The Hon. Greg Hunt MP
Minister for the Environment
The Coalition Government's plan to tackle climate change, reduce emissions and reduce pressure on electricity prices
Paper to the Carbon Market Institute Workshop, Melbourne
24 October 2013
Thank you for coming here today. I appreciate the opportunity to speak with you about the Coalition Government's plan to tackle climate change and reduce pressure on electricity prices.
Let me set out the points of bipartisan agreement in this area:
- We agree on the science
- We agree on the targets
- We agree on market mechanisms
We disagree, absolutely, on what is the right market mechanism. The idea that a punitive electricity tax is the right approach has been unequivocally rejected by the Australian people at the recent election.
If ever there was a problem requiring new solutions to be unearthed, it is climate change.
The fact is that climate change is driven by greenhouse gas emissions, and these emissions are a by-product of the things that improve our quality of life.
We have all become accustomed to the benefits that power, transport and agriculture have brought to our lives. It would be a backward step for us to forego those benefits ourselves, or to deprive them from the people of developing nations.
This means we need new technologies and innovations that will allow us to achieve these same benefits but without the accompanying greenhouse gas emissions.
In my view, this is a problem that is tailor-made for a genuine, light touch, market-based solution, not a heavy, deep punitive electricity tax, no matter what it is called.
For this reason, I am very glad to be talking to you today about the market-based mechanism that Australia will employ so that we can harness those new innovations, and do our fair share in solving this global problem.
Before going any further, I think it is important to restate the Government's position on climate change very clearly. We accept that climate change is real. We accept that humans are contributing to it. We accept the need for action.
We believe that acting with other countries to tackle climate change is critical to Australia's future. Australia will exercise a constructive role in international climate change negotiations.
We remain committed to reducing Australia's emissions by five per cent below 2000 levels by 2020.
This is a bipartisan commitment. In other words, we agree with our parliamentary opponents on what Australia's fair contribution should be within an international response.
What we do not agree on, however, is the form our domestic policies should take to drive our response to climate change. And in this the Coalition Government is not alone.
Today I want to address the Government's approach in three phases, firstly the international context, secondly the repeal of the Carbon Tax and thirdly the Emissions Reduction Fund.
1. International Approaches
The starting point for any international assessment is the finding of Australia's Productivity Commission that:
"no country currently imposes an economy wide tax on greenhouse emissions or has in place an economy-wide ETS 1."
While the ALP might claim that carbon taxes and emissions trading schemes are the only way to tackle climate change, this is simply not correct. A look at the international situation reveals a very different picture.
I have previously covered the limited role carbon taxes play in reducing emissions. Today I want to discuss the world that is, not how some would imagine it to be.
1.1. Direct Action Internationally
There are a variety of active international approaches to directly reducing emissions.
First, there is direct abatement purchasing. Norway's Commercial Carbon Procurement Program purchases abatement credits worth millions of dollars through a competitive tender process.
Japan is establishing its Joint Credit Mechanism which will help it to meet its emissions reduction targets by purchasing direct abatement and funding low-carbon technology diffusion through bilateral agreements with developing countries. Agreements to purchase abatement have been made with Bangladesh, Ethiopia, Indonesia, Laos, Kenya, the Maldives, Mongolia and Vietnam.
Further, the United Nations Clean Development Mechanism (CDM) operates as an abatement procurement scheme. It has registered over 7,000 projects and generated over 1.4 billion tonnes of abatement for market-based purchase.
Second, the European Union, Russia, South Africa and the United States, among many others, all employ energy efficiency measures to abate carbon emissions.
In the United Kingdom residential building sector, all new homes built from 2016 will need to have zero emissions for heating, hot water, cooling and lighting.
Under the Korean Target Management Scheme, around 500 large-emitting entities are required to meet energy efficiency targets.
Third, there are renewable energy targets in Europe, and countries as varied as China, India, Russia, Brazil, Indonesia, Mexico, South Korea, Vietnam and New Zealand, as well as 30 US states.
Mexico has a goal of 35 per cent of electricity from renewable energy sources by 2024.
There are energy intensity and efficiency targets and schemes in countries such as China, India, Indonesia, Japan, New Zealand, Thailand, Turkey and the US.
New Zealand has an economy-wide energy intensity improvement target of 1.3 per cent annually to 2016.
Fourth, to tackle vehicle emissions, the US, the EU, Canada and Thailand all rely on emissions standards. The EU emissions standards for cars aim for a fleet-wide average of 130 grams of carbon dioxide per km in 2015 and 95 grams of carbon dioxide per kilometre in 2020. Fleet-wide emissions are currently on track to meet the 2015 target.
Meanwhile Canada is progressively implementing regulatory fuel economy and emissions standards for new cars and trucks (mirroring US rules).
