Issue 44, October 2008

Too far, too fast: AiG

The country's most influential business lobby, the Australian Industry Group, has told the Rudd government that its member companies are "gravely concerned" it is moving too fast and too far ahead of the rest of the world on decarbonising the economy. "Until the world's major emitters also take action," it says, "there are significant risks for Australian trade-exposed industry."

The Ai Group, noting that electricity price will rise substantially "in the near term" under the government's proposed policies,  has called for the scheme to be delayed by a year, for more favourable treatment for trade-exposed business and for nuclear power to be considered as part of the Australian approach to abatement.

It adds that the scheme's design should give priority to ensuring the continuity of electricity supply in its early years, arguing that, if some generators face financial distress under emissions trading to the point where they under-allocate resources to essential maintenance, supply reliability will be put at risk.

Stop, wrong way, say retailers

Australia's retail sector, which was influential in the mid-1990s in persuading the Keating cabinet that a proposal by then-Environment Minister John Faulkner to introduce a carbon tax was a risk to supermarket prices, has told the Rudd government that it has major concerns about the emissions trading system Ross Garnaut has put forward.

The Australian Retailers Association, representing a $292 billion business sector employing 1.2 million people, has said in a submission responding to the government's green paper that "sacrificing the economy without the support of major emitting countries does not make sense."

ARA adds that it is "irresponsible" of the government to fail to provide accurate analysis of price impacts on "groceries for working families" before "forcing" the emissions trading legislation through Parliament.

The ARA's views echo the opinion of the Australian Food & Grocery Council, which has warned that the $70 billion food and grocery manufacturing sector could be under threat if the proposed trading scheme does not protect its competitiveness.

Sorry, wrong number

Climate Change Minister Penny Wong (and her speech writers) have dropped a multi-trillion dollar clanger.  Speaking to the Australian Industry Group in Canberra on 1 September, Wong put the cost of halving global emissions by mid-century at $US45 billion, citing the International Energy Agency.

The actual number from the IEA is $US45 trillion -- more than 60 times higher than the current giant American bank bail-out scheme that had the US Congress in a tizz through September.

The IEA says that just the R&D investment to underpin the huge infrastructure commitment will need to run at $US10 billion to $US100 billion over the next 15 years if the effort is to succeed.

As they say, a billion here and a billion there and soon you're talking real money!

$US6 trillion for APEC energy

Australia's Resources & Energy Minister, Martin Ferguson, says $US6 trillion will be needed to meet the projected energy demand from now to 2030 in the Asia-Pacific Economic Cooperation group nations.  

The 21-country group includes Australia, Canada, Japan, Indonesia, Russia, China and the United States.

Speaking to an APEC energy working group roundtable in Cairns, Ferguson told participants that delivering energy security in a sustainable way is the key to their economic future.

One of the key messages from global markets, he added, is that there is a link between constrained supply infrastructure and increases in the price of oil, gas, coal and uranium.

Old plant threatens security

Engineers Australia has told the Rudd government that electricity supply security issues arising from over-reliance on aged generation plant complicates the introduction of an emissions trading scheme.

In a submission responding to the carbon regime green paper, Engineers Australia argues that there has been "under-investment in Australia's generation capacity for some time" and that the supply system is now excessively reliant on relatively large, aging capacity.

"For some time now," the professional association says, "there have been confused signals to potential investors, notably from conflicting regulation between jurisdictions, in particular pricing regulations, government-sponsored risk reduction schemes, government ownership of generators (creating uncertainty about non-commercial decisions for private investors) and uncertainty about climate change policy (as well as) conflicting and confused climate change programs."

Tough for Tarong

While the investor-owned generators have been given stick by environmental activists over allegedly alarmist claims about the impact of emissions trading, the Queensland government-owned Tarong Energy has highlighted the sector's cause for concern. Its two coal-fired plants emit 13 million tonnes of carbon dioxide a year, CEO Helen Gluer has told the Department of Climate Change, and thus would be exposed to a cost of $260 million a year if the carbon charge was $20 per tonne -- and this would be more than twice the corporation's average annual profit over the past five years.

Economic loss, she adds, can occur in two ways for a coal-fired generator: it may be unable to pass through its carbon cost to customers while sustaining market share or it may be forced to reduce its market share and therefore total revenue in order to pass through the costs.

