The Australian Environment Business Network Carbon Leadership Forum - Future Directions

Speech to Australian Environment Business Network

Introduction

It gives me great pleasure to be at today's Australian Environment Business Network Carbon Leadership Forum.

I want to take this opportunity to talk through the Clean Energy Plan because it is an incredi-bly important economic reform that will define our future.
First, I want to talk about why the Gillard Government has chosen a market-based approach to drive the transition of the Australian economy to a low carbon future. Second, I want to talk in some depth about the four key elements of the Clean Energy Future package. Third, I will give some political context to this discussion.

Why use the market to drive this change?

We know that climate change is happening. We know that in Australia, we are contributing to climate change - we are the highest emitters of carbon dioxide per capita in the world. We know we have to lower our emissions. And though it does seem to change from day to day, we are fairly confident we have bi-partisan commitment to achieving an emissions reduction target of 5 per cent below 2000 levels by 2020.

The question we are still debating is what is the best way to lower our emissions?

It is not a simple question. It is a question that involves every part of our country and every part of our economy. And it's a question we've been dealing with for a long time now.

In 2007, the Howard government produced a comprehensive study into emissions trading - the Shergold Report. This report recommended a "cap and trade" solution to lowering Aus-tralia's emissions - a market based carbon pricing system.

More recently, Professor Ross Garnaut, with the help of the Australian Treasury, produced the longest time frame economic modelling of the Australian economy ever undertaken. Professor Garnaut's conclusion was the same as that of the Shergold Report - that the most efficient and effective way to reduce carbon emissions was through a carbon price applied through private markets.

A broad based carbon price creates incentives for businesses, throughout the economy to reduce emissions, and for all consumers to use energy more wisely.

The argument for a market based mechanism is based on the simple fact that Australians at work and in their lives generally, are far better placed to deliver an efficient transformation in the economy than any minister or bureaucrat.

Governments should not pick winners. Yet this is what the Opposition proposes to do, and at taxpayers' expense.

The Clean Energy Future plan

Based on that core principle of using the market, the Clean Energy Plan provides a coherent and comprehensive package to cut pollution, drive investment in new clean energy sources, support Australian families, and create the transformational change required if Australia is to meet the environmental and economic challenges of the coming century.

As foreshadowed, there are four key elements to the package:

introducing a carbon price;
promoting innovation and investment in renewable energy;
encouraging energy efficiency; and
creating opportunities in the land sector to cut pollution.

A carbon price

Obviously the element that is grabbing the headlines is putting a price on carbon. For the first time, the largest polluters will now pay a price for every tonne of pollution that they put into the atmosphere. This is the pricing signal that underpins the other three elements of the package.

Pricing carbon pollution encourages companies to innovate and invest in new cleaner sources of energy as well as creating the incentive to cut pollution. Companies, and coun-tries, that do this successfully who will be most competitive in the clean energy economies of the 21st century.

The price of carbon pollution will initially be fixed at $23 a tonne in 2012-13, to increase by 2.5% each year, before transitioning to a flexible market price under a "cap and trade" scheme in 2015-16.

Fixed price start

An important feature of this plan is that there will be a fixed price period for the first three years of operation.

A short fixed price period provides price certainty for businesses, giving them time to adapt and prepare for the fully market-based mechanism. It is a sensible and considered way to ensure an orderly transition to a more efficient low carbon economy.

It will motivate businesses to develop new systems for measuring and accounting for their emissions performance and "learn by doing".

The Carbon Pricing Mechanism will transition to flexible pricing on 1 July 2015.

An overall limit (or pollution cap) will be placed on annual greenhouse gas emissions from all covered sources of pollution. There will be no limits on individual sectors, firms or facilities. At least 13 months advance guidance on pollution caps will be given, allowing businesses time to prepare for the flexible price period, including putting in place appropriate hedging arrangements.

The pollution cap will be set each year. Pollution from covered sources will not be able to exceed the yearly limit unless the additional pollution is offset by eligible Carbon Farming Initiative units or eligible international units. I will be talking about Carbon Farming in just a moment.

During this stage, the price of a tonne of carbon pollution will be determined by the market. Again, with a view to ensuring a smooth transition, for the first three years of the flexible price stage, safety valves - a price ceiling and price floor - will be built into the system to avoid price spikes or plunges.

