Regulations to reduce carbon emissions in Australia would massively increase business costs and seriously disrupt electricity supplies. They would also ruin the nation's major electricity generation businesses.
Australia, especially Victoria, has the world's most competitive electricity supply industry, thanks to deregulation and privatisation reforms.
Since they were sold, Victoria's power stations have lowered costs, including by shedding four fifths of their previous workforces and reducing maintenance downtime. Households and industry have benefited with cheap power prices.
Canberra's Carbon Pollution Reduction Scheme (CPRS), imposes an increasingly stringent annual cap on permitted emissions. Its goal is to bring carbon emissions down to 20 per cent of today's levels. The cap on emissions has a fall-back tax at $57 per tonne of carbon dioxide, an imposition equivalent to 1½ times Victoria's current market price for electricity.
The CPRS has two painful implications.
The first is that it eradicates coal based electricity. And yet we have no source of power to replace coal. Gas, though lighter in its carbon emissions, cannot offer a long term solution in the context of the planned reduction levels and is more expensive. Nuclear is carbon free but has been demonised out of consideration and anyway is twice the cost of coal based electricity. The various renewable options would bring unreliability and require massive permanent subsidies.
The second implication is that the targeted carbon reductions under the CPRS very quickly bankrupt Victoria's electricity generation industry.
Canberra's carbon tax proposal leaves Australian generation businesses far more vulnerable than their counterparts in the US and Europe. That's because Penny Wong's plans allocate only 4 per cent of total allowable emissions free to existing electricity generation businesses. The US bill provides 35 per cent of total emissions free to generators.
Because brown coal has more emissions than black coal it is the first casualty of the CPRS carbon tax. According to confidential information prepared by Ernst and Young, the present proposals would reduce the worth of Victoria's Latrobe Valley generators from their current $7.9 billion to $2 billion.
That Sword of Damocles hanging over generators' heads creates difficulties in their loan refinancing, even without the global financial meltdown. Moreover, the higher risks of looming bankruptcy mean the businesses will avoid throwing good money after bad and stint on maintenance. This foreshadows earlier supply problems than Canberra bargained for.
The generation businesses are looking for more free carbon credits. A trebling of currently proposed free credits would preserve their balance sheets. But, though this would silence shareholder outrage, it would do nothing to ensure future electricity supplies.
Canberra cannot meet its goals on carbon emission reductions, unless it forces the closure of coal based electricity generation. This supplies 80 per cent of Australia's electricity.
Governments hope that forcing up electricity prices will bring a dramatic reduction in energy usage that leave us little worse off and that we will also see sudden stunning technological breakthroughs. These pious wishes are in contrast to the certainty that carbon emission restraint policies will destroy the magnificent electricity supply industry that has been developed in Victoria and Australia generally.
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