Nick Xenophon (SA, Independent) Share this | Hansard source

I indicate my support for the Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 and related bills and I want to outline the reasons. As I previously said, I believe we need to take meaningful and appropriate action to address the issue from both an environmental and an economic point of view. In respect of climate change, the cost of not doing so in the next few years, effectively, will be much greater for generations to come. The debates around how to deal with the need to both reduce emissions and support our economy have been long and vexed. I am concerned that even now we do not have a detailed policy in place to achieve the goals we must meet. Back in 2009, then opposition leader Malcolm Turnbull and I jointly commissioned Frontier Economics to model and formulate an alternative, intensity based emissions trading scheme. The Frontier scheme could have delivered deeper cuts to emissions at a lower cost than the CPRS and the carbon tax, because it avoided the enormous economic cost associated with the revenue churn of the former government's scheme.

Frontier's modelling estimated that for every dollar invested in abatement there is a churn of $5 to $6 through the economy. An intensity based scheme, by contrast, sets emissions targets for industries, particularly the stationary energy sector, and avoids that level of churn and with it distortions and loss of economic activity. It also avoids unnecessary distortions in energy pricing in the way the merit order works with respect to that—and that is also important for economic growth and getting the balance right to find the most efficient way to reduce emissions.

Frontier Economics also calculated that it would be relatively simple to amend the CPRS legislation at the time to make it one-third cheaper and twice as effective by introducing intensity based elements. I moved a number of amendments to that effect, rejected by both the then government and the then opposition.

The warnings given at the time by Frontier of the potential for a budget black hole in the former government's approach were dismissed by the then government—Senator Wong, I think, called it 'a mongrel of a scheme'. Well, for a mongrel, it had a lot of bite! Frontier warned the Rudd government back in 2009 of the budgetary black hole created by the decline in revenues from permit sales. The government ignored this and the black hole turned out to be about $5 billion a year. They also warned that one group that would see the upside of the abolition of the price floor announced in September 2012 would be the private brown coal generators in Victoria and South Australia.

Danny Price, the Managing Director of Frontier Economics, made the point back then that the former government handed the generators billions of dollars of cash compensation and permits in the high-fixed-price period, based on the Treasury modelling of carbon prices across many years, not just the fixed-price period. These figures were unrealistically high. Ironically, as Danny Price pointed out in an opinion piece in The Australian in September 2012:

Of course, one group that will see only upside from the abolition of the price floor is the private brown coal generators in Victoria and South Australia. The government handed them billions of dollars of cash compensation and permits in the high fixed-price period, based on the Treasury modelling of carbon prices across many years, not just the fixed price period, that now look unrealistically high. Ironically, this makes the dirty brown coal generators more valuable than if the government had never priced carbon and compensated for it.

Danny Price went on to say:

It also makes the dirty brown coal generators relatively more valuable than the cleaner, government-owned black coal power generators in NSW and Queensland that have not been compensated.

Something Treasury has also ignored over the past few years in the context of carbon policy, which must be tackled now, is a tax interaction effect associated with different mechanisms for reducing emissions. This tax interaction effect should not be ignored from a public policy point of view—or from a sheer economics point of view. It actually matters.

Frontier's proposed amendments to the CPRS would have substantially reduced the economic distortions that the proposed CPRS, or the current carbon tax, would create, as a direct result of savings due to a reduction in inefficiencies of the tax interaction effect of current policies. As Frontier put it:

… pre-existing taxes already create economic distortions that discourage investment, consumption and labour. When a carbon price/tax is imposed in addition to these existing taxes, the resulting economic costs are multiplicative, not additive.

That means that the revenue churn of the CPRS and the carbon tax has a disproportionate drag on the economy, as well as leading to much higher abatement costs.

I am also acutely aware that the Gillard government had, in effect, a reverse mandate when it came to the carbon tax, in the sense that the former Prime Minister promised not to introduce a price on carbon on the eve of the 2010 election. That, combined with the flawed design of that scheme and the associated budget black hole, made it impossible for me to support the former government's carbon tax and emissions trading scheme. But, in the context of this vote to repeal the carbon tax, there ought to be, at the very least, a very firm personal commitment from the Prime Minister to establish an alternative scheme which at minimum will achieve the bipartisan goal of a five per cent reduction in emissions on 2000 levels by 2020.

That leads to the next question of how to best replace the carbon tax with a credible alternative scheme for emissions reductions. I have said before that I was shocked to hear during the Senate inquiry into these bills on 26 November last year that Treasury has not undertaken—or had not, at that stage—any modelling to determine whether it is more effective to spend money to reduce high-emissions activity or to spend money to increase cleaner generation activity. This is a significant gap in policymaking and I strongly believe the government should commission such modelling as a matter of priority. In fact, a question I would like to give on notice to the government, Mr Acting Deputy President, is: have they actually undertaken this? I think it is something the government ought to address when they are summing up this debate—because they know, Treasury knows, that whether you spend money on reducing high-emissions activity or on increasing cleaner generation activity does make a difference to what is more cost-effective and the price effects of that.

A carbon reduction policy can only achieve its objectives through investment because, in order to transform the economy to a lower-polluting one, you need to change how energy is produced and used. Therefore, we need to know where to direct investment for the best outcomes. The business environment needs to be conducive for that investment to flourish; otherwise, the taxpayer has to pay for it through subsidies or the consumer through higher power prices—and, inevitably, they are effectively one and the same.

