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Rudd’s carbon flop


8:12 AM, 8 Dec 2008
Giles Parkinson

It’s just a week away from the release of the Rudd government’s white paper on carbon trading and its interim targets on carbon reduction, and there is growing speculation the path of least political resistance will be chosen, along with a modest reduction target of between 5 and 15 per cent.

Let’s hope not. For a start, a soft target would mean the government abandoning any pretence that it was a ‘leader’ on the issue of tackling climate change. Instead, it will suffer the ignominy of being the first developed country to run up the white flag as the world embarks on the tortuous negotiations for a successor to the Kyoto Protocol, where the UN is pushing for cuts of between 25 and 40 per cent.

In any case, it’s difficult to see how a compromise target of 10 per cent – give or take 5 per cent – would please anyone or satisfy any particular ambition. It fails to recognise the opportunities and the economies of energy efficiency and the potential of new technologies. It fails the science – and you’d have to wonder why the government would be doing any of this if it didn’t believe in it – and it fails to satisfy the business craving for regulatory certainty.

For nearly a decade, investment in energy infrastructure in this country has been virtually paralysed by the federal government’s weak stance on climate change policy and an inability to plot a likely carbon price and build that into investment models.

Now, more than ever – thanks to the financial crisis and the recession it will inevitably cause – the country needs a strong carbon price signal that can provide a fillip to major investment. And it needs it soon, not in five or 10 years time.

There is a growing acceptance among business of all persuasions that strong targets mean strong policy. And this would be good. Soft targets might result in a mere patchwork of arrangements across the globe. Ambitious targets, apart from actually seeking to address the issue at hand, is more likely to generate robust policies, and the development of international sectoral agreements that could reduce the anxiety of those industries fearing they will be disadvantaged.

The focus here is very much on investment and on jobs. ‘Business’ – as it is often lazily described in the mainstream media – is said to want the government to go soft to protect trade exposed industries and jobs. But on closer analysis, how much of ‘business’ really wants this?

Business – as classified by many of our leading banks, most leading superannuation funds, the property council, leading economists, renewable energy companies and innovative companies across a host of different sectors, as well as the trade union movement – would actually like the government to go harder.

A strong target, they argue, would provide the financial incentives for the investment that could help the country capture a significant share of the projected multi-trillion dollar (now there’s a big number) clean energy industry that is expected to emerge over the next few decades.

This is as true for the fossil fuel industry as it is for renewable energy. Last week, the Monash Energy venture, a $5 billion project sponsored by Royal Dutch Shell and Anglo American to convert coal from Victoria’s Latrobe valley into cleaner liquid fuel was suspended because of rising costs.

Projects to convert coal into clean fuel are predicted to be as or even more expensive than renewable technologies that are already currently available. Coal is in as much need of a strong carbon price or direct financial assistance to protect its future as solar thermal, marine power, geothermal or even algae. A capped or artificially low carbon price will not attract investment or provide incentive. International money chasing clean tech investments and opportunities will simply look for a home elsewhere.

And the union movement is not so sure it’s future is beholden to the health of what can loosely termed as the ‘fossil fuel’ industries. Indeed, the ACTU has become a strong proponent of investment in clean and sustainable technologies, and late last month was a party to a communiqué that suggested half a million jobs could be created through such measures as building retrofitting, sustainable infrastructure and green jobs policies.

The government, in making its final deliberations on an emissions target and the final design of the carbon trading scheme, will be mindful that many of the arguments, and threats, of the interests that have sought to protect their high ground have been weak.

For instance, the logic behind Woodside’s argument that its $30 billion LNG development in the Browse basin is under threat from a carbon price was severely challenged last month by analysts at JP Morgan, and last week analysts at Citi suggested a carbon price of $40/tonne would have minimal impact on the company’s LNG projects, and just 0.3 per cent on its internal rate of return if the Browse project was included.

The lead and zinc miner Nyrstar made a big noise about the possibility of closing its lead and zinc smelters and taking capacity elsewhere. The financial health of those operations is indeed under threat, but not from a carbon price. The price of those base metals has collapsed due to a slump in demand from customers such as steel manufacturers.

But as it conceded the following week, Nyrstar won’t be switching capacity to its operations in Europe, because electricity costs there are already much more expensive and the company says it faces a similar ETS scheme post-2012. And it won’t be moving it to China either, because it’s about to sell those operations because they can’t make any money.

‘Carbon leakage’ is indeed likely to occur, but most probably from sunrise industries such as renewable technology groups and other innovators who will take their business to countries with stronger targets and more focused assistance.

Perhaps what metals producers and new technologies need most is some sort of ‘New Deal’ for local, regional and global business – one with the ambitious targets and focused policy that could trigger a wave of investment. The world needs it now, in more ways than one. 

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