In the power generation sector, regulatory standards for power stations have been tightened in the US and Canada. Regulatory standards for coal-fired power plants in Canada will start from 2015 and are expected to reduce emissions by 41 million tonnes of carbon dioxide in 2020 from 2005 levels, according to Environment Canada.
Last but not least, forest emissions reduction targets have been implemented in Brazil, Indonesia, and Mexico. In addition, Indonesia's Presidential Regulation on the National Action Plan requires each Province to create mitigation plans in the forestry, peatland and agriculture sectors, among others.
1.2. Australia's Abatement Challenge
By comparison, when you look at what has been projected to happen under the Carbon Tax, it is clear that the policy is flawed.
We know that here in Australia under the Carbon Tax our domestic emissions have been predicted to go up, not down.
The previous Government's own modelling from December 2012, which it submitted to the United Nations Framework Convention on Climate Change, shows that our emissions increase under the Carbon Tax from around 560 million tonnes in 2010 to 637 million tonnes in 2020.
The most recent Quarterly Update of Australia's National Greenhouse Gas Inventory report released by my Department today reveals that our emissions in the year to March 2013 are estimated to be 557 million tonnes - exactly the same level as the previous year.
This is despite the previous Government estimating that the Carbon Tax would raise an average of $9 billion a year over the first three years.
Let me reiterate that: a multi-billion dollar cost to Australia's economy for no change in domestic emissions and projected emissions of 637 million tonnes domestically by 2020.
Under the Carbon Tax, Australia will not be able to meet its five per cent reduction target at a reasonable cost without relying heavily on internationally-sourced carbon credits. Given that the previous Government's modelling indicates that the price in 2020 will be $38 a tonne, this is an annual purchase of approximately $3.8 billion of international permits in 2020 alone.
There is a simple reason why the Carbon Tax fails in its fundamental task of reducing emissions: it is the wrong market mechanism for this particular problem.
At its heart the Carbon Tax is an electricity tax. And because electricity is an essential service, in economic terms it is a highly inelastic good.
One recent international study found that electricity consumption is highly inelastic in both the United States and the EU. The study found that a 10 per cent increase in electricity prices would produce only a 2-2.5 per cent reduction in emissions from residential electricity consumption. The Commonwealth Treasury's own modelling uses an elasticity estimate of around three per cent.
In other words, electricity pricing is a blunt and inefficient mechanism for changing household energy-use behaviour2.
The simple fact is that where there is no ready substitution and the costs of switching to an alternative or mitigating are high, higher prices just become a tax. And there is nowhere that this is truer than in the essential service that is electricity.
A failure to understand this explains why the Carbon Tax so badly fails its own test of reducing emissions.
2. Carbon Tax Repeal
For the reasons outlined above, the Coalition took to the election a clear and unequivocal pledge to repeal the Carbon Tax.
We believe the Carbon Tax is clearly the wrong mechanism to tackle climate change.
That is why the repeal of the Carbon Tax will be the first order of business of the new parliament.
We expect that when it comes to the crunch, the ALP should not and will not ignore the Coalition's overwhelming mandate for this necessary and important reform.
There are already reports of division within the ALP ranks over whether to fight the repeal legislation. It is time for the ALP to accept the express wishes of the Australian people and the outcome of the election. We learnt from Work Choices. They have yet to learn from the Carbon Tax.
Repealing the Carbon Tax will lower costs for Australian businesses and manufacturers, boost growth, increase jobs and ease cost of living pressures for households. Crucially, it will take the pressure off electricity and gas prices.
On average, households will be around $550 better off in 2014 15 than they would have been with the carbon tax in place.
Last week we released the draft Carbon Tax repeal bills for public consideration. Individuals and businesses have until November 4 to make a submission on the bills. There are at least twenty currently scheduled business and community consultations in that period.
The bills will not only remove the Carbon Tax, they will also remove the Carbon Tax equivalent on fuels used in shipping, rail and air transport and on synthetic greenhouse gases.
Under the draft legislation, the Carbon Tax will end on June 30, 2014. No matter when the bills pass, they will take effect on 30 June 2014.
The repeal bills are robust to all scenarios and will ensure that 30 June 2014 is the final date for Carbon Tax liabilities.
This simplifies the transition for businesses and gives complete certainty about future liabilities.
Liable entities must still pay all Carbon Tax liabilities incurred up to 30 June 2014.
Carbon Tax liability reporting for the 2013-14 year will also need to be completed. In fact emissions reporting arrangements will continue and will - in the future - support the work of the Emissions Reduction Fund.
Under the legislation, the Australian Competition and Consumer Commission will be given further powers to take action against businesses that engage in price exploitation following the repeal of the Carbon Tax.
