Cuts to existing programs will hurt Direct Action

The Coalition isn't even in power, yet has managed to scare investors away from putting money behind Labor programs. But threats to tear-up contracts and major ambiguity about renewables programs could ultimately undermine Direct Action.

The Coalition so far has done an excellent job in essentially ruling from opposition and in defiance of the Parliament. Even though the Parliament may legislate for a range of carbon emission reduction initiatives, if the Opposition says they are opposed, or remain ambiguous about its position, it has acted like the kiss of death for investor confidence. 

The Opposition has already succeeded with the carbon price. Forward price contracting for electricity is starting to reflect a future without carbon pricing. This is a major victory for the Opposition. If businesses had started to invest significant funds on the basis of a carbon price, it would have made it very difficult for the opposition to proceed with repeal. While political parties may huff and puff when in opposition, once in government and presented with angry bankers and investors, they become loath to undermine existing sunk investments.

The Opposition clearly understood this, so its commitments on carbon pricing left itself almost no room to manoeuvre, or back out. It was as if Abbott assumed the position of the Spanish Cortes landing in America back in the 1500s, burning the boats so his soldiers were motivated by no chance of retreat. 

They are attempting the same thing with the Clean Energy Finance Corporation by stating a Coalition Government won’t honour contracts it might sign from July onwards. But this pledge is on far shakier ground. It is one thing to change legislation without compensation, it is quite another to tear up contracts that a government entity has signed. 

Legal experts suggest the government would face an unavoidable compensation bill for such actions. The Coalition is no doubt aware of this, so its real intent is to scare businesses away from entering into contracts with the CEFC in the first place.

Shadow environment minister Greg Hunt told Climate Spectator that he has the legal grounds to back out of CEFC contracts citing the case of OPEL Networks.

OPEL Networks was signed-up by the Howard government to provide broadband services to rural and regional areas in mid-2007. However the Labor government didn’t tear-up the contract on the basis simply of a change of government policy. Instead it terminated the contract because it felt OPEL hadn’t met the terms of the contract (something OPEL disputed but never chose to challenge in court).  

Hunt further justifies the Coalition’s stance by invoking the possibility the CEFC could spend $10 billion in an irresponsible binge to get the money out before a Coalition government can stop it. Yet the CEO of the CEFC, Oliver Yates, almost laughed when Climate Spectator put this possibility to him. He patiently explained that while the CEFC does expect to announce quite a number of deals shortly after July 1, it isn’t about to spend anything remotely close to $10 billion, or even the annual target of $2 billion within the space of a few months prior to the election.

Unfortunately even where the Coalition has not explicitly sought to scare away financiers, the ambiguity of its policy position is leading to an investment strike. 

At the Solar 2013 conference the audience was not consoled by Hunt’s repeated statement that the Coalition supports a 20 per cent Renewable Energy Target. They knew such a statement leaves open the possibility of legislative amendments that could significantly scale-back renewables development.  Given the Coalition is determined to review the scheme in 2014, little more than a year after a prior review concluded, everyone is extremely suspicious. 

Hunt then made the audience even more worried when he mentioned shadow energy minister Ian Macfarlane would be making a policy announcement on ARENA closer to the election. The function and funding of ARENA are set-out via legislation passed less than 12 months ago which was supported at the time by the Coalition. 

The ARENA board and CEO don’t seem to be complaining about this legislation restricting their operation. In addition the renewable energy sector isn’t calling for any changes. So it seems puzzling why the Coalition wants to make an election announcement about the organisation. Given the state of the government budget, the conclusion one is left with is cuts to funding, something Hunt was unable to rule-in or out. 

If you are a rational investor rather than an environmental idealist this all suggests you’d be better served putting your money somewhere else. The Coalition says it recognises the importance of regulatory stability to investment confidence. But when you also state you’ll tear-up contracts and refuse to rule out fundamental changes to existing government legislation, you send a very different message.

This is a risk not just to the Labor government’s programs, but also those of a future Coalition government. For Direct Action to succeed it will require 10 year investments. No one will proceed with such investments if the Coalition simultaneously tears up CEFC contracts, and reinterprets its commitments to renewable energy legislation.