If compensation is well below the actual loss incurred, Gluer points out, asset value write-downs are almost certain and "the potential for financial impairment becomes very real, with ramifications for dealings with suppliers, financiers and trading counter-parties."

Meanwhile, government-owned Hydro Tasmania has told DCC that it believes a carbon price of about $80 per tonne will be needed to provide the current least-cost renewable energy technologies with a viable position in the power marketplace.

No ETS bite on transport emissions

Australia's largest oil refiner, Caltex, says the emissions trading arrangements proposed by the Rudd government in its green paper will do "very little" to cut the 115 million tonnes a year of greenhouse gases from use of petroleum products in its first three years -- but it will slug the firm's two refineries $90 million a year (at a charge of $40 per tonne of CO2) and put the domestic refining sector at risk of being run over by imports.

The impact of the ETS on vehicle users will be initially offset fully against the petroleum excise on the green paper's proposals.

Caltex says the government's proposed arrangements will see it become the largest purchaser of carbon permits in the country, having to acquire about 10 percent of the market because it will be required to buy permits cover customers' use of fuel and then pass on the costs at the pump.

The $90 million, it says, will be its residual cost for emissions from its refining operations.

The refiners are not included in the trade-exposed industries to receive a measure of free permits because they are not "emissions intensive" the proposed formula.

Caltex warns that national security of supply of petrol, diesel and jet fuel could be "seriously weakened" by the scheme in its present guise.

National efficiency drive

The Council of Australian Governments at its latest meeting in Perth -- hosted by newly-elected Liberal Premier Colin Barnett -- has agree to develop a national strategy for energy efficiency to accelerate pursuit of greenhouse gas abatement. 

CoAG aims to agree on "streamlined roles and responsibilities for energy efficiency policies and programs" by December and to finalise a strategy by next June.  An early target will be national legislation for appliance energy performance standards and labelling

The first ministers also agreed to expedite introduction of nationally-consistent regulation of carbon capture storage.

$3 million a day

The Queensland government-owned distribution business ENERGEX says that it is spending $3 million a day keeping the lights on the State's south-east. The corporation says it is investing $830 million in 2008-09 on upgrading the power network plus $340 million at least on maintaining and operating the system.

Part of the driver of expenditure is the growth of Brisbane's northern gateway area, where commercial and residential power demand is rising by more than twice the national average and ENERGEX is forecasting growth of more than five percent per year "for the foreseeable future." 

Overall, the corporation connected 40,000 new homes in its service area in the past year -- effectively one new connection every eight minutes.

While the nation's image of south-east Queensland is essentially hot and sweaty, it is the winter cold snaps that keep the supply system on the go -- ENERGEX says the region's peak winter electricity demand has risen by almost 22 percent in three years, well in excess of national trends.

ENERGEX says its current, regulator-approved capital expenditure program is worth $4 billion over five years.

The spending can only rise: more than a quarter of Australia's population growth over the next 25 years is expected to be located on the coast from Noosa to Coolangatta, pushing Greater Brisbane ahead of Melbourne as the country's largest city.  It was been estimated that this will require building 575,000 new homes in 20 years -- and connecting them to the electricity system.

Meanwhile, in Adelaide Lew Owens, chief executive of privatised distributor ETSA Utilities, has described the energy sector as operating in "an unprecedented period of complexity, change and uncertainty," in releasing a discussion paper on the future management of the South Australian network ahead of the firm's bid for regulatory capital spending approval for the period 2010 to 2015.

Owens says ETSA's challenges include the task of renewing ageing infrastructure, much of which was installed in the 1950s and 1960s.

$4.5 billion on new networks

Integral Energy, the second-largest government-owned power distribution business in New South Wales, is seeking regulatory approval to spend $4.5 billion on network extensions and upgrades over the next five years.

In a September statement after a failure of its system had cut power to populous Castle Hill in Sydney's outer north-west for six hours, Integral said it planned to spend $160 million in the Baulkham Hills shire alone to ensure reliability in an area where demand is projected to rise nine percent in three years.

The proposed $4.5 billion outlay follows Integral's budget of $2.9 billion for network development between 2005 and 2009 -- which the distributor claims has achieved a 25 percent improvement in system reliability.

