Wednesday, July 16, 2008

What's the most dodgy part of the emissions trading green paper?

I reckon it's this: A promise of special direct assistance to existing coal-fired power stations on the grounds that it will encourage companies to invest in Australia.

Excuse me!

The existing generators have already invested. And quite a long time ago. Anyone who built a coal-fired power station recently would have known what was coming.

(In any event, the emissions trading scheme will hardly hurt the existing coal-fired generators. They are encouraged to pass on their higher costs. When they can't, it will be because competitors such as wind-power are taking their market, which is some time off, but what we want.)

Wong's paper justifies the handout this way:

"If the change in regulatory arrangements was unanticipated and implemented without compensation, and investors viewed this as evidence that the Government was likely to change the regulatory regime in future in an unpredictable way, then investors might regard Australia's electricity market as a riskier investment proposition.

An increased perception of risk would increase the expected returns required by investors before they would invest, potentially delaying new investments in the generation sector.

The extent of this risk is unquantifiable as it is based on the subjective views that investors may have held in the past and the view that they may take of the stability of the new investment environment in electricity."

Pardon me while I laugh.

Come to think of it, it these sentences fail to pass Professor Garnaut's "laugh test". Can you read them out loud without laughing?

As Garnaut has reminded us, when tariffs were cut Australia didn't compensate existing manufacturers, because it wouldn't cop crappy arguments like this one.

This is a handout resulting from lobbying. Nothing more.

Much of it will go to the beleaguered NSW government which owns coal-fired generators.


drwoood said...

I agree - the handouts to "strongly affected industries" are absolutely ridiculous. This handout is essentially a transfer of wealth to shareholders. It is a strange idea that shareholders should be compensated for decisions by governments - should should shareholders of cigarette companies have been compensated for decisions to ban cigarette advertising?

One affect that this handout will have is that industries will have a huge incentive to emit 1500 tonnes carbon dioxide equivalent per million dollars of revenue, so that they qualify as a disproportionately affected industry.

One difference between the Green Paper and the Garnaut Review is that the Garnaut Review is proposing to invest 20% of auction revenue on RD&D, it seems that the Green Paper has better uses for the revenue - rewarding rent seekers.

These industries would probably have passed on almost all costs to consumers anyway, see Hepburn, C., Quah, J. and Ritz, R. (2006) Emissions trading and profit-neutral grandfathering, Oxford Economics Department, Paper 295, December.

Peter said...

Thanks drwood.

Adam said...

Nah Peter, I reckon this part is even dodgier (Box 3.8 on pg 166):

For example, if a liable entity failed to comply because of the cost of permits, where a make-good provision applied, the entity would be required to pay the compliance penalty and proffer permits for surrender in a subsequent period. This would be
required regardless of permit cost.

A variation of this arrangement would be for the Government to make good on behalf of noncompliant entities; for example, by buying back an equivalent number of permits in the market to make up the shortfall.

That sure is a variation, alright! A polluter fails to have sufficient permits to surrender, so the Government steps in to buy the permits for them! There would want to be a bloody great fine on top of it!

Peter said...

Thank you Adam. said...

Good post, Peter. It's politically bizarre. I can't see how this won't damage their credibility in the longer term when people (eg. Chris Uhlmann's question at the Press Club yesterday) draw comparisons with the first phase of the EU ETS and just say 'told you so.'

Anonymous said...

The risk with a trading scheme (rather than a straightfoward tax) was alway going to be the rent-seekers. It's just a pity that the govt volunteered this up front.


Julie said...

I completely agree. The handouts make a mockery of letting the market set the price too - if the govt gives out permits, then they've set the price themselves at $0. And then everyone else will want them for free too. Ridiculous.

johng said...

Apart from the economic discussions about emmissions trading what annoys me about the attitude of the big emmitters is that, they seem to be saying, yes we are aware of global warming and the role of our industries in that, but should you take any action to force us to lower our emmission levels then we'll take action against you and, if necessary, go somewhere else where another government won't have the clout/wherewithall to prevent us doing what we want. Global warming isn't our problem it's everyone else's.

Peter Wood said...

On pages 511-514 of the Garnaut Review Draft Report, there is an appendix that rebuts many of the arguments for 'compensation' for owners of emissions-intensive firms. These arguments and rebuttals cover equity, sovereign risk, transition continuity, investor confidence, price volatility, threat to reliability, reversal of previous assurances, and complexity. It would probably be good for some submissions on the Green Paper to remind policymakers of Professor Garnaut's comments.

Peter Wood (drwoood)

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