Talk about being graceless in victory. The biggest polluters have won virtually everything they could have hoped for in Rudd’s emissions trading white paper. Over 3.9 billion to the polluting coal power stations, billions more in free permits to the biggest emitters. Pretty much everyone who asked for special treatment has got it. As Richard Dennis put it so eloquently, there will be no polluter left behind by 2020.
But they’re still not happy. They only got 99% of what they asked for – and now they’re screaming for the extra 1%. Heather Ridout from the Australian Industry Group has been bemoaning how difficult a 5% target will be. And now the Aluminium and Coal industries are saying that the compensation scheme isn’t good enough. They want more.
The poor, oppressed and marginalised coal industry want more. The spot price for thermal coal from Newcastle peaked at $201 per tonne earlier this year, up from around $70 a tonne in early 2007. It’s back down around the $70-$80 mark now due to declining demand and fluctuations in the value of the dollar. These price fluctuations far exceed any impact of the emissions trading scheme. They’ve hardly been doing it tough in recent years.
The reality is that the Australian coal industry and the other big polluters have proven themselves incapable of thinking of anything other than their short term profits. And by throwing around their considerable economic weight, they are condemning the rest of us to an uncertain future. What planet do they think their children are going to live on? Is there anyway we can vote them off?
8 Comments
It’s slowly dawning on me (apropos of a comment on the live blog the other day by Jonathan Green) that due to the economic slowdown and people’s self-conscious, non-market-driven adoption of energy efficiency and/or austerity measures we might just reduce emissions below the target level even before the ETS comes into effect. In which case there will be effectively no market at all for emissions trading.
Bernard Keane said (on the liveblog) that the ETS will operate “like a tax, not a cap-and-trade system” for its first years … how is that ensured?
The white paper includes a measure to stabilise the market by capping the price of permits at $40/tonne (the government will sell permits in excess of the “cap” at this price) but I didn’t see any measure to set a *minimum* price. Have I misread it, and will the auction necessarily produce a meaningful initial permit price, or is it possible that permits will trade at some silly low price if emissions fall below the cap in the first year of the ETS or before its introduction?
I don’t know so much of the detail, Jonathan, but the ETS designers are considering what’s called a ‘fixed price start’ for the scheme. It was Garnaut’s idea.
Essentially, it means that in the initial phase and prior to post-2012 mitigation efforts the price is set at some figure (Garnaut says around $20 a tonne), rather than opened up to the market to determine price through auction and trade. As you say, to introduce the scheme with without a fixed start could lead to very low prices if Australia manages to reduce our emissions significantly in the meantime – hence the critical importance of getting the targets right (they are not, incidently).
A fixed price for carbon would be, in effect, a tax.
The idea is to use the fixed price start as a transition, to build the bureaucratic infrastructure etc. to make sure the scheme is robust prior to the ‘floating price’ that would accompany the auctioning/trading process. And to make sure that massive fluctuations in the price don’t influence the global negotiation process in setting a post 2012 agreement. And would provide some degree of certainty for business & householders etc.
Several comments:
The coal fired power station owners are likely to have to write off billions of dollars in asset values. The white paper includes modelling by 3 separate consultants which comes up with a range of asset value changes. The compensation package is below the lowest of these.
This has 2 primary consequences:
1. The marginal generators will stop spending on maintenance, reducing reliability. None of the system reliability modelling has taken this into account. There is a non-neglible probability of having several large generators out at once. This will cause power “rationing”.
2. International companies invest in countries that don’t screw investors. There’s a reason no one will invest in Venezuela, because the government has a history of negative intervention. Australia risks being put in the same category. This has the potential to scare of investors in renewable project who become rightly concerned that the government can/will change the rules.