The former government fatally damaged its carbon policy by its ill-considered, and I suggest cavalier, changing of the rules. Removing the carbon price floor and then bringing forward the ETS by a year may have seemed like reasonable and popular policy shifts, but it caused great uncertainty for investors and highlighted the lack of robustness in the scheme. I have no doubt that the changes in government policy have led to major investors either walking away from the Australian energy market or deferring additional investment.

I think the second Rudd Government's proposal just before the election, to link the carbon price to the European scheme by next year, was the final nail in the carbon tax coffin. A European price of about $6 a tonne would be a nuisance tax that would do nothing to drive investment in cleaner energy in Australia. This is especially true where the European price may have been artificially inflated and, in any case, may have little stability—hardly attractive for investors. But the energy sector here well knows that the European scheme has been subject to significant political volatility, leading to price uncertainty. Here in Australia, that would create investment uncertainty and risk. That is why I have to date supported retaining the Clean Energy Finance Corporation.

The elegant simplicity of the Frontier scheme would have been that instead of charging for all emissions it would reward cleaner forms of energy and technology, reducing their cost rather than increasing them, largely avoiding a revenue churn and the associated economic distortions. Also, rather than government acting as both a conflicted tax collector and benefactor, trade would occur between market participants. Despite its flaws, at least Direct Action could be modified to be more efficient and it does not involve the churn of the former government's approach. I believe Direction Action can be modified to take elements of the Frontier approach, to deliver a more cost-effective environmental outcome than the current carbon-pricing arrangements. As I understand it, the Direct Action approach involves a tender process—I say 'as I understand it' because a discussion paper released relatively recently on Direct Action seems to lack sufficient detail, although it appears the government is prepared to show some flexibility in its approach.

Australian state governments conduct tenders for billions of dollars of services in the economy each year. Some of these tenders are flawed and sometimes the services delivered are poor. However, a robustly designed tender process can still be a credible approach to obtain services at a competitive price. Under Direct Action there is only one buyer of the services—the government.

There is a direct cost to the taxpayers and the government has given itself a lot of wriggle room in setting out what the likely costs over the next four years will be. Environment Minister Greg Hunt told Lateline's Emma Alberici that the emissions reduction target is $2.5 billion over the next four years, in terms of money to be spent, but the coalition's policy documents three years ago said that Direct Action obligations would cost $10.5 billion over 10 years. The big advantage of Direct Action that I see, subject to modifications, is that the government spends only a dollar for every dollar that needs to be invested in reducing emissions—not a $5 tax for every dollar, as occurs under current arrangement. This means Direct Action will largely avoid the tax interaction effect, and in this sense is cheaper than what we currently have in terms of reducing emissions.

The other significant benefit of Direct Action is that it will appeal to investors and that they will have a contract with the government to supply abatement. Investors understand contracts and so does the government. It is a very secure and well understood instrument in business and this level of security will attract the investment needed to achieve our abatement targets.

I note Minister Hunt has said that Direct Action could be implemented by regulation, rather than through legislation, to avoid a hostile Senate. I think that is very problematic because of the potential for any regulations to be disallowed by the Senate, throwing the scheme into disarray and with it any investor certainty with respect to abatement.

I still regard the Frontier scheme as much more targeted in terms of emissions abatement, but I think there is scope for what appears to be a malleable Direct Action approach to incorporate its key elements. It is worth noting that the Frontier scheme unveiled by Malcolm Turnbull and myself, in mid-2009, actually had a 10 per cent emissions reduction target, not five per cent. That is because some of the cost efficiencies from the Frontier scheme were spent on achieving a tougher target. Given that Direct Action has a similar quality, I will be urging the government to allocate some of the efficiency savings from Direct Action to achieving a more ambitious but affordable emissions reduction targets.

I believe the government needs to reconsider its approach to excluding overseas permits from Direct Action. This needs to be put on the agenda. There are arguments to consider the competitive neutrality of buying permits overseas, as long as they are robustly assessed and the local economic benefits of abatement are taken into account.

That brings me to the next related question of how the Direct Action scheme and the renewable energy target may interact. I think it is important that, while all the carbon policy balls are up in the air, the government needs to look at the interaction between the RET and Direct Action. There is an opportunity here to have a coherent environmental policy as well as having a more ambitious reduction target.

I note the May 2011 report from the Productivity Commission, Carbon emission policies in key economies, said that the RET was an expensive form of abatement. Whilst I query whether the commission took too narrow an approach in its analysis, I think it would be worthwhile to review the RET in at least one regard, as it has been reviewed in other jurisdictions—that is, the existing framework fails to weight renewable energy certificates on the basis of whether the renewable energy is more reliable as a baseload source. Baseload geothermal, solar thermal and tidal power are at a distinct disadvantage in the current scheme, compared with wind energy, because of this lack of weighting. If you want to replace coal-fired power stations you need to have a reliable form of baseload energy. It is reasonable to say that wind energy investment has choked out investment in baseload renewables, which is something that is of particular concern in my home state of South Australia as it has enormous potential with its geothermal reserves in the north of the state.

Debate adjourned.