The price ceiling will be set at $20 above the expected international price in 2015-16 and will rise in real terms at 5 per cent each year. The price floor will be set at $15 in the first flexible price year and will rise in real terms at 4 per cent per year.

The role of the price ceiling and price floor beyond 3 years will be reviewed before the end of their 3 year period.

As you will appreciate, providing certainty to business is one of the key design features of the Clean Energy Plan. The legislation will specify default cap setting arrangements to ensure that the Carbon Pricing Mechanism continues to operate in the event that one or both Houses of Parliament disallow the regulations.

Stability and continuity through new institutions

To ensure that Australia progressively reduces carbon pollution into the future, the Govern-ment will establish two new institutions.

Highly professional, well respected, a-political institutions overseeing the transition to a clean energy future will provide stability and continuity.

A new independent Climate Change Authority chaired by Mr Bernie Fraser, former Governor of the Reserve Bank, will be established to advise on setting pollution caps and progress towards meeting targets. The Climate Change Authority will also undertake reviews of the carbon pricing mechanism.
A new Clean Energy Regulator will administer the carbon pricing mechanism.

Although the Government will retain final authority for the limits on pollution, these institutions will provide the bedrock of rigorous analysis and guidance on which effective policy development and implementation will be built.

Price impacts and Household Support

Modelling done by the Australian Treasury, predicts that employment will continue to grow after a carbon price mechanism is introduced. By 2020, national employment is projected to increase by 1.6 million jobs. Reducing our carbon pollution in this way will not diminish our economic strength and competitiveness.

The modelling also shows that the impact on the cost of living is quite modest. The Govern-ment will ensure households are provided with the support they need to transition to a low carbon future. Under the clean energy future package 9 in 10 households will receive some combination of tax cuts and increased payments to help them with cost of living impacts.

The Government will also increase pensions, family payments and income support payments by an amount equivalent to a 1.7 per cent increase in the maximum annual rate of the relevant payment.

Some people have posed the question of why we are compensating households and whether that will shield households from the pricing signal, and therefore diminish the effect of the carbon price.

There is a sound policy reason for compensating households. Although households have some control over how much pollution they generate - and I will talk about energy efficiency a little later - it is really industry that is in the best position to change Australia's emissions. Specifically, the design of the Clean Energy Plan is aimed at the heaviest emitters, about 500 in total, who can modify how they do business in order to limit their carbon pollution.

Industry support

Jobs and competitiveness are critical to Australia's future. The Government will provide considerable industry assistance to those sectors of the economy needing support as the carbon price is implemented.

A Jobs and Competitiveness Program will allocate free permits to emissions intensive, trade exposed businesses. Initially 94.5 per cent of permits will be free for highly emis-sions intensive activities such as aluminium, steel and cement and 66 per cent will be free for moderately emissions intensive activities such as tissue paper, ethanol and glass containers.

This assistance will be worth around $9.2 billion over the first three years of the carbon pric-ing mechanism.

Steel will get focused support through funding to eligible steel manufacturing businesses to support investment, innovation and productivity. The Steel Transformation Plan will provide assistance of $300 million over five years from 2012-13.

Manufacturing businesses generally are facing a number of competitive pressures including high exchange rates and high raw material input costs.

Transitional assistance for manufacturers will help businesses to reduce their energy consumption and carbon pollution and transition to the new clean energy economy while remaining competitive.

The Government will also roll out a $1.2 billion Clean Technology Program consisting of three streams:

The $800 million Clean Technology Investment Program will assist manufacturing busi-nesses invest in energy efficient capital equipment and low emissions technologies, proc-esses and products.

The $200 million Clean Technology Food and Foundries Investment Program will provide food and beverage processors, metal forgers and foundries opportunities to invest in energy efficient capital equipment and low emissions technologies, processes and products.

And the $200 million Clean Technology Innovation Program will support research, develop-ment and commercialisation of clean technology products, processes and services in all in-dustry sectors.

These three programs require co-contributions from industry. Together will leverage around $3 of investment from industry for every $1 of support from the Government.

Innovation and investment in renewable energy

Supporting renewable energy and encouraging the development of mature renewable energy technologies and industries is the second element of the government's clean energy future plan.

Australia has abundant sources of renewable energy. By finding better ways to produce en-ergy from existing sources and by tapping in to new energy sources, Australia will be able to achieve substantial carbon pollution reductions.

Under the Renewable Energy Target, the government remains committed to achieving 20 per cent of Australia's electricity supply coming from renewable sources by 2020.

