Report shows the wasteful reality of Rudd’s climate change scheme: Kohler

Melbourne’s Grattan Institute has made a fine contribution to Australia’s greenhouse gas debate with a report, released this morning, that looks into how much emissions trading would actually cost companies and industries.

Or at least it would be a fine contribution if there were still a debate going on. There are many national debates in Australia in 2010 – health, population, asylum seekers, tax, super, who’ll win Masterchef – but for the time being carbon trading is not among them.

No doubt the push for a price on carbon through emissions trading will return one day, but for the moment it has run out of greenhouse gas. Poor New Zealand, still due to start its ETS on July 1, is feeling a bit silly – a shag on a rock.

In Australia Kevin Rudd’s CPRS, with its modest targets and elaborate compensation, is twitching feebly on the roadside having been run over by the GFC, Tony Abbott, health reform, tax reform, super reform and international recalcitrance.

John Daley and Tristan Edis at the Grattan Institute have now put it out of its misery, strangling it with cold reality.

The report, available here uses Australian industry’s own data to analyse the impact of carbon pricing, and is a devastating indictment of what appears to have been loose and over-cautious policy-making by the government.

They conclude that many of the free permits in the CPRS are unnecessary and that the scheme is a $20 billion waste of money.

In particularly they have done a lot of work on alumina refining, LNG production, cement, electricity and coal mining – industries that account for 8% Australian industry and emit about 30 per cent of our greenhouse gases.

These industries, it’s true, would become less profitable, with costs rising by 1.4% of revenue. However, they find that Alumina, LNG and coal mining would still be internationally competitive and that shielding them would be very costly and discourage them from restructuring to produce less carbon.

The value of the proposed free permits for the aluminium industry, for example, work out to be $161,101 per employee per annum. The government would be better off just hiring them. For LNG it’s $103,344 per employee per annum.

Total employment in industries at risk is 70,000, and most of these people work in facilities that would continue to be viable under a carbon pricing regime. By comparison, tariff cuts reduced employment in the motor industry by 55,000 and the textiles clothing and footwear industry by 64,000.

There are currently 9,000 people employed in the electricity generation industry, “the only sector of the electricity industry whose employment will be substantially affected by carbon pricing”, yet improvements in electricity sector productivity between 1985 and 2000 led to a reduction in total employment from 330,000 to 154,000.

Says the Grattan report: “While protecting the profitability of Australian industry might seem like a good thing, it creates many problems. It mutes the incentives for these industries to reduce emissions. It creates perverse incentives which encourage investment in activities that benefit at the expense of others. It damages the environment because industries are not encouraged to move to lower emission locations. It inhibits efficient restructuring of the economy. And it imposes very substantial costs on the rest of the community.”

The report finds that the CPRS went “substantially further” than necessary to prevent perverse outcomes due to carbon leakage (industries moving offshore to higher emitting countries) in all of the industries studied.

And although the number of free permits would decline by around 1 per cent a year to meet the government’s modest emission targets, the Grattan Institute finds that many industries would be capable of reducing carbon emissions much faster than this.

When Australia’s climate change bureaucrats eventually come out of hibernation and open the creaking door into the dusty room containing the reports and draft bills on this subject, they should be carrying the Grattan report with them.

Meanwhile Iceland’s Mt Eyjafjallajokull volcano is imposing a carbon reduction scheme of its own. The volcano is belching somewhere between 150,000 and 300,000 tonnes of carbon dioxide per day into the atmosphere while preventing 450,000 tonnes a day of CO2 emissions through European air travel, although unlike Australia’s CPRS, that really is disruptive.

This article first appeared on Business Spectator.