Q&A Grant King on carbon pricing

TE: So back in 2006 you were part of the Australian Business Roundtable on Climate Change. You took a very prominent leadership position in arguing for Australia to introduce an emissions trading scheme or some kind of clear long term price on carbon. This was even though we had George Bush in the White House and likelihood of a co-ordinated global approach to pricing carbon was extremely remote.

You also told Lateline on July 2011 when asked did the government get it right with a $23 carbon price that, “I think the Government has struck a reasonable balance…So I think the carbon package, the carbon part of the package is in about the right place. It will cause some change, not as quick as some would like, but that price together with the offsetting measures I think is a reasonable package”

But in a recent speech to CEDA you seemed to be questioning the value of a carbon pricing scheme. You said, “there’s little evidence of abatement being driven under this scheme” and suggested an alarming cost of abatement figure of about $700 per tonne of CO2 and probably vastly more, by dividing the total revenue of the scheme by the quantity of emissions reductions relative to business as usual.

Can you appreciate that people may have seen these statements as inconsistent and perhaps have driven suspicions that you were driven more by changes in Origin’s commercial interests and balancing political probabilities rather than perhaps what are the interests of the broader community?

GK: I can certainly see that and I certainly understand, Tristan, that in these contentious areas people, which I’m not suggesting you would do, but people far rather, you know, attack the legitimacy of a person’s point of view than the point of view itself, so it’s quite usual that the… you know, when one proffers a different view, it’s quite usual for the suggestion to be that that’s entirely because of your commercial interests, but there are some principles and themes that go through this that are quite consistent. Soif you’re happy, I’ll talk them through with you ?

TE: Yes of course.

GK: So, let’s go back to the round table and for me the most profound learning I took out of that round table or the work we did back then with the CSIRO was that carbon is an inventory problem, right, it’s not a rate problem, it’s an inventory problem and the reason it’s an inventory problem is because of the residency of carbon in the atmosphere, so it’s far better to take a tonne out today than to… Well, put it the other. If you take a tonne out today, so let’s say it’s 2015 just to make the maths easy… If we take a tonne out today for thirty-five years to 2050, we’d have to take thirty-five tonnes out in 2050 to have the same effect, right, and that’s because carbon is an inventory problem, not a rate problem. Ok.

TE: Yeah. So, it accumulates over time.

GK: Because of its residency. Because as carbon is… you know, it has a slow decay, its residency period makes it an inventory problem, not a rate problem. So, early action is always preferable than delayed action. Ok.

TE: Yes.

GK: Now, if we then go to the US to give you this practical example, you know, the development of shale gas in the US has caused an incredibly profound change in the fuel mix in the US to the extent that now I think it might be about fifty per cent of electricity in the US is generated from gas… you know, hugely substituting for coal. The reduction in US emissions over the last three or four years exceeds all of Australia’s emissions. The US, for example, has actually met, not that it signed up for it, but has actually met what was considered to be its Kyoto target. Now, that is a profoundly good thing because taking that amount out now is far more important.

To have the same effect in 2050 of reduced CO2 concentration in parts per million if that change had not occurred, just imagine the staggering amount of carbon you’d have to take out in twenty or thirty years’ time to have the same effect. So early action is critical.

What’s driven that in the US has been no subsidies, no policies, it’s just been the workings of the market. And the point that I find quite interesting is that’s despite the vast opposition of environmental groups who for some reason don’t like gas. When it’s a profoundly good thing for that to occur because carbon is an inventory problem, not a rate problem.

So, my view has always been firstly we should be acting early and the more we do, the sooner the better and that view remains consistent.

The second point that’s consistent and has been consistent not only in the view we hold but in the view of certainly every industry group that’s contemplated this question is the no disadvantage principle. In other words, in making that transition we have to find ways of dealing with the economic impacts of that adjustment. And I won’t sort of fill in all the middle, but that principle is absolutely recognised and embodied in the current scheme in two respects:

the compensation to existing generators built, you know, where the capital was invested and built in a prior time when carbon wasn’t an issue.
And secondly the EITE assistance for [trade exposed] industries that were developed and built before it was an issue.

So, that no disadvantage principle has been the second enduring point. So, the first enduring point is that early action is always better because it’s an inventory problem, not a rate problem and the second enduring point is that the transition is a sort of no disadvantage test in that transition and that’s been recognised and implemented in the carbon scheme that’s been put in place in Australia.

Now, what has profoundly changed is not my view, but the circumstances that surround it…

Oh, sorry. I’ll make one other point. The third point that Origin has very, very consistently made the point that nought to twenty won’t do anything, twenty to forty will change the future investment decisions a little bit. In other words, if you were going to build coal, maybe you’ll build gas if carbon prices are between twenty to forty dollars a tonne range and if you want to cause fuel substitution of your existing fleet, you’d need a price of forty to sixty dollars a tonne for that fuel substitution to occur. Now, we’ve always consistently articulated that range and there’s nothing uniquely Origin about that. I mean those numbers are well understood by most people, you know, who are close to the numbers.

The fourth point, just a minority point, is that prior to the GFC, so 2006, ’07, ’08 I think it was… when a lot of the thinking about their schemes and a lot of the progress for around these issues was being made, in our view there was a… sort of pretty much an emerging consensus that carbon would, have a price of somewhere around twenty dollars a tonne was probably about where it was going to end up. Now, whether it was scheme A, B, C, D, E, you know, an effective carbon price of about twenty dollars a tonne sort of seemed to be where the sort of global consensus was heading. And to me it’s no surprise that where it settled in Australia was twenty-three.

