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A speech to the Australian Financial Review's Third Annual Emissions Conference

by the

Federal Minister for the Environment and Heritage
Senator the Hon Robert Hill

Darling Harbour, Sydney
March 30, 2000

I would like to begin by thanking the Australian Financial Review for providing this valuable public forum and for its ongoing interest in the global warming issue.

Australia's greenhouse credentials will again be on display to the international community next month at a special conference in Washington organised by the Pew Centre for Global Climate Change.

Australia has been invited to address the conference on our success in implementing the domestic responses required to meet our Kyoto greenhouse gas reduction target.

The Pew Centre's desire for Australia to be a central part of this conference sends two strong messages.

Firstly, it is a signal of the growing international recognition of Australia's efforts to combat global warming and an acknowledgment that we have quickly become a world leader in developing the innovative domestic actions needed to deliver reductions in greenhouse gas emissions.

And that recognition is well deserved. Australia is well advanced in its domestic response having committed almost $1 billion to greenhouse gas reduction programs and having established the world's first dedicated national greenhouse office to drive these programs. Our domestic efforts have a strong emphasis on promoting leading-edge renewable energy technology, increasing the uptake of renewable energy, and improving energy efficiency in Australian industry.

The second message that our involvement in the Pew Centre conference will send will be to those who may still doubt the need for Australia to be seriously involved in addressing the global warming issue.

The Pew Centre represents 22 of the largest corporations in the United States - corporate giants such as BP-Amoco, Shell International, Du Pont, Whirlpool and Boeing. Collectively these corporations have a reported income of $590 billion.

Apart from their unquestioned global stature, what these companies have in common is that they have accepted the basic science of climate change and, more importantly, have accepted that it is a serious enough issue that they should be taking action now.

While I applaud the environmental merits of their standpoint, I also suspect that economics is a major factor in their thinking.

These corporations have a responsibility to their shareholders to prepare themselves for changes which may impact on their financial viability and to take pre-emptive action to minimise such impacts. Their early commitment to act on greenhouse gas emissions is an indication that they believe that the global community expects action on global warming, and that it is most likely to be delivered through a ratified Kyoto protocol.

They also, no doubt, are positioning their companies to take advantage of the economic opportunities that could arise from the implementation of the Kyoto Protocol. And there's nothing wrong with that. As the Pew Centre itself notes, our challenge is to address global climate change while at the same time sustaining a growing global economy. To the corporate leader with vision, the two goals need not be mutually exclusive.

These companies have clearly read the global mood to be one of action rather than inaction on greenhouse gas reductions. Further confirmation that their assessment is correct is provided by the actions of the massive Tokyo Electric Company. This large global utility has already invested in forests in New South Wales as a means of gaining carbon off-sets and is clearly positioning itself to be ahead of the game when the international rules on emission reductions are finally settled.

Having said that, the response in general from Australian industry to our Kyoto commitment has been positive - the success of programs such as the voluntary Greenhouse Challenge which now involves some 449 companies and industry associations and will deliver savings of 20 million tonnes off projected emissions is proof of that. But there are still significant pockets of resistance from those who hold out hope that the Kyoto Protocol will not be ratified and therefore not come into force.

Those who choose to delay or obstruct moves toward greenhouse gas reductions are simply ignoring the inevitable. There is likely to be an ever-increasing demand from governments around the world, and the people they represent, to take action. And the science which has driven this global call for action is becoming more certain, rather than less certain.

Already the early indications are that the 3rd report of the Intergovernmental Panel on Climate Change will provide further confirmation of the impact that human activity is having on our climate.

So there is no doubt we will be facing constraints of some sort on carbon emissions in the future - whether that is delivered by ratification of the Kyoto Protocol or through some other obligation.

It makes both good environmental sense and good economic sense for Australian companies to act now in a manner which minimises abatement costs rather than risk facing potentially higher costs of more radical responses down the line.