Its chief executive, Vince Graham, says some of the expenditure is needed to replace "baby boomer" assets -- installed between the 1960s and the 1980s.

Under new national electricity market arrangements, eastern seaboard capital spending by the distributors require approval of the Australian Energy Regulator. 

LNG threat reinforced

Giant global energy company ExxonMobil has reinforced the warning by Australia's Woodside Petroleum that the Rudd government's proposals for emissions trading are a threat to more than $50 billion of domestic LNG developments currently under consideration.

In a submission to the government responding to its green paper on emissions trading, ExxonMobil says the scheme as proposed will ensure that both LNG projects and Australian petroleum refining face "significant disadvantage" against international competition.What is being offered to some parts of industry as alleviation, the submission adds, "perversely discriminates" against businesses in a competitive situation where their profit margins are driven down to low levels compared with revenue. The scheme disadvantages activities where revenues may be relatively high, based on substantial input costs, even though profitability may be relatively low.

"If the Australian LNG industry bears any cost associated with emissions trading above those borne by its (overseas) competitors," asserts ExxonMobil, "this has the potential to price (it) out of the growing markets of the Asia Pacific, which are particularly sensitive to price movements (because of) the intense level of international competition."

The company warns that the long-term nature of LNG contracts means that the proposed carbon scheme could exclude Australian projects from some markets "for the next few decades."

The scheme is a threat to the long-term viability of Australia's seven petroleum refineries, too, it says.

The LNG industry is pushing to be exempted from the emissions trading regime until overseas competitors face similar carbon cost burdens.
EIMs asking for more The Australian Industry Greenhouse Network has told the Rudd government that its green paper proposals for allocation of carbon permits to energy-intensive, trade-exposed industries is "unsubstantiated" and "arbitrary" and only half the level needed.

AIGN argues that 45 percent of permits should be allocated to the EIMs rather than the 20 percent proposed.

The lobby group dismisses as a "myth" arguments that higher allocations to industry will shift the cost burdens of emissions trading on to householders and other energy customers.  The whole point about EIMs, AIGN says, is that competition prevents them from increasing the cost of their products.  Under-compensating them and over-subsidising households, it adds, in fact adds to energy-intensive industry costs.

AIGN says the current proposals will result in reduced production by energy-intensive industry and deter new investment.

The Network is also demanding that the Rudd government abandon its current plan to considerably extend the mandatory renewable energy target.  Increased renewable capacity, it says, will crowd out efficient investment in generation.

AIGN says it recognises that 9,500 GWh of annual renewable production has been created under the existing MRET and another 3,500 GWh a year by State schemes. It proposes that the Rudd government ditch its plan to drive delivery of another 35,500 GWh a year by 2020 and increase the target to just 13,000 GWh -- and that the subsidy should be reduced annually by the emissions trading permit price.

Overlooked opportunity

Alstom, one of the world's largest energy equipment manufacturers, provider of about quarter of the current global generation capacity, says Australia is "somewhat overlooking" the opportunity to reduce power plant carbon emissions by improving the thermal efficiency of existing fossil-fuelled units. 

Replacing Australia's largest power station set at Bayswater in NSW with state-of-the-art ultra-supercritical plant of identical capacity, it says, would enable emissions savings of five million tonnes a year -- the equivalent of making one in 20 Australian households carbon neutral.

Upgrading open-cycle gas generation plants to the most modern combined cycle systems, technology currently commercially available, would also provide "real opportunities" to cut emissions. 

In a submission to the Rudd government, Alstom says efficiency developments could be encouraged by either "a robust price" for carbon emissions or regulation.

Looking to make big waves

Start-up clean-tech company Carnegie Corporation is talking big numbers in its bid to boost the image of ocean energy as a potential player in Australian electricity supply.

The Perth-based business, which has the southern hemisphere rights to operate projects based on a technology that carries high pressure seawater ashore to produce power and potable water,  says there is a resource in near-shore Australian waters less than 25 metres deep to provide more than 170,000 MW of generation capacity -- more than three times the total national system. 

The estimated wave power resource in deeper Australian waters, it claims, could power 500,000 MW.

Carnegie is operating a small test plant offshore Perth and is investigating potential projects near Albany, Western Australia, and offshore Tasmania.

