Media Release

Address to the 2011 Economic and Social Outlook Conference





Last weekend, The Australian newspaper prominently reported the head of the Business Council lamenting the current public focus on the carbon tax and the mining tax ahead of much more important reforms. Graham Bradley is right to be disappointed. Of course, the public conversation should be about measures that will make our country more prosperous; but if the only measures likely to be implemented in this term of parliament are those that will make us less prosperous these, perforce, will be the subjects that people talk about.

The Coalition, I stress, is not arguing about the carbon tax and the mining tax because we choose to. We're talking about them because that's what the government has placed top of the national agenda and because the most positive thing that an opposition can do is stop a bad government from making people's lives worse.

The Coalition has had much to say about welfare reform and will have more to say about workplace reform once the field evidence is in. As long as we are in opposition, though, and an election is supposed to be at least two years off, our most constructive contribution to public debate is to establish beyond doubt that the current government is a threat to our prosperity and that the current government's so-called reforms are no such thing.

It's only when an incumbent's signature policies evoke derision from all but its most rusted-on supporters that an opposition can fully focus on being an alternative government and that's far from the case with the carbon tax especially when so much business commentary still begins with the observation that "we support a carbon price…"

The Coalition's fundamental contention is that the unilateral imposition of a carbon price will put Australia at a competitive disadvantage compared to countries which are taking no such action. Contrary to the government's repeated assertions, there are no countries - none - that are planning to impose an economy wide carbon price, as the Productivity Commission has just confirmed. In the absence of comparable international action, an Australian carbon tax will damage our economy without helping the environment which is why it can't be fixed; it just has to be fought.

Before the last election both the Prime Minister and the Treasurer made explicit commitments to the Australian people not to proceed with a carbon tax. Their justification for trying to introduce one, despite these unequivocal pledges, is that Australia risks being "left behind" and not doing its "fair share." Recent presentations by the Prime Minister and the Treasurer have been littered with these phrases - despite the Productivity Commission's explicit finding that Australia's existing emissions abatement, without a carbon tax, is currently in the "mid-range" of the countries it studied.

Since the collapse of the 2009 Copenhagen conference, all the movement internationally has been away from any form of binding commitment to reducing greenhouse gas emissions. The Prime Minister frequently claims that that China is shutting down coal-fired power generation facilities "at the rate of one every one or two weeks". What she doesn't say is that they're just replacing old and inefficient coal-fired power stations with newer and bigger ones - dramatically increasing the amount of coal they burn and the emissions they produce year in, year out.

Over the five years to 2009, China's actual increase in carbon dioxide emissions was about 2,500 million tonnes per annum and I stress that these figures are from the Garnaut Report, not from Lord Monckton, and over the 10 years to 2020, Professor Garnaut projects these emissions to rise by a further 6,000 million tonnes per annum. To put this in perspective, the proposed decrease in Australian emissions over the decade is about 50 millions tonnes per annum - so the increase in Chinese emissions alone is expected to be over 100 times as large as our reduction, on top of an increase 50 times as large that's already taken place.

Understandably, the government prefers to focus on China's (non-binding) pledge at the 2010 Cancun conference to reduce the emissions-intensity of its output by 40 to 45per cent. This sounds impressive but to put it in perspective Australia has already achieved a reduction in emissions-intensity, without a carbon tax, of about 50 per cent between 1990 and 2008. This is largely the result of business decisions taken on purely commercial grounds to reduce power and fuel consumption. Many of these decisions, such as Visy's to replace power from coal with power from burning garbage that would otherwise go into landfill, could actually be harder with a carbon tax impacting on cash flows and profits.

What can be said of China's current emissions reduction pledge is that, by comparison with India's, it looks positively draconian. A few weeks ago the Prime Minister personally launched a departmental fact sheet entitled 'Climate Change: Countries Acting Now' claiming that India was already taking "national action" on carbon pricing through a "clean energy tax on coal that will raise half a billion dollars annually for clean technology development."

On this reasoning, Australia already takes much stricter national action on carbon pricing. After all, the Indian coal tax referred to is just $1 a tonne. Australia's state mining royalties exceed $20 a tonne, for Queensland coking coal, while our spending on clean technology development far exceeds half a billion dollars a year. What's more, India's pledge at Cancun was merely to "endeavour" to reduce its emissions intensity by 20 to 25per cent by 2020 from 2005 levels - in other words, a non-binding pledge to do about half that which Australia has already achieved without a carbon tax.