I would also note that the Howard Government worked very hard to ensure that the Kyoto Protocol gave recognition to Australia's special circumstances. There are those who foolishly believe that Australia has something to win by derailing the Kyoto Protocol.

But if the Kyoto Protocol were to falter, there is no question that it would be overtaken by some other international process aimed at delivering reductions in greenhouse gas emissions. There, of course, would be no guarantee that this new process would take into account our national circumstances in the way we were able to achieve in Kyoto.

The resultant outcome could in fact be a more difficult target combined with reduced access to low-cost abatement mechanisms such as carbon trading. Industry should be aware of the dangers of going down such a route.

As an expression of our commitment to the Kyoto outcome, the Howard Government ensured that Australia was among the first nations to sign the Protocol.

We are now working constructively with the international community to resolve outstanding issues such as compliance, sinks, and flexibility mechanisms in time for the next Conference of the Parties in The Hague in November this year.

A satisfactory resolution of these issues is a prerequisite for most member states for ratification. It is necessary to ensure that nations can meet their commitments by the first accounting period.

While I understand that the pace of these negotiations can be frustrating to industries looking for immediate policy certainty, the time must be taken to ensure that implementation of the Kyoto Protocol is both effective and fair.

And progress is being made on these key issues. The issue of sinks, for example, is one of key strategic importance to Australia and must be part of the final package put before the Hague COP.

The final detail on the definition of sinks will be central to Australia's ability to honour its commitment in a cost-effective manner. Sinks also provide Australia with unique opportunities through revegetation efforts - efforts which will provide additional environmental benefits in terms of biodiversity, and land and salinity management. Not surprisingly, we have taken a lead in negotiations on this complex issue and next month will host a major international forum in Perth.

Of more direct relevance to your gathering today is progress on the issue of flexibility mechanisms, such as emission trading schemes.

Australia played a key role during the Kyoto conference in ensuring that provisions for emissions trading were included in the Protocol.

Developing a credible and effective international trading system is now central to the success of the Kyoto Protocol. To put it in simple terms, without such a system the Protocol will not come into force.

Australia has argued strongly in the subsequent negotiations that international trading should be open, uncapped, and market based.

While the Commonwealth is yet to determine a policy position on domestic trading, we recognise that market mechanisms generally find the least cost path towards goals.

It also follows logically that if an international trading system provides the most cost-effective manner of delivering carbon emission reductions, then a comparable domestic system would provide similar benefits to industry and the environment.

The challenge would then be to establish a domestic market that is broad enough in terms of coverage and deep enough in terms of participants, and reasonably free of distortions, which could deliver the most cost-effective means of reducing our emissions.

Research carried out by ABARE indicates that the cost to countries of achieving greenhouse targets is much less through an emissions trading system - particularly one that operates internationally - than through administrative policies and measures. According to ABARE, adoption of international emissions trading would see the overall costs of abatement fall by around 80 per cent.

And lower costs driven through trading will pay a double dividend:

The contentious issues arise when you consider the differential impacts on sectors of the economy, and when you accept that contributing to the greenhouse solution is going to mean some level of costs for Australia and for other developed countries.

It needs to be recognised that it is the achievement of greenhouse targets - not trading in itself - that will impose costs and some structural readjustment on the Australian economy. Trading simply brings those issues into sharper relief because it is an economy wide instrument.

In considering the implementation of emissions trading, Government will need to think carefully about the economic impacts and to consider its policy responses in sectors that stand to be hardest hit by the realisation of a price for carbon emissions.

Of course, there will always be differing economic views of the impacts of trading. I am reminded of former US President Harry Truman's lament that that he longed to meet a one-armed economist, because whenever he asked an economist for an opinion, the answer was always, "Well on the one hand this, ....but on the other hand..."

Again on the issue of trading, the global momentum is building behind the forces of action, rather than inaction. Another signal to the Kyoto doubters.

The World Bank, for example, has developed a Prototype Carbon Fund that allows businesses to invest in pooled funds that will be put toward projects under the Clean Development Mechanism. The International Energy Agency has also developed a trading simulation which Australian companies will participate in.