But in my view that global consensus was… I think probably reasonably evident at the time, but clearly evident in hindsight, with the GFC of 2008 the… I think the sort of failure to really progress in Copenhagen

TE: Yes.

GK: Yeah. And I think Copenhagen was generally considered to be a huge disappointment, you know, in respect of progress on these issues and then the European credit crisis which has seen, you know, the biggest… some of the biggest subsidies and the biggest supporters at a national level of particularly renewable energy; Spain, you know, Greece… or sorry, scribble Greece because it failed as an economy, but Spain, Germany, some of the bigger supporters of renewables have completely pulled back their subsidies for renewable energy and of course the carbon pricing scheme itself in Europe has its critics and irrespective of the veracity or otherwise of the scheme, produces a carbon price. It’s not around twenty which is where people thought it was. It’s what? Five dollars or six dollars or something like that. So, the environment has changed dramatically. It’s not our views and our principles that have changed. It’s just the environment

TE: But I mean, Grant, at the time 2006, even 2005 I know Origin was playing a prominent view at that time I would say… I mean how is that any different to now in terms of the international environment? You had George Bush sitting there who very clearly said he wasn’t going to do carbon pricing and we’re now in a situation where I would think the circumstances are no worse than they were then in terms of the likelihood of a globally consistent agreement.

GK: I think that’s true on the day, Tristan. I think that people were much more hopeful that progress would be made and the key issue is that the relative disadvantage that now exists in our economy, if we go back to that no disadvantage principle, is much greater than people would have thought and that’s just the facts that matter, you know.

TE: But you were advocating for a carbon price at a time when… and saying look Australia should put a carbon price in place even though other countries don’t have a carbon price. Now, it still makes sense provided obviously there were provisions for trade exposed industry, which there are. So I’m sort of struggling to understand why things are any different to back then. Especially given the fact that we have a large proportion of permits supplied for free to trade exposed industry. Why does this change circumstances at all?

GK: So, I’ve… Well, I’ve lost the complete recollection of the dates, Tristan, but there have been various levels of bipartisanship around carbon policy in Australia, right. Today you could argue there is still a degree of bipartisanship around a five per cent reduction by 2020. Ok.

You know, you’ll have your own view, but both sides of politics say they’re committed to that objective and that’s been the case for how many years? Six years? Eight years? A long time. And whilst today there’s bipartisanship around that target there’s a complete lack of bipartisanship about how it’s going to be achieved. Now, there were periods of time that both sides have articulated their commitment to that target that there was actually even agreement that we should do it by way of an ETS.

I think for the record it needs to be noted that the reason we didn’t have an ETS earlier was in fact the Greens, right. Correct?

TE: Well, I suppose it’s a matter of saying who should support the scheme? Should it be the Coalition that should vote it through the Senate? Or the Greens? And, you know, they all had their reasons for why they objected to the scheme.

GK: Sure. Sure. But the Greens could have voted for an ETS, you know, what in 2007… I can’t remember the year, but whenever it was, you know, a long time ago.

TE: 2009.

GK: Yeah. But they didn’t. Now through all of that time, there has been a bipartisan political commitment to a reduction in carbon and the question for the company was not that, it was the means and we’ve continually articulated and would still articulate that we would still think an ETS is a better means than other means that were proposed at the time. Though even today you could begin to doubt that because whilst I still think that is the better economic and intellectual view, the European scheme which is often held up as a model has its critics. Certainly some would suggest that hasn’t been really that effective in reducing carbon emissions. I’m not going into the effectiveness of the European scheme, but you know it certainly has its critics.

But, you know, so Origin’s position is… and, you know, I think most of the business representative groups’position has been consistent for the greater part of that time, probably the greater part of six or eight, if not even ten years, but certainly six or eight years there’s been a bipartisan political commitment to reducing carbon emissions. We supported it. And we, when asked, continue to articulate that we thought an ETS was the most effective way or the best mechanism to do it.

We’ve continually said that depending on price you’ll get different outcomes, but a price less than twenty will change nothing and more than forty is probably necessary to make deeper cuts. Somewhere in between will make a difference to investment decisions, but that’s about all.

Now, the consistency of the position is that in that middle position of twenty to forty which may have influenced investment decisions and changed the fuel mix, you know, more gas, less coal, has been rendered irrelevant because there is less demand growth and an excess of renewable energy and therefore even the twenty to forty range, twenty-four, twenty-five is doing nothing because there are no investment decisions to make in generation and therefore that signal is doing nothing.

TE: I suppose it is in power generation, but that’s not the only area where we can get abatement is it?

GK: No. But I think that in respect of those sectors of the economy that are part of the scheme what percentage of it is generation, stationary energy? Huge.

So, look that’s just the facts. I mean the world has changed. And it really is an important point that in that range in which the price which at the time we said was about right, and so you’ve liked to picked these points out, at that time there was still a perception that there would be a growth in demand for electricity. The new investment would be required in generation, but a price in the low twenties would probably influence those choices and increase the probability that there would be more gas in that future fuel mix. And all of that has been rendered redundant because there’s now less demand growth and there are more renewables being forced into the system at very, very, very significant public subsidy.