Follow the EU and US on a carbon price or we will just export jobs

Seamus French

(First published in The Australian on 4 April 2011)

There is one simple fact that highlights the minerals sector's concerns with an Australian carbon pricing scheme based, as widely expected, on the carbon pollution reduction scheme.

A new carbon tax, if set at $25 a tonne, will raise more tax from liable Australian companies in its first three months than the European Union's emissions trading scheme has generated since its launch more than six years ago.

Think about that. The proposed carbon pricing scheme in the country that accounts for 1.4 per cent of global emissions is going to generate more tax revenue in three months than the scheme in the European trading bloc that accounts for 14 per cent of global emissions has generated in more than six years.

With a population of 500 million and an economy 16 times larger than Australia's, the EU has been able to create a functioning carbon market with a tiny fraction of the tax burden.

The EU is the world's largest exporter. After 2013, when the EU begins to sell (that is, tax) some permits, firms that produce 73 per cent of European merchandise exports will be granted up to 100 per cent of their permit liability free because they are "at risk of carbon leakage".

By contrast, just 16 per cent to 19 per cent of Australian goods exports come from sectors that are classified as "emissions intensive and trade exposed" under the CPRS model. In other words, most Australian exports will be paying the highest carbon costs in the world but without any ability to pass on those costs.

The impact on jobs will be severe. Let me use an example from my company, Anglo American. We have planned investments of $4 billion to grow our business in Australia. Based on our conservative modelling, a carbon pricing scheme as envisaged by the government would halve the value of these investments. In a global company such as Anglo American, Australian projects would become less attractive, putting at risk more than 3000 jobs in regional Queensland and NSW.

The other carbon pricing scheme most frequently cited by the Gillard government as evidence of global action is the Regional Greenhouse Gas Initiative, which applies to power plants in 10 northeastern states of the US. These states, including New York, Massachusetts and New Jersey, account for almost 20 per cent of the US economy, about three times the size of the Australian economy, and about 4 per cent of global emissions. The present carbon price in this scheme is just $1.89. How much tax has been raised by this scheme during the two years of its operation? About $790 million, according to a program review published a few weeks ago. In short, the proposed Australian carbon tax will raise more revenue in its first month (July next year) than the US regional scheme has generated since it started in January 2009. Yet legislators in New Hampshire are threatening to withdraw from the scheme, citing adverse effects on their local economy.

Why haven't the world's largest carbon emitters sought to maximise taxation revenues from their carbon pricing schemes?

Because they recognise the true purpose of such a scheme is to send a signal to emitters that carbon emissions will create a long-term liability and that they must make a transition in the longer term to a low-carbon economy; because they recognise such a transition can be achieved only by development of abatement technology in a 10 to 20-year timeframe; because they recognise such technology will require investment funding by industry, funding that should not be diverted to taxation revenue.

So what lessons can we learn from the EU and US to help design a carbon pricing scheme?

First, a carbon price should be introduced through phased-in auctioning or at a sufficiently low level for Australia to make the transition to a low-carbon economy in the long term without destroying jobs in the short term; this is the only credible and, as we have seen, proven solution to the "devilish dilemma" of climate change.

Second, don't give our competitors an unfair advantage. Consider the EU's approach to shielding trade-exposed industries. The EU has an emissions intensity test and a trade exposure test. Industries need to meet only one of those to qualify for free emissions permits. Under the CPRS, however, if an industry doesn't meet the emission intensity test it is exposed to the full cost of a carbon price even if firms have no capacity to pass the costs on in fiercely competitive global markets. Coal exporters met the CPRS test but were still arbitrarily excluded from free permit allocations.

Third, let's resist the temptation of using an environmental initiative to raise taxation revenue. A low fixed starting carbon price or a phased-in approach means lower cost impacts on Australian consumers, reduced need to compensate, safer export sector jobs and a greater opportunity for industry to invest in reducing emissions. A carbon pricing scheme focused on maximising taxation revenue rather than incentivising abatement technology will do little to change global temperatures by 2020. As Tim Flannery noted: "If the world as a whole cut all emissions tomorrow, the average temperature of the planet's not going to drop for several hundred years, perhaps over 1000 years."

But such a scheme will cause irreparable damage to our resources-dependent economy, our global competitiveness and, most importantly, to job creation in regional Australia.