The main game in emission policy awaits the Garnaut report and perhaps the "strategic review" of the Government's climate change policies being conducted by Citigroup consultant Roger Wilkins. Timetables are being refined but by the end of the year the Government will have the advice it does not want to hear -- that achieving marked reductions in carbon-dioxide and other greenhouse gases will be possible only at horrendous economic costs.
A tax or an emission allocation that becomes tradeable is the means favoured to reduce the release into the atmosphere of carbon dioxide and other gases said to be contributing to global warming. Muddled thinking on the part of the Government, which also wants to use emission reduction policy as a means of stimulating new industries, is complicating the matter.
On top of imposing a price on emissions, the Rudd Government has a 20% renewable energy target by 2020. The Productivity Commission (PC), speaking for a unanimous view among economic literates, has shown that the various renewable schemes will not add one iota to emission reductions if they accompany a tax or tradeable rights regime.
The PC also demonstrated that renewable schemes on top of a tax or tradeable rights policy will ensure that any reduction path chosen would be far more costly than it need be.
In a series of meetings, Climate Change Minister Penny Wong has clashed with energy industry business leaders in her presentation of the Government's policies. It was not the 20% renewable energy target by 2020 that worried the business leaders. A 20% renewable target, if confined to electricity, would impose a cost on the economy of $15 billion a year, close to doubling the current defence budget. Massively disruptive and needlessly costly though this would be, it is doable.
Of far greater concern are the implications of a tax or tradeable rights scheme aimed at bringing an abatement of carbon-dioxide emissions. While a tax and tradeable right have different features, the Government is telegraphing that it will not be allocating emission rights to companies for free as has been the case in the European Union. A policy of auctioning such rights would require companies to make up-front purchases of rights, a prospect that is focusing the minds of industry.
For a 1000 MW brown coal plant (and Victoria has 6500 MW) the cost of emission purchases in net present value terms would surpass the plant value at a tax or price equivalent of $20 a tonne of carbon dioxide. Plants using black coal would be similarly placed at a price of under $30 a tonne.
And as prices of at least $100 a tonne are foreshadowed with the sort of emission reductions being considered, business leaders meeting with Senator Wong were seeing the value of their capital totally eliminated. They were, understandably, irked.
For a business manager, the prospect of receiving a free allocation of emissions would, on the face of things, allow profitable market exit. If the price were $30 a tonne of carbon dioxide, a forward sale of rights to a 1000 MW brown coal generator would be worth in excess of $2 billion -- significantly more than its present worth as a productive facility.
There is a theoretical possibility of carbon sequestration providing a way forward for coal-derived electricity but this, if feasible, is likely to treble electricity costs. The other alternative is that the brown coal and black coal power stations will have to be closed down, raising electricity prices and devastating the economies of the Latrobe and Hunter valleys.
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