In the United States, all moves towards a national cap-and-trade scheme have been abandoned. Seven US states - Arizona, California, Montana, New Mexico, Oregon, Washington and Utah - had committed to a regional emissions trading scheme, but only California now remains officially committed to implementing one next year and the Productivity Commission notes that "it is likely that the permit price and abatement will be close to zero in 2012." As well, New Jersey and New Hampshire are in the process of abandoning a regional greenhouse gas initiative while the Conservative Party in Canada recently won an outright majority on an explicit policy of rejecting any unilateral carbon tax or ETS.

Now, without Australia's comparative advantage in fossil fuels, Europe can have an ETS with much less impact on its economy. But to put the European ETS into perspective, it raises only about $500 million a year. At $26 a tonne, an Australian carbon tax would raise more in three months than the European ETS has raised in five years.

Of course, Australia should take prudent steps to reduce emissions but the case for doing so is not improved by pretending that other countries' actions are stronger than they are. As former Prime Minister John Howard pointed out in 2007 when committing the Coalition in-principle to an emissions trading scheme, "nothing we do alone will materially affect our climate… (and) without a global framework that includes all major emitters we lack a genuine global solution." That's why the measures that the Coalition now proposes to fund under our direct action policy have other environmental benefits in addition to reducing emissions.

The government sometimes claims that pricing carbon is worth doing unilaterally, like tariff cuts, because it's a historic reform, akin to financial deregulation or introducing the GST. But unlike the genuine reforms of the Hawke-Keating and Howard-Costello governments, a carbon tax increases overall business costs, decreases economic efficiency, reduces employment, and massively and permanently boosts the size of government. Change it certainly is, but reform it's most definitely not.

To count as "reform", change should improve economic outcomes. Instead, the carbon tax looks like an act of economic self harm even on the government's own modelling. The Treasurer recently told the National Press Club that under a carbon tax annual growth in gross national income per person would "only" be 0.1percentage points lower than otherwise and that, with a carbon tax, real national income per person would be "16per cent higher than current levels by 2020."

In fact, real national income per head has not risen at all in the three and a half years of the Labor government so far. This is why people feel so financially squeezed and why the Howard era now seems like a golden era of prosperity that's been lost. The Treasurer's projected 16 per cent increase in per capita GNI, if it happens, would be just half the 32per cent growth achieved by the Howard-Costello Government in its 11 and a half years. The Treasurer's boast, in other words, is that, under a carbon tax, Labor will deliver just half the real income gains of the Coalition.

That 0.1percentage point of lost annual growth due to the carbon tax is almost a tenth of the annual real per capita income growth Treasury is projecting. Compounded over 8years it would see 2020 GDP lower by around $18billion, with a cumulative loss of national income over the period of around $70billion. Now, such a loss is hardly trivial and illustrates the fundamental point that, however the government chooses to describe it, a carbon tax will detract from national wealth.

The Treasurer assured his Press Club audience that "the modelling (which he referred to rather than released) shows aggregate employment is approximately the same with or without a carbon tax." In fact, the modelling doesn't show anything of the sort. Rather, it seems to assume this outcome in the medium term on the basis that other things in the economy like real wages will adjust to make it so. So Wayne Swan owes it to the workers of Australia to explain how much their real wages might have to be cut to achieve this outcome.

If the Government's previous modelling for the abandoned carbon pollution reduction scheme is to be believed, the figure is something like 2.6per cent by 2020, which on today's average full-time wage of about $70,000a year would amount to a pay cut of approximately $1,800. So it's hardly surprising that the Treasurer only partially released the modelling he relied on.

The government frequently claims that the jobs lost in steel, cement, aluminium, plastics, glass and motor manufacturing under a carbon tax would be outweighed by the "green jobs" that a carbon tax would create. The idea that moving from more to less efficient sources of energy would create jobs is, to use Nigel Lawson's phrase, "economic illiteracy of the worst order."

A UK study released in March found that for every job created in the renewable energy sector, 3.7 existing jobs were lost. A 2009 Spanish study found that for every "green job" created by subsidies and price supports for renewable power, more than two jobs in other industries were lost. As well, many of the "green jobs" were temporary, in construction, installation, marketing and administration.

