart or riding however high in the esteem of the governing party, should be allowed to get away with treating the people’s elected representatives with contempt.
Paul Keating once snarled that the senators were “unrepresentative swill.” However rude this was, he was an elected MP and could indulge in political cat-calling if he wished (although, as we all know, his arrogance eventually brought him undone with a vengeance in the polling booths).
Parts of the bureaucracy trying to “diss” the Senate – and there have been a number of occasions lately where this has happened, but none more blatant than simply ignoring a Senate committee request – is simply not on.
No matter what the Treasury thinks – and Wong, too – this is not a policy above and beyond the public domain.
It is not secret economists’ business.
Carbon policy is not a morality play.
There is nothing magic about 1 July 2010 as the date to introduce the ETS.
For the reasons that Concept Economics (see above), the Australian Industry Group (see above), the Minerals Council and others have set out in some detail, there are grounds for thinking that there are serious problems with the current official approach.
When someone as talented and of such standing as Professor Warwick McKibbin goes before the Senate fuel and energy committee, as he did on 19 February, and expresses a range of concerns about the emissions trading scheme, as proposed, then it surely is time to stop the rush to legislate the present ETS and to re-evaluate it carefully.
For whatever reason, Swan took a big step in this direction in February and then, for whatever other reason(s), dropped the idea again like a hot potato seven days later.
So now it is up to the Senate – and the Prime Minister should make it his business to tell the Treasury to get down off its high horse asap and co-operate with the requests for information of senators working in an official committee.
Meanwhile the electricity supply industry – and other energy sectors – will still be left wrestling with time, cost and risk. Some of its executives may even be using other four-letter words while they do so.
2 March 2009
| to top of page |