Carbon tax industry assistance, including the Jobs and Competitiveness Program, will continue until 30 June 2014 to assist affected businesses. It will not extend beyond that because there will be no need for it.
3. Achieving Australia's Emissions Target through Direct Action
In tandem with the abolition of the Carbon Tax, the Coalition Government will implement its Direct Action plan to reduce Australia's domestic emissions by five per cent below 2000 levels by 2020.
The good news is that we believe this task will now be easier than had previously been thought.
Preliminary figures from my Department indicate that our abatement challenge is now around 440 million tonnes to 2020 rather than the 750 million tonnes assumed before the election.
The revised figures are due to a range of factors, most particularly reduced emissions in the industrial and manufacturing sectors as a consequence of the collapse in overseas demand and changes in the land and forestry sectors, as well as our carryover from the first Kyoto period.
These are preliminary figures and further work is being done by my Department incorporating the latest National Inventory figures. I plan to release the 2013 Australia's Emissions Projections report in December.
Suffice to say, we are now more confident than ever that we will be able to meet our emissions reduction targets through our Direct Action plan.
Direct Action encompasses, among other things, support for solar power through our million roofs program and plans to green our urban areas through our 20 million trees initiative.
However the centrepiece of Direct Action is a market-based mechanism for reducing carbon dioxide emissions - the Emissions Reduction Fund.
Through this Fund, we will provide a powerful and direct incentive for businesses across the Australian economy to work with the Government to reduce their emissions.
In short, the Emissions Reduction Fund will use incentives for positive action to create a market for abatement, and this will be far more effective at reducing Australia's emissions than the Carbon Tax.
3.1. Emissions Reduction Fund Structure
I set out much of the Fund's structure prior to the election, but allow me to briefly recap.
The Fund will 'buy back' abatement via a reverse auction. This is a well-established market mechanism that will allow the Government to achieve its environmental outcomes while minimising costs.
By buying up the 'abatement cost curve', we will provide powerful incentives for businesses to bring forward the lowest cost emissions reduction projects.
The Fund will create a market for abatement in the same way that the National Water Market System has created a market for water. The latter system also relies on a reverse auction and has proven effective in allowing the Government to minimise its cost while achieving additional water flows.
There is no need to tax the economy as a whole. The important thing is to focus on the gap and then purchase the reduction necessary to fill that gap.
One of the questions I'm often asked is "where will the emissions reduction come from?" This was never clear under the Carbon Tax.
By contrast, under Direct Action the lowest cost abatement may involve a whole range of projects including those to clean up waste coal mine gas, clean up power stations or to capture landfill gas.
It may be a mix of energy efficiency improvements in Australian households, commercial buildings and industrial facilities. It may be reafforestation of marginal lands, or revegetation, or improvement of soil carbon.
The important thing is not where the abatement is achieved, but that it is real, measurable and additional to business-as-usual.
We are not being prescriptive about where the emissions reduction will come from. In fact we are keen to unlock abatement opportunities across all of the Australian economy.
To illustrate the difference in approach between the Emissions Reduction Fund and the Carbon Tax, let me do a short comparison.
Under the Carbon Tax, the brown coal power stations were given the bulk of $5.5 billion in cash and free permits. No substantiative action was required in return for the $5.5 billion. Almost all of the Carbon Tax was then passed on to households and businesses in the form of higher electricity prices.
By comparison, the Emissions Reduction Fund will create positive incentives for industry to innovate and invest in new technologies to reduce their emissions through access to a pool of capital.
There is already highly promising work underway into low emissions brown coal technologies. These are technologies that could be available before the end of the decade. An incentive-based approach is more likely to move us along the pathway towards the development of these technologies than an electricity tax.
There are also technologies that have further potential to capture emission streams to produce algal liquid fuels and other products.
While we will only purchase the lowest cost abatement, these are the type of innovations the Fund could unlock in just one sector.
In short, it has been largely business as usual under the Carbon Tax for brown coal power stations. Under Direct Action, however, there are real prospects of increasing efficiency and cleaning up electricity generated from brown coal under an incentive-based scheme.
Rather than driving up the price of electricity, which is the outcome of the Carbon Tax, we aim to reduce the costs of low emissions sources of electricity through incentives rather than penalties.
This is the fundamental difference between the two approaches one raises electricity prices, reduces competitiveness and results in emissions increasing. The other provides incentives to achieve actual domestic emissions reductions.
3.2. Emissions Reduction Fund Costs
Unlike the multi-billion dollar a year Carbon Tax, the Emissions Reduction Fund is modest and capped in cost. Indeed it is critical to remember that less than three months ago the ALP predicted that the Carbon Tax, even if renamed as an ETS, would soar 50 per cent to $38 dollars a tonne within a few short years.
