Why Turnbull knows better than Abbott: Part II

Administering firm-by-firm Direct Action, which Tony Abbott proposes, will be a complex and costly task, as Malcolm Turnbull once explained.

As has been extensively reported by Climate Spectator, Tony Abbott confirmed that the Coalition’s Carbon Abatement purchasing scheme will apply baselines to firms based on their emissions intensity.  If firms go above this baseline then they would be fined (no one yet knows the amount) but if they go below the baseline then they might be eligible for taxpayer payments. But the detail on this is yet to be revealed (with one day left before the election).

Sounds all pretty straightforward, right?

Well, Malcolm Turnbull happens to know a bit about this as he was the environment minister in the Howard government when it was grappling with whether or not to implement an emissions trading scheme and whether there might be better alternatives. Here’s what he had to say in a speech to parliament:

However, if a scheme operates whereby the government pays the firm to reduce its emissions intensity, leaving aside its impact on the budget and taxes, there is firstly going to be a substantial and contentious debate about what the correct baseline is, then whether it will be actually be reduced.

… Arguments, of considerable ferocity, will arise as to whether a new piece of equipment would have been bought anyway with the risk that the government ends up funnelling billions of dollars to companies to subsidise their profits without achieving any real additional cuts in emissions.

Now, all of us know in this House that industries and businesses, attended by an army of lobbyists, are particularly persuasive and all too effective at getting their sticky fingers into the taxpayer's pocket.

What on earth is Malcolm on about, you might ask. How hard can it be to just work out a firm’s emissions and then divide it by their output?

Actually, it can get quite complicated.

Firstly, you can’t practically do it on the basis of a firm’s emissions intensity, like Abbott and Hunt have said. For example, what’s the output of Rio Tinto as a firm? Is it coal, is it iron ore or bauxite or alumina or aluminium or some other product they make? So you actually need to go down to, at least, an individual factory, mine or production plant level – which makes for an awful lot of baselines.

Even deciding which years you include in setting the baseline can be complicated. Greg Hunt has said the average of the past five years, but what if you’re a steel mill that had a major shutdown and re-build during that period? What if you had some unusual problems that led to lots of shutdowns and then energy intensive start-ups? Maybe some years should be excluded as outliers in setting the baseline.

In addition, what emissions should be included in your baseline? This might not just include your own direct emissions but also the emissions associated with producing the energy and steam you use. For example, steel mills if they reduce coking coal use will reduce methane emissions from the mines that supplied the coking coal. But what if the supplying coal mine’s emissions drop, should the baseline be adjusted down from the historical average? There’s a real issue about how do you manage the inter-relationships of baselines where an upstream supplier of energy has a baseline as does someone who uses that energy downstream, otherwise you’ll overestimate the abatement you’re purchasing.

Also, what if you as a firm had done the right thing and made major investments in low emissions equipment during this period the baseline is set so you’re at best practice and your competitors sat on their hands. They’ll be rewarded with soft baselines and get taxpayer money for upgrades while you could get penalised for what might still be best practice emissions intensity. Shouldn’t you get some credit or dispensation for early action?

And output – how do you measure it? You see, oils ain’t oils. Take two oil refineries. Sure they both process barrels of oil. But some oil can be relatively light and pure and some can be thick and full of sulphur. Also, that barrel of oil can be converted into an incredible array of fuels from thick black bitumen to gaseous LPG. 

Furthermore, you’d expect energy efficiency to naturally improve in some plants, just as Abbott has suggested. So you’d want the emissions intensity baseline to step down over time so taxpayers weren’t unnecessarily forking out money.  But what is a reasonable degree of efficiency improvement to expect and wouldn’t it need to be tailored to each industry and maybe even each plant?

Lastly, what baseline to you apply to a firm or plant that is still yet to be built? ‘Best practice’ says the Coalition policy – but how do you determine best practice? Companies have all sorts of arguments they can deploy for why they can’t achieve the lowest level of emissions intensity achieved in other locations and best practice should be tailored to their circumstances. They use different, harder to process feedstock, they can’t access hydro electricity, the ambient temperature is different, their plant is smaller – the list goes on and on.

This can all get very, very tricky. It will require lots of public servants and consultants to administer and monitor. And guess what – businesses will always know their own business far better than government. They can obscure and misconstrue data about their business and lead officials down all manner of garden paths so they get a generously high baseline.

Who will ultimately pay for this excessive complexity? Turnbull had some thoughts:

Because most capital equipment, especially in the energy sector, has lives running into many decades, the business is going to require assurance that the government subsidy will match the life of the asset – so running well beyond 2020.

Which is why a subsidy scheme which terminates in 2020 will achieve very little….

Having the government pick projects for subsidy is a recipe for fiscal recklessness on a grand scale and there will always be a temptation for projects to be selected for their political appeal.

In short, having the government pay for emissions abatement, as opposed to the polluting industries themselves, is a slippery slope which can only result in higher taxes and more costly and less effective abatement of emissions.

*For part I of Why Turnbull knows better than Abbott, click here.

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