As the Productivity Commission head, Gary Banks, put it in a speech on carbon tax issues in March and I quote: "Crucially - and this point seems not to be widely understood - it will not be efficient from a global perspective (let alone a domestic one) for a carbon-intensive economy, such as ours, to abate as much as countries that are less reliant on cheap, high-emission, energy sources... Modelling aside," said Gary Banks, "it's commonsense that achieving any given level of abatement is likely to be costlier in a country with a comparative advantage in fossil fuels."

It appears that the Government's claim of limited economic damage from a carbon tax assumes the early availability of international permit trading. The results the Treasurer has just announced are much the same as those obtained by Treasury's CPRS modelling in 2008, which did assume this. As the Treasury said then, "linking the scheme to international markets by allowing unrestricted imports of eligible international units will provide an effective cap on domestic carbon prices (and will be) an important mechanism for ensuring that abatement is achieved at the lowest cost globally as well as nationally".

But trading in carbon permits is intrinsically different from trading in iron ore, say, wheat, water allocations or even financial instruments not only because carbon dioxide can't be seen or touched but because one party, in a more conventional trade, has a strong interest in receiving the good that's been paid for. With carbon trading, neither party has any intrinsic interest in the emissions reduction underlying the permit. Their only interest is in checking that the required transfer has taken place on a register. Such a trading system, therefore, would require the most intensive third party policing because it wouldn't be automatically policed by the parties to the trade and without such policing, an emissions trading scheme could offer the appearance of achieving lowest-cost abatement without much actual abatement occurring at all.

In Australia, many businesses are already required to conduct carbon audits at considerable expense with large numbers of officials supervising monitoring and compliance. In countries or organisations with less developed and less scrupulous administrative cultures, the scope for corruption is obvious as even the European Union has discovered.

This is a fundamental practical problem that will arise with any emissions trading scheme - one that could outweigh on its own the alleged benefits of trading in carbon permits. Yet so much of the public debate simply ignores such obvious problems as if creating a carbon market was no more difficult than creating a market in domestic water allocations. The government's reliance on extensive international trading of permits to achieve Australia's abatement objective without prohibitive costs highlights this problem. Without a dependable "carbon cop", Australian businesses might easily end up spending vast amounts on permits generated overseas for abatement that's never actually happened.

The difficulty of establishing a functioning carbon market has implications for the stability of any carbon price. Last October, the carbon price on the Chicago Climate Exchange plunged towards zero and trading effectively ceased. Shortly afterwards, the exchange closed to all trading of new emissions allowances. This was an ignominious outcome for a market which, at its founding ten years ago, was tipped to reach $500billion in capitalisation.

Under the European ETS, the price of permits tripled in the first six months of the scheme then collapsed by half in 2006 before declining to zero at one point in 2007. Recently, the permit price has fallen by 20 per cent in just a week, including a fall of 11 per cent on just one day. Such volatility fatally undermines the argument that an ETS will provide "certainty" for emitters.

The price of carbon has to be relatively stable to provide the government with the revenue it needs to fund appropriate compensation and to avoid the need for compensation to be regularly adjusted up or down. But the price of carbon has to be high and rising to drive the shift from coal to gas and then from fossil fuels to renewables that is the whole point of an emissions trading scheme.

It's hard to see how the government could count on such a novel market to deliver the "certainty" that it says people need. Participants in a carbon market could never be sure that the government wouldn't grant free permits to some struggling but politically sensitive industry, causing a collapse in the permit price and wiping out the value of investments. Perhaps the Prime Minister could provide investors with a personal assurance that "there will be no free permits under the government I lead."

As well, the government's latest commitment, to move from a carbon tax to an emissions trading scheme in 2015 come what may, junks its February commitment only to transition to a carbon market after considering "carbon pricing in key competitor economies" and "the integrity and price" of units in the "international carbon market."

This is why direct action, as the Coalition proposes, is actually a more practical marketbased approach to emissions reductions than an emissions trading scheme. A tender process for emissions abatement is as real a market as a water buy-back scheme. It is in fact a more transparent and direct way of establishing a carbon price than the establishment of a carbon exchange.

As part of the Copenhagen Consensus project, Bjorn Lomborg put together a panel of high-profile economists in 2009, including three Nobel Laureates, to recommend optimal responses to climate change. From among the 15 options considered, the four carbon tax options were rated 12th to 15th, in other words last. Technologyled responses, including further research into particular approaches, and adaptation rated most highly with options such as forestry sinks, or the direct action that the Coalition proposes, put around the middle of the pack.