That interest is being reflected by some of the more forward looking Australian companies who are prepared to look at the opportunities provided by Kyoto, as opposed to just focussing on the costs.

While welcoming this interest, our government has consistently cautioned that decisions on emissions trading in Australia cannot be made independently of developments internationally.

We are, however, cognisant of the fact that to get the benefit of carbon trading in time for the first accounting period under the Kyoto Protocol we will have to have such a scheme in place by 2008.

There is much that needs to be done in the meantime to get the economy ready for a new trading market on this scale.

As you would be aware, the Commonwealth has been actively progressing these issues. The Australian Greenhouse Office has released four discussion papers and, having sought feedback from the business community and other interested parties, we are now moving toward more detailed consideration of design options.

We understand that business is seeking certainty on the principles which would underpin a new trading system - issues such as coverage of a domestic system, allocation of permits and regulation of the market.

I expect the Ministerial Council on Greenhouse to be debating these issues within the next few months.

There are a number of factors which the government recognises as being important to its deliberations on the trading system issue.

The first is an issue which has been raised by both Australian companies and also by the Pew Centre - that being the "no disadvantage" principle.

Under this principle businesses that have taken steps to reduce their emissions prior to the Kyoto commitment period should not be disadvantaged through abatement policies adopted by the Government in response to Kyoto commitments.

Companies argue that this is necessary to provide proper incentives for emitters to position for maximum abatement and to allow for a cost-effective transition toward the emission constraints that will apply in 2008 and beyond.

The Government will need to consider this principle in developing policy responses and deciding the form of any eventual emissions trading system.

It is particularly relevant to the issue of permit allocation. For example, if valuable emission permits were to be handed out on the basis of actual emissions on a particular start-up date, there would be no incentive for companies to reduce their emissions prior to that start-up.

It could, in fact, cause the reverse situation where companies increase their emissions prior to the start-up date to obtain an unjustified economic advantage.

This is clearly an undesirable situation from both an economic and environmental perspective. While our policy on this issue is yet to be finalised, I am not inclined to reward those who would make Australia's national abatement task more difficult in the coming years.

Second, we will need to consider crediting of early actions so that early movers can "bank" credits against potential future economy-wide measures. I consider crediting to be a different issue from ensuring no disadvantage, because crediting provides a positive reward for specific actions. Because of this we would consider it as a means of driving further abatement initiatives throughout the economy and providing hedging opportunities against future greenhouse liabilities.

Thirdly, voluntary trading is developing and is useful for learning purposes. I note in particular internal trading systems put in place by companies such as Shell and BP Amoco, and the trade in carbon sequestration credits being developed by the Sydney Futures Exchange, State Forests of New South Wales, and other players. The Commonwealth will seek to support such initiatives to the extent possible, given the uncertainties that still surround the international rules for trading.

These voluntary trading schemes are, of course, a practical expression of the interest being shown by Australian companies and international companies which trade here.

It is also a sign that here in Australia there is a momentum building for early action on greenhouse gas reductions. Such signals of our commitment are important to Australia's continued effective involvement in the international negotiations which will determine the final shape of the Kyoto Protocol.

It is also a sign that Australian industry recognises the cost benefits of acting now rather than later. More importantly, I hope that it signals that Australian industry is looking to position itself to move toward a less carbon dependent existence.

The reality is that delivering on our Kyoto commitments will involve some economic costs but will also provide new economic opportunities.

Forward-looking Australian companies and industry sectors are moving now to ensure that they can take advantage of the least-cost options provided by the Kyoto Protocol. These companies and industries will also be the best placed to exploit the opportunities provided by the post-Kyoto global economy.

This minimum cost, maximum opportunity game plan will help ensure that Australia's economy remains competitive in a world which increasingly recognises the need to act wisely to reduce its impact on our natural climate system.

Commonwealth of Australia