All roads lead to an ETS

Is the Coalition promising to kill the carbon tax while intending to retain what the Gillard government promises for 2015: an emissions trading scheme?

Julia Gillard and her ministers can sing, dance and spin as much as they like in the wake of Carbon Sunday, but the most obvious point today is that our emissions abatement future does not lie in their hands.

In another life, a former senior minister in the Hawke/Keating governments used to remind me in the run-up to the 1996 election that the only thing that really matters about the opinion polls is the long-term trend.

On this basis, Labor is a dead party walking and the key issue is what Tony Abbott and the Coalition will do about carbon policy when they grab office.

We know what they will set out to do: kill the carbon tax and some of its attendant features. For all the dancing on the heads of pins going on in Labor and media commentary at present, this will be accomplished one way or the other.

The real point for investors in energy infrastructure, manufacturing, mining and other businesses strongly reliant on secure, affordable power supplies is what else will they do?

Apparently, despite rumbles in the Coalition caucus room and growls from energy-intensive manufacturers, wanting the RET dead, too, Abbott and his team are committed to the bipartisan renewable energy target at its present level – something that Greg Combet at the weekend was also re-affirming despite noises from the Greens, the environmental movement and green energy rent-seekers, wanting the target expanded.

Meeting today’s RET will require an outlay of about $20 billion on some 7,000 MW of wind farms, mainly in Victoria and New South Wales, in the next seven years, not a minor challenge. Even if it is met, the abatement it can deliver will be not more than a fifth of the other bipartisan target: cutting national emissions to five per cent below 2000 levels by 2020.

Assuming that the demi-bipartisan commitment to "direct action” – in this case paying the owners of older, emissions-inefficient power stations to shut down units – is pursued, and taking in to account that coal plants will be replaced with gas-fired turbines, the abatement gain by 2020 from this move plus the RET will be not more than a third of the national target.

Which leaves almost 100 million tonnes a year of emissions cuts to be delivered at 2020.

How this can be achieved without some form of cost on carbon is challenging better minds than mine, but it seems inconceivable that the Coalition can make good its promise to stick to the big target without imposing one.

This raises the question of whether the Coalition is engaged in its own version of the carbon egg dance – promising to kill the tax while intending to retain what the Gillard government promises for 2015: an emissions trading scheme?

Scratch the electricity supply industry at present and you will find a substantial number of managers who believe, and hope, this is what the Coalition intends regardless of the present Punch-and-Judy show.

Scratch the upstream petroleum industry, which is on the front line with domestic electricity and gas infrastructure development in delivering a half trillion dollar investment in resources over the next 20 years, and you will find a similar view, I think, with one important difference: the LNG industry does not want a domestic ETS impacting on exports until there is a global scheme embracing all its competitors.

Looking at the world in the wake of the weak-kneed "Rio 20” exercise, attended by Julia Gillard in the vain hope that it would add some shine to her image at home, and you surely would have to conclude that a Coalition government winning office in 2013 is unlikely to need to cope with a global ETS before 2020.

Which throws up a domestic scheme as the most obvious (at least to a non-politician) way to go.

The two essential elements of such a scheme are a cap on emissions and the ability to trade carbon permits.

The cap is already agreed between Labor and the Coalition: it is the below-2000 target.

The next step is to put in place an ability for emitters to trade.

The government doesn’t need to set a price – that will be down to the market.

Semantics it may be, but Abbott can keep his "blood oath” to withdraw the carbon tax and still stay on the green brick road.

What’s more there is money to be made out of this gig if the government opts to auction the permits rather than allocate them.

Without tripping myself up on the details, of which I understand about one word in 20, the McKibbin-Wilcoxen model is seen by some economists I know as being an 'elegant' way to deal with all the inescapable complexities of going down this road.

Those who would say that this is all very unlikely, given the Coalition’s current apparent hard line, need reminding that Peter Costello, Andrew Downer and David Kemp (then environment minister) took an emissions trading scheme to federal cabinet little more than a decade ago and were held off by the implacable opposition of John Howard, who then changed his mind too late when staring defeat in the face in 2007.

Abbott is going to destroy the Gillard/Swan/Combet carbon tax because it is a political imperative, but a large number of energy managers are on tenterhooks as to whether he is implacably opposed to emissions trading.

What is maddening most of them is that the nature of the political game requires Abbott to keep his intentions well disguised until at least the election campaign and perhaps right through it.

However, they, too, need a sense of perspective.

The current LNG projects are going ahead on the basis of contracts with the Asian Pacific buyers.

The current multi-billion dollar outlay on power networks is going ahead until 2014 on the basis of long-decided regulatory determinations.

The investment in wind farms will go ahead because of the legislated RET requirements.

If contracts for closure are signed with owners of old coal plants later this year, work will start on replacing the capacity with baseload gas units – the market demands for electricity, even in their current depressed state, will dictate this.

Some open-cycle gas plants will be built between now and 2020 because, whatever is happening to core electricity demand, peak power requirements continue to rise and the market will reward investors.

The biggest impediment to investment in renewable energy generation today is not the carbon tax imbroglio but the snail’s pace resolution of rule changes for new transmission lines.

If this is resolved this year and proposals for new links are approved in 2013-14, we could see a stimulus for wind development in its most welcoming environment, South Australia, because energy could be sold in to Victoria and NSW.

Nowt to do with whether or not there is a carbon tax or an emissions trading scheme.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.


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