Fixed price is no longer part of the scheme, although there is a cap (really a penalty price) for the first 5 years. A minimum carbon price is somewhat unnecessary. Permits can be banked indefinitely (and have full property rights attached). There are plenty of clued up investors/companies/banks that will buy if the price is too low. We know that post 2020 the prices will almost certainly climb above $40 in real terms. That effectively sets a floor of $15-20 based on some risk assumptions. If the price was below $10 individual citizens would buy them and voluntarily surrender them. Australia’s per capita emissions are something like 25 tonnes each per year. $250 would cleanse my conscious for 12 months.
I agree, trade exposed industries are whingers. If their productivity isn’t worth the permit price, we should shut them down. Then australia could generate revenue by exporting permits to EU, Japan or soon US.
I find the position on fuel tax very frustrating. This is one of the few cases where the price signal is being removed (even compensated industries see the price signal, they can always increase efficiency, cut emissions and sell the permits).
Exactly, EnergyPedant, and thanks.
Supposing that the emissions trading scheme is intended to reduce industrial emissions of CO2 in Australia, it should be primarily concerned with reducing consumption of coal in existing unmodified power stations. Electricity is the one area where Australia’s carbon intensity is unusually high, where it is inexpensive to reduce demand and where significantly cleaner production technologies exist (some, like gas and wind, are readily available at a competitive cost, while others like CCS, wave power, solar, nuclear and geothermal are not yet proven to be cost-effective in Australia).
Agriculture, forestry and transport emissions are also significant, but the ETS explicitly excludes agriculture. Rudd’s decided to cut fuel excise while introducing the ETS as a consequence of the 2008 oil price boom, despite the subsequent bust. Morally speaking, of course transport emissions need to be included; practically speaking, oil will definitely have much stronger price signals in years to come. Both fuel excise and ETS will be lost in the noise. The oil price will jump around plenty more (mostly upwards) in the next few years; even the IEA now admits that global “conventional” oil resources will inevitably be declining in production by 2020.
The capital devaluation of coal-fired power generators is precisely what’s required to cut emissions. We need that money to be diverted from maintaining “marginal” (that is, unprofitable) coal-fired power stations towards cheap renewables (solar hot water, anyone?), end-use efficiency (eg. absorption coolers and decent insulation in commercial buildings instead of racks upon racks of improperly-sized aircon inverter units) and related technologies that will more cheaply maintain grid reliability such as demand response (paying big loads like aluminium smelters and desalination plants to shut down in peak demand hours) and distributed cogeneration.
There is no justice whatsoever in any claim of “moral hazard” or threat of capital flight (!?) on the part of coal-fired power station owners. The owners, state and private, have known since about 1990 that sooner or later this was inevitable. Their valuations should probably have already made allowance for a larger cut than Rudd is aiming for! This ETS is going to have much smaller consequences, and be much more predictable, than this year’s crazy oscillations in the world market prices of oil and coal.
There is, however, a moral hazard imposed on investors in renewable generation by unpredictable changes in the MRET and the possible volatility of the emission permit price. I was looking for any mention of the fixed price Garnaut recommended and I didn’t see it. I do intend to read the white paper in full but there simply hasn’t been time yet.
I’m not at all confident that individuals would buy permits and throw them away to assuage their consciences in the circumstance that actual emissions “prematurely” fell below the target, especially as a consequence of recession: people won’t have money “to burn” and they know they’re not personally responsible for anything like 25 tonnes of industrial emissions per year (a more realistic figure is six or ten). Industrial emissions are mostly attributable to businesses over which consumers have little direct influence: aluminium, mining, transport (all export-oriented) and big retail.
Agreed on “trade-exposed” industries. The subsidy already given on the price eg. aluminium smelters pay for electricity is enormous; compensaton for the ETS merely makes this worse. Taxpayers and/or other electricity users pay for every cent of that power; it should be factored in to the price of aluminium and if that closes smelters, so be it.
I feel quite out of my depth on alot of the technical discussion above. But I will offer you something from what I think of as my political intuition. And given one of the grandfathers was a confidante of Robert Menzies maybe it runs in the genes a little.
Howard privatised Telstra – because it helped to destroy the grip of unionism in the old Telecom. Arguable but certainly a potential motive.
