Why business wants the carbon price to stay

With questions hanging over the Coalition's climate policy, it's becoming obvious the business community wants the carbon price to stay. Here's four reasons why...

Last week I argued that with the collapse in the price of European carbon allowances, the big end of town in business would prefer the Coalition did not rescind the carbon price.

The Australian Industry Group has already come out publicly stating that it believes the carbon price should stay, but move immediately to international trading.

Tony Shepherd, the chair of the BCA, has been strident in his criticism of the current fixed $23 carbon price, but when asked about whether he’d like the emissions trading scheme abolished, stated the BCA membership want a market-based mechanism. In other words, they want an ETS.

And on the front page of the Australian Financial Review on Wednesday was a story indicating that the energy suppliers are also extremely nervous about the Coalition’s Direct Action plan.

Why on earth would big business and its industry associations who have been complaining incessantly for the past four years about carbon pricing, actually prefer this to the Coalition’s plan for taxpayers to pay polluters to reduce their pollution?

Here’s four good reasons why.

1. The carbon price won’t actually cost them that much money

Unless something miraculous happens in Brussels, once trading in carbon permits commences businesses will be paying a carbon price likely to be around $5, at worst maybe $10. Electricity generators would be able to pass much of this on and so would suffer little loss in profit. Also big industry, such as chemicals, metal smelting and cement, will get over 90 per cent of their permits for free in most cases and at worst 60 per cent, so the end cost per tonne of carbon is 50 cents and at worst $4.

This equates to a cost in almost all cases comfortably less than 1 per cent of revenue and less than 2 per cent of industry value-add (a proxy for profit).

However if restrictions were removed over the use of carbon credits from developing countries known as CERs, it would result in a carbon price before free permits of less than 50 cents. This makes the carbon price a rounding error in the accounts of just about every business, no matter how polluting.

2. Direct Action is an unknown quantity

It doesn’t seem to matter who you talk to: big carbon emitter, carbon abatement project developer, banker, journalist or public servant, all of them just scratch their head when you ask how they think Direct Action will work. There is an incredible amount of confusion and doubt about how it will be implemented. The fact that Coalition party members have put out contradictory statements on the policy just adds to the confusion.

A prominent public illustration of the confusion was that the BCA’s head Tony Shepherd seemed to think the Coalition hadn’t even released its policy yet.

While Direct Action might seem like a get out of jail free card for polluters, there are all sorts of things that might happen in terms of how it is implemented that could cause difficulties and challenges for some major emitters. For example what about the penalties for those firms that go above their baseline? Also if it funds a lot of energy efficiency this could hurt electricity generators far more than the carbon price.

Plus for other businesses it’s clear that if the Coalition is serious about reaching its 2020 emission cuts, this will cost the budget a lot of money. That money has to come from somewhere and that could hurt businesses who don’t emit that much.

3. Direct Action will struggle to last and who knows what might replace it/supplement it

Businesses with professional and experienced government affairs staff realise how incredibly complicated the implementation of a baseline and credit emissions reduction auction scheme would be. How do you work out what should be the baselines for new facilities or expansions, how do you prevent businesses from gaming it, how do you work out what abatement activities go beyond business as usual and how much credit should you give them? There are a myriad of questions that get thrown up.

These businesses also know that politicians have a habit of raiding the budget allocation for such types of schemes.

Consequently there is real scepticism about whether the Direct Action policy will last. That then poses a serious worry for business about what might replace it, or what regulatory measures might be imposed to make up for its weaknesses. The imagination can run wild with possibilities. Especially if the current conservative state governments are replaced with Labor governments, or if deals need to be made with the Greens in the Senate.

4. Direct action fails to resolve long-term investment uncertainty

It has to be said that neither the government’s carbon price nor Direct Action effectively resolve the huge uncertainty that afflicts investment in carbon and energy-intensive sectors. If the Coalition were to miraculously return to its Howard government 2007 position in favour of an ETS it would still leave the uncertainty that comes with linking our scheme to international carbon markets.

But it would at least mean we would have a bi-partisan approach on the main mechanism for controlling greenhouse gas emissions. This would represent a major improvement in the investment environment for the power sector in particular, as well as other carbon and energy intensive areas of the economy.

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