In contrast the Emissions Reduction Fund will have an initial allocation of $300 million, $500 million and $750 million over the forward estimates period.
3.3. Emissions Reduction Fund Design Principles
I'd like to take a few moments to go through the three high level design principles that will guide the development of the Fund.
First, projects supported by the Fund can only contribute towards Australia's international targets if the emissions reductions have environmental integrity.
To have environmental integrity projects must meet two critical criteria:
- Emissions reductions must be "additional" to business-as-usual. Projects paid for by the Fund must go beyond what would have occurred in the normal course of business. They cannot be required under existing regulatory requirements.
- Emissions reductions must be genuine - they must be credibly and conservatively estimated and must be verified.
Lowest cost emissions reductions
Second, the Emissions Reduction Fund should be designed to encourage projects delivering lowest cost abatement.
By purchasing the lowest cost emissions reductions available, we will be able to maximise the emissions reductions that can be delivered within the Fund's budget. This will provide confidence that Australia can meet its international emissions targets.
The design of the reverse auction process will be critical in delivering on this objective.
Third, the Emissions Reduction Fund should involve streamlined administration.
Simple, clear and transparent rules will help to keep administrative costs low and ensure that businesses, landholders and other stakeholders can easily participate.
Critically, we will use architecture that is already in place and working well, such as the National Greenhouse and Energy Reporting System, the Carbon Farming Initiative and the Clean Energy Regulator.
3.4. Emissions Reduction Fund Terms of Reference
It is now one month since the new Government was sworn in.
On day one, the Prime Minister instructed the public service to begin preparing legislation to repeal the Carbon Tax.
The day after the release of the Carbon Tax repeal bills, we released the Terms of Reference that will guide the consultation process for the design of the Emissions Reduction Fund.
In releasing the Terms of Reference, we are inviting submissions on:
- what emissions reduction opportunities could be unlocked by the Fund
- how key features, such as the auction, baselines and contract arrangements, can be best designed, and
- how transitional issues could be managed, including for existing participants under the Carbon Farming Initiative.
Submissions from business and the broader community will inform the development of a Green Paper in December 2013.
The Green Paper will set out the Government's preferred options for design of the Fund. A White Paper will follow in early 2014, which will outline the final design of the Fund.
In releasing these Terms of Reference, our intention is not to lay out the full design of the scheme but to seek views on the optimal design against the framework set out above.
We want and value your input. We are serious about this process being a full, honest and open consultation, where all ideas are welcome.
We know that considerable experience and expertise in this area resides among the Australian community, and it's our intention to draw from that experience so that the Fund can operate as efficiently and effectively as possible.
It is my earnest hope that many of you here today will play an active role in this consultation process.
One of the matters that the White Paper will address is the mechanism for dealing with emissions above the business-as-usual baseline.
The mechanism will work with the Emissions Reduction Fund in helping Australia to meet its emissions reduction target.
It will only apply in exceptional circumstances, in part because the Emissions Reduction Fund will be there to help large emitters to take the action needed to constrain their emissions.
The mechanism will also help encourage co-investment by business and ensure that tax payers get value for money. Ongoing Government funding should not be necessary once technologies are mature and become business as usual.
As we have said before the election, we are budgeting zero revenue. This is not intended as a revenue-raising mechanism.
Let me conclude today by talking briefly about the Government's environment plans more broadly.
It is now just over one month since we were sworn in, yet we have already made a start on the work that is needed for a better Australia.
Our approach to meeting this challenge rests on practical, targeted outcomes.
The Coalition Government's Plan for a Cleaner Environment rests on four pillars: Clean Air (Direct Action), Clean Land, Clean Water and Heritage Protection.
It offers real outcomes for businesses, the community and the environment.
These pillars will help us build a partnership between business, the community and the Government and put us on a path towards a better, stronger, cleaner Australia.
Our Clean Air plan will be delivered by our Direct Action plan with the Emissions Reduction Fund at its heart, without a punitive tax on electricity.
Our Clean Land policy is built upon the Green Army, Landcare reform and creating a One Stop-Shop for environmental assessments and approvals.
Clean Water includes our commitment to the Murray Darling Plan, Water Security and Reef 2050.
Heritage Protection will be built on a range of programs focussing on community and heritage icons.
This is a careful plan to improve Australia's environment and reduce Australia's greenhouse gas emissions.
I am confident that the Emissions Reduction Fund will be highly effective in harnessing the power of the market to achieve real, measurable results.
The challenge now for Labor is to recognise the election result.
The question for Labor is clear: will they allow repeal of the Carbon Tax to pave the way for a climate policy that will achieve our targets or will they continue to support a scheme that sees domestic emissions rise and electricity prices soar?
There is no doubt that the Australian people have spoken. And there is no doubt that there is a better way.