It is routinely claimed that, as long as the Government recycles all of the money it raises from a carbon tax through tax cuts, benefit increases or industry assistance, households and firms won't be worse off, at least in aggregate. Now, leaving aside the government's redistributive agenda, it's claimed that people will have been fully compensated for the change provided the whole scheme is revenue neutral.

But unfortunately for the government, this claim does not accord with basic economics. Shifting energy generation from lower to higher cost sources and shifting transportation from lower to higher cost fuels raises costs to firms and households above and beyond the tax paid. As the Productivity Commission put it in its recent report, under a carbon tax consumers "not onlycurtail their energy consumption, but pay more for what they continue to consume", for a total cost which "comprises tax payments to governments ... and the 'subsidy' to producers of renewables." In other words, the cost of the carbon tax will be greater than the revenue raised because of the inefficiency inherent in the scheme.

For much the same reason, criticism of the Coalition's direct action plan that it will involve a cost to the budget is misplaced. The direct action plan entails a cost of around $3.2 billion over four years. That's hardly more costly than a carbon tax raising $11.5 billion every single year at $26 a tonne. It means, rather, that the costs of reducing emissions are transparent and borne by the government - as they should be in an intervention to achieve a public good - rather than hidden and borne by consumers through yet another hit on their cost-of-living, in excess of any "compensation."

There is another reason why the government's modelling almost certainly understates the costs of a carbon tax. For example, Treasury's CPRS modelling assumed sufficient progress in the development of commercially viable carbon capture and storage technology such that: "From the mid-2020s, carbon capture and storage (would begin) to replace conventional coal-fired technologies, including through retrofitting existing power plants." These technological developments may well emerge over the coming decades, but the modelling is of dubious predictive value if key problems are simply assumed away.

Such assumptions also provide an astonishing counterpoint to the government's rationale for another of its mega-schemes, the National Broadband Network. With the carbon tax, the government assumes that technology will change rapidly with fundamental breakthroughs within the next 10 to 15 years. By contrast, with telecommunications, the government assumes that no technology will emerge to challenge fibre as a delivery mechanism. The government insists that a carbon tax is needed to create a competitive market, to unleash what Professor Garnaut terms the "genius of the market" no less. By contrast with the NBN, it not only insists on picking the single technology for the next generation but directs that competition with this new network actually be shut down.

It's worth pondering why so many people have come to the view that putting a "price on carbon" is the best way to reduce emissions when no one says that we should continue to dump toxins in the Yarra on the basis of tradeable certificates. In his Forgotten People address, Sir Robert Menzies referred to how we could become the quote "ready victims of phrases" unquote. What he meant, I suspect, was the natural human tendency to judge the slogan rather than to think through the concept. Describing a methodology for reducing emissions as "market based" is a good PR ploy to calm the suspicions of people instinctively averse to more regulation. A "market based" regulatory system that business notionally supports, that the public can be told is saving the planet and that gives government a giant and growing revenue source is the politically savvy bureaucrat's manna from heaven.

The basic flaw in this so-called "market based" system is that it creates a massive cash cow for government. As long as the price is paid to government, regulating carbon dioxide by putting a price on it should give every market enthusiast pause for thought. The unavoidable regulatory mechanism means a massive and permanent increase in the size of government even if all the revenue is handed back. Even if what's traded is a property right given to business, there's the issue of regulating such an unusual market. This, after all, is a market based on the non-delivery of an invisible product to no one and is almost certain to be scammed.

So on close consideration, carbon pricing turns out to be just another pot of gold for government. It's instructive that the IMF has just recommended a 25 per cent hike in Iceland's carbon tax to address, not an environmental problem, but to address its fiscal crisis. The Greek government is now selling carbon permits to meet its debt obligations. When Julia Gillard promises to over-compensate low income earners for price rises, the carbon tax has become just another vehicle for redistributing wealth. It's a form of socialism masquerading as environmentalism.

Ladies and gentlemen, thanks so much for the opportunity to put some thoughts on paper. I learnt from my journalist days that if an argument was really important it had to be reduced to paper because all too often when you simply talk about these things the weaknesses in your argument can be skated over. The beauty of putting it all on paper is that the errors, I hope, are there, even for the author to see and hopefully to address.

Thanks so much.