Howard ‘reformed’ the docks to smash the MUA’s industrial influence.
Howard instituted the ABCC to smash the building unions.
Okay now flip the coin to Rudd. He protects the unionised industries in dirty energy and dependent sectors. He makes platitudes and wimpy encouragements to the as yet non existent non unionised sunrise industries of renewable energy. These could without much doubt greatly compete and replace the traditional/unionised sectors in dirty energy and manufacture. Not least with a gross feed in tariff for solar thermal and solar PV. What’s Rudd going to do? He’s going to dance with the one who brung him.
Sure the sunrise renewable sectors could unionise too, but that’s hypothetic. Real politik doesn’t care.
That folks is political economy. It’s crude. It’s bad policy. It’s craven. It’s as good an explanation of what’s going on as anything else around.
Tom thats a really good point on the politics Rudd faces.
He’s getting pulled both ways within his own party.
There is dissension within the ACTU as well between those who say the targets are too soft and those who’s members will lose jobs.
Ultimately there has to be some losers out of this process. As I see it they are:
Upper and Middle class (basically anyone not getting any form of welfare payment). I don’t think I qualify for any compensation, which wouldn’t bother me if it wasn’t for the hand-outs to everyone else.
Those who lose their jobs in the brown coal industry. Powerstation owners might lose some money, but they have also made plenty in recent years. Workers are going to go from being well paid (many over $100K) to out of a job in the next 10-15 years.
Lots of businesses who have to pay more for electricity (but they will ultimately pass the cost through to customers so maybe they don’t count).
EnergyPedant,
I think ten to fifteen years is long enough for both owners and workers to plan for some kind of a transition, don’t you? And even the CFMEU seems to admit that, supporting renewable and CCS projects wholeheartedly. In this day and age only teachers and nurses have any guarantee that their job will still exist in 15 years time. The price of that certainty is lousy pay working for incompetent state governments…
If the Victorian power-station workers are *really* lucky, carbon capture and storage (subsidised mightily of course) will prove just cheap enough that brown coal can survive, though closure or replacement of the older generators is almost certain. But they wouldn’t be particularly unlucky if the generation had to be replaced with geothermal, gas, wind and/or solar thermal power. Despite the high capital cost, renewables are actually more labour-intensive to operate than coal-fired power stations.
The technology is not fundamentally different, and even wind turbines are big enough that only utilities are likely to invest in them — therefore they pose relatively little threat to a quick-witted union. Only solar PV and highly-integrated cogeneration are likely to be bought and operated by smaller and non-unionised businesses.
While the cheapest way to reduce emissions is to reduce aggregate demand, there will likely never be a need to reduce actual generation *capacity* under the ETS and MRET, since intermittent renewables require a degree of redundancy from complementary generators. If we’re generating 20% or more of our electric energy (watt-hours) from intermittent renewable sources by 2020, renewable generators would necessarily represent at least 50% of our generation capacity (watts). That’s a lot of new construction, and a lot of fossil fuel (or geothermal) power that we’ll have to keep on line.
We have been paying far too little for our electricity for far too long. While a sudden hike in the power bill will hurt, I reckon higher prices will benefit everyone in the long run; they’ll pay for good new jobs and we will start seeing process efficiencies everywhere that it never before occurred to us to look for.
Jonathan that point about out electricity being cheap is one that isn’t brought up enough. We have almost the cheapest power in the world in Victoria. Thats why we have energy intensive trade exposed industries. When it turns out that the cost of that power was an illusion, it makes sense to have those industries shipped to where ever the best wind/hydro/geothermal resources are.
South Africa has cheaper power, but they also have major supply security issues and systematic black outs at regular intervals.
Its a harsh reality, but the La Trobe valley coal industry (unless CCS works soon) is likely to disappear. The brown coal will go first, because the carbon saving of the gas replacement is so much greater than for black coal. There are plenty of plans and projects to replace the coal generation with gas (and some wind).