Summary
The Federal Government has released a Clean Energy Plan and a draft of a Clean Energy Bill 2011 as part of its response to climate change. The plan provides assistance to Australia’s emissions-intensive trade-exposed industries, which have argued that they should not pay a full price for their carbon pollution, or that taxpayers should pay them to reduce their emissions.
There is a legitimate role for government to protect industries by exempting them from some of their carbon pollution costs, where there is a credible threat that this could result in production shifting overseas without any improvement in global emissions (known as carbon leakage). However, exemptions must be tightly targeted, because they increase the cost borne by the rest of the community to achieve Australia’s emission reduction targets.
This report scrutinises three industries prominent in their claims for exemptions and other assistance: black coal; liquefied natural gas (LNG); and steel. It finds that taking into account recent commodity prices and exchange rates, the level of protection in the draft legislation is unjustified and costly.
With no protection, even if carbon prices rise for example, to $40 per tonne of CO2 — well above the Treasury forecast to 2020 — it is difficult to foresee large job losses in black coal mining or LNG production. Australian export coal production and employment will continue to expand. And the viability of major LNG projects would not be significantly affected. Exemptions for LNG production put a particularly heavy burden on the rest of the community because its emissions are set to double in the next decade.
By contrast, the steel industry is under pressure due to shifts in global capacity and exchange rates that may well be structural and long-lasting. A carbon price with no assistance would add to these pressures. However, the government’s proposed assistance is so generous that steel producers will receive an unjustified windfall gain.
The draft bill fails to tightly target assistance only where there is a genuine risk of carbon leakage. Instead, it implicitly aims to equalise carbon costs with international competitors irrespective of the risk of carbon leakage.
Claims for protection to ensure a level playing field and maintain jobs should always be scrutinised carefully. The Productivity Commission has played a vital role in doing so. Over 25 years, the Commission has exposed the costs of subsidising industries just because “other governments do it too”. Unilaterally reducing industry assistance has lifted Australian living standards.
The draft bill asks the Productivity Commission to oversee industry assistance in the Clean Energy Plan. Yet it distracts the Commission from an unbiased consideration of the public interest in playing this role. The Commission should be given more scope to review protection in the wider public interest, applying a true carbon leakage test. To ensure transparency, the bill should also provide for public access to detailed data about industry emissions and levels of assistance.