It claims that the island state, bedevilled in recent years by the impact of drought on its hydro-electric generation system, could achieve 1,700 MW of commercially-viable ocean energy supply -- 68 percent of Tasmania's current power needs.


In trying to sell his emissions trading proposals to the only audience he has to convince -- the Rudd cabinet -- Ross Garnaut makes a point that will not be lost on other nations when the horse-trading gets under way at Copenhagen in 15 months time on a successor to the Kyoto treaty.

The targets he is proposing, Garnaut wheedles, are "much less stringent" 2020 goals than any of the developed countries and regions have modelled. They are designed to "protect Australia's position" by allowing for population growth.

Climate Change Minister Penny Wong, Australia's designated negotiator in global greenhouse talks, can expect to have that line thrown back at her more than a few times at Copenhagen.

Now that we have established the importance of protecting Australia's position in the global debate is it okay to drop the cant about being a selfless world leader on the greenhouse issue?  Especially, when an experienced negotiator like Brian Fisher, head of the Australian Bureau of Agricultural & Resource Economics for 18 years and part of the federal government's negotiating team for a dozen of them, believes that a new agreement is "decades away".

In his usual trenchant fashion, Fisher, now heading up consultancy Concept Economics, told a September forum for farmers organised by the National Bank, that is "absolutely nothing to be gained" by Australia going first in pursuing actual reductions in emissions from today's levels by 2020.

Australian-based trade-exposed industries will be "roasted on a spit" if the Rudd government pursues this agenda, Fisher said. "There is nothing to be gained. We are climate-takers, not climate-makers."

How the Rudd cabinet feels about imposing a major cost burden on the Australian economy during a period when it will be struggling to deal with the aftermath of the global credit fiasco and its predicted long-term impacts on trade has yet to be revealed -- but the submissions from the Australian Industry Group (see above) and Australian Retailers Association (also above) will surely cause ministers unblinkered by ideology and not in thrawl to opinion polls to engage in some furious introspection.

Speaking to the media after AiG exposed its submission, a group executive said it didn't want to be alarmist, "but, yes, there are substantial threats of job losses."

The government's preferred position, as set out in its green paper, the AiG warns "will leave many trade-exposed industries in an uncompetitive position."

The group sums up its position: the current policy proposals will damage domestic industry and employment without delivering commensurate environmental benefits.

This would have been daft in the world in which we apparently lived a year ago; it will be madness in the environment the feral financiers have bequeathed us.

The AiG wants the emissions trading approach recast to "address these threats more adequately," but it is hard to see the rationale for proceeding at all with carbon taxes until the UN climate change summit at Copenhagen in December next year has revealed who else will come along for the ride.

The list of industry sectors the AiG has consulted among its membership before giving Rudd and Wong a thumbs-down -- and that is what it is, no matter how diplomatically the message is expressed -- covers the heartland of Australian manufacturing: paper and paper products, glass, metals fabrication, food processing and appliances, plastics and chemicals, minerals processing and energy, as well as a wide range of service industries.

The wide scope for damage is illustrated by just one sector, iron and steel manufacturing,  pointing out that (1) Australia is an ideal location to make iron and steel because it is one of the few countries with abundant, high quality deposits of key raw materials, (2)  it employs 24,000 people across several hundred sites, paying $1.5 billion in wages, while  contributing $1.6 billion a year in exports, and servicing customers in other manufacturing areas, infrastructure, agriculture and building and construction -- and (3) if economic growth continues to drive demand for its products and local supply is constrained by carbon charges, the extra needs will be met by other countries without emissions trading schemes.

Throw in all iron and steel manufacturing, fabrication and casting activities, the sector adds, and it employs 91,000 people and generates about $29 billion in annual turnover.

 The Rudd government scheme, it warns, risks imposing substantial new costs that its main international rivals do not face -- and the government apparently doesn't appreciate its inability to reduce emissions in the short and medium term.

One of the many business submissions on the green paper to the government comments that there must be a "sweet spot" between a hard-line approach to greenhouse gas abatement and a weak scheme that reduces Australia's international standing.

This is no doubt true, but, after almost a year in office, how much evidence is there to demonstrate that the government is even heading in the right direction, let alone being close to hitting the "sweet spot."

All of which adds up to a compelling argument against going too far, too fast.

Keith Orchison
10 October 2008

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