STANDING COMMITTEE ON FINANCE AND PUBLIC ADMINISTRATION
(Senate-Monday, 20 October 2008)

DEPARTMENT OF THE PRIME MINISTER AND CABINET PORTFOLIO - Department of Climate Change

Senator «MILNE» Earlier, Minister, you made a statement about the lessons learnt from the early days of the European trading system. Amongst those were the over-allocation of permits and the inflation of emissions projections by companies and so on. I want to refer to that in relation to the Innovest report commissioned by the ACF that came out today. I wondered whether you had reconsidered your commitment to free permits, given that the European experience has suggested that that has been one of the big problems in Europe and they are moving completely away from free permits to 100 per cent auctioning.

Senator Wong -Senator, I have just been in Europe and I have to say that that is not quite a correct characterisation of what they are doing. They are proposing-they have not agreed yet-to move incrementally over time. In fact, the percentage proposed is smaller than 100 per cent. I do not know whether Mr Comley or anyone else would like to make comment on what we can learn from the European scheme.

Mr Comley-I think that the first lesson that came from the European scheme was to have an emissions monitoring and reporting system in advance of the scheme starting-that is probably the most important lesson-which is what the NGERS has put in place. The second point is: it is not clear to me that the issue of free allocation of permits is that closely related to the question of whether you overallocate in terms of the scheme cap at the start of the process. So the question of whether you set the emissions cap tight enough to produce a positive price is really a question of your confidence in the emissions trends which comes from both the quality of your inventory and the quality of NGERS. Part of that, of course, in the Australian case, is that it is one jurisdiction's report rather than multiple. Probably the last relevant lesson here is that the European system started with a first phase without any banking of permits, whereas the green paper proposal is to have unlimited banking of permits. So, even in the event that you did overallocate, it would tend not to drive the price down to zero because of that banking in the subsequent periods. It is those sorts of discussions that we have had with European officials on the way through on the design of the scheme that have informed the green paper design.

Senator «MILNE»-Nevertheless, aren't they saying that their move to phase out free permits-if you want to describe it in that way-is a reflection of the fact that they would have been better to go with an auctioning system to start with?

Mr Comley-The question of allocation of free permits versus auctioning is partly an efficiency question, depending on how you allocate them, but largely a distributional question. And I think the point that has been made at a number of forums is that the question of how you handle distributional questions is one on which you can learn lessons from elsewhere, but it largely comes down to the local circumstances of each country as to how you handle those situations.

Senator «MILNE»-But is it not true to say that, once you go to a free permit system, whatever your allocation is you are subjected to a huge amount of lobbying, which leads to outcomes not necessarily in the best interests-whereas if you auction 100 per cent then you have got cash which you can distribute, which, again, will be subject to political lobbying. So it is either before or after, I suppose.

Senator Wong -Senator, I am not sure there is a political-lobbying-free approach to policy development-

Senator «MILNE» -Exactly.

Senator WONG -and certainly not in this area.

Senator «MILNE»-Has anyone had a chance to have a look at the Innovest report that came out today on this very issue, pointing out the windfall gains that certain companies would get under the currently proposed arrangements?

Mr Comley -I have not looked at that report. I do not know if any other officers at the table have either.

Senator Wong -I have only seen media reporting of that, because I have obviously been in estimates and-

Senator «MILNE» -We may pursue that.

Senator Wong-There are a range of views. There are different views in the community about whether what is proposed is, from one perspective, too generous, and, from another perspective, not generous enough. The government is simply going to have-in the context of the discussions, the consultation, the sort of detailed analysis we are undertaking-to make a decision that we believe best strikes the right balance.

Senator «MILNE»-I will be interested to know what the department's response to that report is, once you have had a chance to have a look at it, and I might pursue that in other fora. Finally, in terms of Australia's emissions trajectories in the various sectors: with energy and transport, what kinds of emissions reductions are you expecting from those sectors-in, say, the next decade-given that they are increasing rapidly?

Mr Comley-In a sense the question is almost twofold. Firstly: what is the trajectory that the government is going to set-and I set think that is a matter for the government by the end of the year. Secondly: to the extent that those emissions reductions are delivered through the CPRS-a cap-and-trade scheme-you can do estimates of where you think the abatement is likely to come, but you cannot be certain about that because it may turn out that abatement opportunities in some sectors are higher than you thought and in others less. So I think that, in aggregate, it is really the trajectory that will drive that.

The second question is a matter of where the abatement opportunities arise that we modelled in the Treasury modelling. Again, part of the reason that you do an emissions trading scheme is because you recognise you do not have the full information about where those emissions reductions will occur over time.

Senator Wong -It is a market mechanism, not a command economy approach!

Senator «MILNE» -I understand that. I also look at the Kyoto target, and you would have to say that without the land-use changes that occurred there is no way we would be meeting that target. Is that a fair assessment?

Dr Parkinson -There is no question that that is the case.

Senator «MILNE»-So, given the same scenario, we have got exactly the same scenario now as the business as usual approach in energy and transport in particular-

Senator Wong -Senator, we do not accept what you have just said, that it is a business as usual approach.

Senator «MILNE» -How is the current trajectory reflecting anything other than a business as usual approach?

Senator Wong -Sorry, I thought the assertion was that the government was taking a BAU approach to energy, for example.

Senator «MILNE»-No, what I am saying is that before an emissions trading system comes in I cannot see that there is a significant shift in the current emissions trajectory on energy and transport. So by business as usual I am referring to current circumstances, current behaviours. Are you saying you do not accept that?

Dr Parkinson -In the last Tracking to Kyoto-do you have the projections in front of you?-there was a significant reduction in the 2020 business as usual estimate.

Senator «MILNE» -Yes, but in which sectors?

Ms Thompson -In fact the government's emissions projection released in the Tracking to Kyoto document showed that there was a decrease in the business as usual line from stationary energy. That was in response to a number of factors but included the projection of the government's renewable energy target. The renewable energy target is estimated to generate 28.5 million tonnes of abatement in 2020. So I think the overall projection for 2020 was estimated at 120 per cent of 1990 levels compared to the previous projection, which showed 127 per cent. That was a reduction in emissions in 2020 of 38 megatonnes.

Mr Comley -And Tracking to Kyoto did not include any impact of CPRS given that the trajectory had not been set.

Senator «MILNE»-I will be very interested to see where these reductions are going to come in in the absence of significant changes on land use, because from where I sit the best opportunity to make a significant and deep cut by 2020 is through land use.

Dr Parkinson-If the emissions trading scheme has a trajectory that is below business as usual, you will get a reduction. If it is above business as usual, it is a pretty silly thing to have done; and if it is at business as usual, the carbon price implicitly is going to be zero. So you will know pretty quickly. Unless you are going to get a positive price, there is not a lot of point doing this, because you will not bring forward any of the technologies. It goes back to Senator Abetz's questions earlier and Senator Johnston's questions as well. Ultimately this is all about getting a price that is going to be sufficient to bridge the technology gaps over time.

Senator «MILNE»-That is quite right, but you can also bring in the mechanics of emissions trading without reducing emissions by starting with a low price. You would acknowledge that there is considerable pressure out there to come with just that, the mechanics of the system of no real change.

Dr Parkinson-It depends how you define ‘no real change'. Maybe my colleagues may have had a different experience, but nobody I have spoken to in business or elsewhere has been saying that emissions should be rising.

CHAIR-It is now close to 11 o'clock. I thank everyone. I thank the minister and the departmental people, my colleagues and Hansard. We will recommence at 9 am tomorrow.

Committee adjourned at 10.59 pm