CLIMATE SPECTATOR: Look out for the budget razor gang

The government is facing some serious strife over maintaining its promise of a budget surplus.

Commodity prices, particularly coal and iron ore which are subject to the mining tax, have dropped considerably in the last few months. In combination with a subdued property and stock market hitting capital gains tax, and poor profits outside of mining, the government's tax revenue is taking a significant hit. This won't be helped by the depressed nature of the European carbon market, which makes Treasury's carbon price forecasts look incredibly optimistic. This political pickle over the budget means the Expenditure Review Committee (or ‘Budget Razor Gang' if you like a bit of drama) will be working overtime.

Clean energy grant programs will be under consideration for the chop. It also illustrates why you want to avoid funding clean energy and emission reduction efforts out of the budget rather than purpose-built schemes such as the Renewable Energy Target.

Right now some social justice groups, as well as some industry lobbyists, are keen to have any future large-scale energy efficiency initiative funded out of the budget rather than through an obligation on electricity retailers. Indeed if they could wind back time many industry lobbyists would have the Renewable Energy Target funded out of the budget.

The argument behind using the budget to fund such programs is that adding extra costs to electricity hurts the poor more than the rich. Electricity typically eats up a larger proportion of low income versus high-income households' budgets.

According to the ABS Household Expenditure Survey, households representing the poorest fifth of the population spend 4 per cent of their budget on domestic fuel and power, while the richest fifth spend 2 per cent. It should be said in response that cigarettes also take up a larger proportion of low income household budgets, but we recognise that this still makes sense because of wider social benefits.

Nonetheless, theoretically it shouldn't matter for those doing carbon abatement, energy efficiency or renewable energy projects whether they receive support via the budget or through a purpose-built scheme. After all money is money no matter where it comes from.

But in reality it matters a great deal. If a program is funded through the budget it is almost guaranteed to suffer one or both of the following:

– The process through which money is handed out is determined through convoluted and highly subjective criteria that can have highly arbitrary outcomes that are incredibly difficult to predict in advance.

– The program lasts at best about three to four years but often can be cut short far sooner. Also the programs are often cut quite suddenly and without much notice. This is endemic in budget-funded programs because at least once a year the program will face the gauntlet of the Expenditure Review Committee. Treasury and Finance are not especially fond of clean energy programs so these always tend to come to the Committee's attention. Budget programs can also face additional chopping blocks as a result of the government trying to tidy-up the budget for the Mid-Year Economic and Fiscal Outlook, or even a Queensland flood.

Both of these endemic characteristics of budget-funded clean energy programs make it virtually impossible for any business to make long-term investment decisions. If you can't predict what's going to happen with a program that underpins your viability, how can you invest in the training of staff, new technology or new capital equipment that won't pay-off for five to ten years?

The Renewable Energy Target has certainly had its share of problems and uncertainty, but it's still here after 10 years. Businesses are signing up to projects worth hundreds of millions of dollars on the back of it, such as the $260 million Mt Mercer Wind Farm committed to just today.

The Expenditure Review Committee will never be presented with a proposal to rescind the RET, nor the carbon price, to get itself out of a budget black hole (although the carbon price could be strengthened). Also to rescind the RET or the carbon price, a government must first get its legislation through the Senate where it will often lack the numbers. Yes, a government has to get its budget through the Senate too, but the Senate is loath to block supply because of its incredibly significant implications.

For energy efficiency product and service providers to grow into a major industry their best hope is a purpose-built scheme operated outside of the annual budget cycle.

It's why clean energy businesses should also be concerned about the Coalition's plan to replace the carbon price with a budget-funded emissions reduction fund. The Coalition is staring at an even bigger deficit than the Gillard government. So once they take office, one of their first tasks will be going through each of their election promises to decide which are ‘core' and which are ‘non-core' promises.