Wednesday, November 25, 2009

Wong's $7.3 billion gift to dirty power stations

I wrote this column in June 2008. The only update is the size of the gift. It's doubled.

Never once on the countless occasions that Australian governments have restricted the sale of tobacco have they felt compelled to compensate the manufacturers for ''significant reductions in their profitability''.

Why would they? The cigarette manufacturers knew what was coming (and had decided to invest anyway) and were blessed with rusted-on customers.

But there was another more important reason why our governments didn't offer ''compensation'' to the industry they were trying to cripple.

To do it would have been to accept that the existing tobacco manufacturers had continuing ''rights'' that the government had to buy out in order to proceed.

It would have helped create a precedent that would have undermined the right of Australia's parliaments to act as they saw fit.

It would have undermined our sovereignty as voters...

The Government's independent climate change adviser, Ross Garnaut, saw the danger clearly in his interim report delivered earlier this year.

As he put it, ''There is no tradition in Australia for compensating capital for losses associated with economic reforms.''

Among the reforms for which he pointed out Australian businesses have not been compensated were the floating of the dollar, the introduction of the goods and services tax and the massive tariff cuts that Garnaut himself oversaw as Bob Hawke's economic adviser in the 1980s.

By the same token he pointed out that there had been no tradition of taking away from businesses the extraordinary windfall gains that they had enjoyed as a result of government decisions, including cuts in the company tax rate.

In the case of emissions trading, businesses had been ''aware of the risks of carbon pricing for many years''. Many had ''sought to re-engineer their production processes to reduce their reliance on emissions''.

He must have been worried that the argument wasn't getting through. In his draft report released just days before last week's Government green paper, he devoted an entire appendix to applying the argument explicitly to coal-fired electricity generators.

There was ''no basis'' for the claim that generators had a ''right to emit carbon dioxide and this right is being taken away by a policy change''.

As he put it ''governments always retain the absolute right to vary policy and industry is generally cognisant of the risk''.

There's no doubt that Australia's coal-fired electricity generators have been cognisant of the risk. They have been lobbying on the basis that their businesses have been at risk since way back before Australia took part in the Kyoto negotiations a decade ago.

But last week, despite all they'd done, and despite all that Garnaut had said, they succeeded in convincing the Australian Government that its 2010 emissions trading scheme was unexpected and that they needed compensation.

In her green paper, Climate Change Minister Penny Wong justifies the idea 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.''

Try submitting that sentence to the laugh test.

That is, try to read it out loud without laughing.

The truth is that when it finally makes a decision on the type of emissions trading system that Australia will have from 2010, Parliament will have ended, not added to, the uncertainty that has been making Australia's electricity market a risky investment proposition.

Does Wong really think that investors will stay away from Australia's electricity market when they know what the rules are? Does she really think they haven't had a fair idea of what was coming for a decade?

Apparently she does. Her green paper proposes making cash payments or payments in the form of free pollution permits to all of the coal-fired power stations that were in existence or planned before June 3, 2007.

Why that date? Because it was the day on which former Prime Minister John Howard came out in support an emissions trading scheme, the day the idea ''became bipartisan policy in Australia''.

The Minister says that Sunday, June 3, 2007, was ''the point beyond which investors could not reasonably argue that they had no knowledge of a potential carbon constraint''.

Where's the laugh test?

It's actually worse than funny. By giving a gift to a class of firms that neither needs it nor deserves it (quite separate to the grant of free permits to exporting and import-competing carbon-intensive firms such as aluminium producers who will need them), Wong has opened the door to all sorts of special pleading.

Woodside Petroleum is just the first cab off the rank. If dirty coal-burning power stations can get compensation, why not cleaner natural gas producers?

It's the sort of endless special pleading for access to ever-widening and ever more complex loopholes that killed the goods and services tax the first time the Coalition proposed it.

John Hewson was unable to explain why he would be taxing a cold pie but not a hot pie and lost the 1993 election.

Australia's existing coal-fired power stations won't need the compensation anyway. They will be able to pass on the extra cost of the emission permits. They will be encouraged to. It is how the scheme is meant to work.

Eventually the higher price of power will prod some of us to use less of it, and eventually wind and commercial solar power generators will become competitive against coal because they won't to buy emission permits.

But none of that will happen in a hurry. In the short term we will have no choice but to buy our power from the existing coal-fired generators. It is where our power comes from.

It is likely that by the time those plants are out of commission they would have been out of commission anyway.

The generators will doubtless pocket the gift Wong plans to give them (the NSW Government will be one of the biggest beneficiaries, owning many of the generators) but it won't encourage them to give up lobbying.

Why should they when another part of the minister's plan has the parliament resetting the five-yearly carbon-reduction target each year?

The tobacco industry would love the opportunity. It shouldn't be given to a dinosaur industry that has served and will continue to serve Australia well and has known for years that its days were numbered.

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Anonymous said...

The whole thing sucks but it's still better than nothing.

I love how the opposition has been calling for reduced govt spending and now negotiates for the govt to spend billions more in order to get their vote.

If this doesn't get past then it will take years(at least the next 2 years) before we get a bill passed


Persse said...

Much of what you say is spot on, though the analogy with tobacco is flawed for this reason, the government - and this would apply to any government - is determined not to allow any threat to continuity of the supply of electricity, for very good political and technical reasons. They are being overly concerned about this in my view, and may well be self-defeating by inhibiting the rise of better technologies.
The history of sulphur dioxide amelioration is more applicable. Both in showing the strenghts as well as the weaknesses of such a scheme.

Ian Lucas said...

How very predictable.

Anonymous said...

I like the tobacco analogy: you can get your "fix" from chewing tobacco, gum, patches or another drug. Just like you can get your electricity from different sources.

Anonymous said...

Well said Peter. It is a complete farce.

carbonsink said...

Govts throw money at coal mining infrastructure ... no-one seems to get upset by that. Why would you get upset by domestic polluters?

Australia's carbon emissions from exported coal vastly exceed what is burnt at home, and last time I looked there were no restrictions on exporting coal to countries without an effective price on carbon.

All those CO2 molecules end up in the same atmosphere, yet our coal-mining industry is generously supported by state and federal govts, cheered on by the RBA and Treasury, and the entire economic commentariat.

Why? Why? Why?

Adam S said...

Surely it is up to the governments of other countries to decide how their coal imports are taxed?

Peter Martin said...

Yes Adam, that is how it will work.

We won't and can't require people who burn coal in other countries to have permits, even if it is Australian coal.

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