Independent economic research commissioned by the Coalition and Independent Senator Nick Xenophon demonstrates that the Rudd Government’s Emissions Trading Scheme (ETS) will unnecessarily drive up electricity prices, destroy jobs and expand the size of government in Australia.
The research, by respected consultants Frontier Economics, is the modelling the Rudd Government refused to ask its own Treasury to undertake.
The results make it clear the Rudd Government should immediately withdraw its Carbon Pollution Reduction Scheme (CPRS) legislation and begin negotiations with the Opposition, minor party Senators and other stakeholders to design a more effective scheme.
To persist with the CPRS would be the height of irresponsibility given Frontier’s work shows the scheme can actually be made twice as green at a much lower cost to consumers and the broader economy, and a net improvement of 68,000 in regional jobs.
With appropriate amendments the ETS can deliver an unconditional 10 per cent reduction in Australia’s 2000 greenhouse gas emissions by 2020, compared to the Rudd Government’s 5 per cent unconditional target.
It shows that by treating the electricity generation sector in a less punitive manner, household power bills need only rise by about 5 per cent in the near term rather than the immediate 25 per cent price hike the Carbon Pollution Reduction Scheme (CPRS) will trigger.
Five years into the scheme, average annual household power bills would only be $44 higher, rather than the $280 price hike under the CPRS.
The damaging impact of the CPRS on regional Australia and the nation’s key export industries is also greatly reduced by the changes modeled by Frontier.
Rather than the loss of 26,000 regional jobs revealed by modelling of the CPRS, Frontier’s proposed changes would lead to net gains of 42,000 in employment in regional Australia.
Overall, the cost to the Australian economy over the next 20 years in net present value terms is reduced by $49 billion, or about a third.
KEY MODIFICATIONS TO CPRS
The key changes to the currently proposed ETS recommended by Frontier are:
– Doubling the unconditional emissions abatement target offered to the international community by Australia from a 5 per cent reduction from 2000 levels by 2020 to a 10 per cent reduction.
– Allocating permits to electricity generators using a baseline approach, rather than forcing generators to purchase permits for all emissions. This enables a less abrupt increase in retail electricity prices, without diminishing incentives for generators to shift to greener power sources.
– Providing 100 per cent shielding without a decay factor to emissions-intensive trade-exposed industries, including the coal industry.
– Auctioning about 30 per cent of the permits required by Australian industry, in line with the ratio auctioned under the proposed Waxman-Markey scheme in the US, rather than the 70 per cent proposed by the CPRS.
– Excluding agricultural emissions from the scheme, but allowing the agricultural sector to contribute to abatement and earn new revenue streams by allowing the inclusion of offsets such as carbon sequestration in forests or biochar.
KEY ECONOMIC OUTCOMES
The key economic consequences of these changes to the proposed ETS are:
– A reduction in the net present value of the economic costs of the scheme over the next 20 years from $121 billion to $72 billion – a $49 billion improvement. Under the approach proposed by Frontier, output, real wages, employment and investment would all be higher.
– Wholesale electricity prices rise by about 5 per cent in the near-term, and then slowly increase over the next two decades until they are about 25 per cent higher than their anticipated level in the absence of any ETS. This compares to an immediate rise of 40-50 per cent in wholesale prices under the CPRS (which translates into a 25 per cent rise in retail electricity prices).
– The impact of the ETS on jobs and output in regions with emissions-intensive economies such as the Hunter Valley, Illawarra, Gippsland and central Queensland is reduced. Rather than tens of thousands of jobs disappearing in these regions, new jobs will be created.
“This is the modelling work that the Rudd Government refused to undertake,” said Malcolm Turnbull, Leader of the Opposition. “It shows that with relatively modest changes, the proposed ETS can be made far less harmful to jobs, investment, regions and the Australian economy.”
“This is a strategy for an ETS that is twice as green and compared to the Government’s scheme saves an average household over $200 a year on their power bills,” said Senator Nick Xenophon. “Rather than shutting down important parts of our economy, we can deliver the right mix of incentives and signals to encourage clean growth.”
“We have long argued that a flawed ETS is worse than no ETS at all,” said Andrew Robb, Coalition spokesman on Emissions Trading Design.
“Frontier’s modelling and analysis provides us with new thinking about how to design a more environmentally and economically effective response to climate change.”
FRONTIER’S APPROACH
Frontier’s analysis utilizes the MMRF-GREEN model at Monash University's Centre of Policy Studies – the same model used in the Garnaut Review and the Federal Treasury's modelling of the CPRS.
MMRF-GREEN is a multi-sector, multi-region dynamic model of the Australian economy.
“It is important to note this is the very same model which was used by Treasury,” said Danny Price, Managing Director of Frontier Economics.
“These results aren’t some pie-in-the-sky magic pudding. They reflect the application of careful design and real world economics to the policy challenge of implementing an ETS in an energy-intensive economy such as Australia.”
TREATMENT OF ELECTRICITY GENERATORS
The use of a baseline approach to the electricity generation sector greatly reduces the ‘churn’ involved in the ETS - less money is raised from industry and then redistributed to households to compensate them for higher electricity prices.
Rather than an abrupt and large jump in power bills, the changes proposed by Frontier would mean a small and gradual increase – giving households and businesses more time to scale back their electricity use by purchasing more efficient appliances, insulating buildings, and making other adjustments.
A much smaller and more gradual increase in power bills also greatly decreases the need for compensation payments to households. This, in turn, means the many billions of dollars of annual fiscal ‘churn’ created by an ETS can be greatly reduced.
“Lower electricity prices will also greatly reduce the indirect costs of the Government’s ETS that would be faced by hundreds of thousands of small and mid-sized businesses,” said Mr. Robb. “For example, under the CPRS, a typical dairy farm faced extra costs of $8000-$10000 per year. Under Frontier’s proposals, this would be reduced by 90 per cent.”
Separately, the Coalition has also committed itself to a doubling of the compensation proposed for the electricity generators, from $4 billion to $8-10 billion, in order to provide greater fairness and investment certainty for firms in this industry.
Securing the balance sheets of existing electricity generators is critical to energy security, and also a key enabler for these firms to invest in cleaner generation technologies.
SUMMARY
“Overall, these possible alterations to the ETS have the effect of delivering a more transparent, market-driven scheme rather than Labor’s big government CPRS,” said Mr. Turnbull.
“We look forward to the opportunity to sit down with Mr. Rudd and Senator Wong to discuss these innovative ideas, and work co-operatively to deliver a response to climate change that best serves the interests of all Australians.”
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