To further promote a clean energy future and help drive the necessary investment in renew-ables, a new $10 billion Clean Energy Finance Corporation will be established to drive innovation through commercial investment in clean energy through loans, loan guarantees and equity investments.

And a new Australian Renewable Energy Agency will administer $3.2 billion in Government support for research and development, demonstration and commercialisation of renewable energy.

Together with the carbon price, the Renewable Energy Target is estimated to drive an un-precedented $20 billion of investment renewable energy by 2020.

Energy efficiency

The third element of a clean energy future will be creating a more energy efficient economy. Increased energy efficiency assists in lowering our carbon pollution, improving our energy security, and helping households and businesses cope with rising energy prices.

The Australian Prime Minister's Task Group on Energy Efficiency reported last year that:

‘Energy Efficiency is Australia's untapped energy resource - a means to improve the productivity of the economy as well as an important element in moving towards a pros-perous low-carbon future.'

In line with the Task Group's recommendations the Government will look at the costs and benefits of a national energy saving initiative that would replace existing state schemes. Similar schemes already operate in New South Wales and Victoria - these require energy retailers to help households and business customers find and implement energy savings.

Small and medium sized businesses can also benefit from improved energy efficiency. Over the next few years, up to $40 million in grant funding will be available to peak bodies, such as Chambers of Commerce, to help them develop and deliver tailored information to small and medium businesses on how to start saving money on electricity bills.

The Government also recognises that another facet of improving Australia's energy efficiency is local action. The existing Low Carbon Communities program will be significantly expanded to promote energy efficiency at a local level and among low income households. Funding for the program will be increased from $80 million to $330 million. $200 million in grant funding will help local governments and community organisations to undertake energy efficiency upgrades to buildings, facilities and street lights. The remaining $130 million will assist low-income households reduce energy costs to respond to the impacts of the carbon price.

Creating opportunities in the land sector to cut pollution

The fourth element of securing a clean energy future will create economic opportunities for farmers and land managers who reduce pollution or store carbon in the landscape.

Agriculture, land clearing and forestry create around 18 per cent of Australia's carbon pollu-tion. Although agriculture is not covered under the carbon pricing mechanism, it is a critical component of the strategy to transition to a low carbon future.

As part of the Clean Energy Future Plan, the Government will invest $1.7 billion in a new Biodiversity Fund and other land sector measures. This funding will deliver a cohesive suite of measures to support action on the land to reduce emissions, store carbon, preserve and restore biodiversity and improve on farm productivity.

Under the Carbon Farming Initiative landholders who store carbon, such as in trees or the soil, and those who reduce emissions from farming practices, will create credits for each tonne of carbon pollution stored or reduced. These credits will be able to be sold onto domestic and international carbon markets, providing a significant revenue stream to regional and rural Australia.

The Biodiversity Fund has close to $1 billion to work alongside the Carbon Farming Initiative by creating stronger incentives for land holders to establish new bio diverse carbon stores, to protect existing eco systems and to stop the spread of invasive species across the land-scape.

Conclusion

Before I conclude I would like to comment on the political context.

We have a difficult political environment in Australia - a minority Labor Government, an Op-position fixated on saying "No" to just about every proposal, and the Greens Party holding the balance of power in the Senate.

This is a difficult position for any Government to find itself, particularly as we embark on the most significant economic reform since the 1980's. But it is entirely manageable, as we have shown since the Government was formed ten months ago. We have passed more than 150 pieces of legislation through the House of Representatives.

And, in contrast to the circumstances just two years ago at which time we faced a Senate hostile to a price on carbon pollution, we have now secured the agreement of key Independ-ents and the Greens Party to legislating a credible and fair approach to a clean energy future.

An exposure draft of the legislation was released yesterday and will be introduced to Parlia-ment in late September. It will be debated and passed by the end of the year.

Moving to a clean energy future is nothing to be feared, rather it presents an opportunity for all Australians.

The government's clean energy future package is a comprehensive, coherent, evidence based approach to reducing the risks of climate change.

No country has expended more effort debating and analysing how we respond to the climate problem.

Doing nothing to tackle climate change is a choice we cannot afford. The choice of doing nothing will leave our country exposed to a potential torrent of environmental and economic change that will be beyond our control.

Our Government has made a choice for action, for Australia to do its fair share in reducing emissions, and for Australia to join the rest of the world in what is, after all, a global problem.

Thank you.