Australia's war on emissions gets off to a sluggish start

The era of free polluting is meant to be at an end. Clancy Yeates decodes the battlefield signals. AFTER months of dire warnings that the Federal Government plans to cut carbon emissions would trash the economy, this week's white paper stunned many in big business with its generosity. The draft plan for the Carbon Pollution Reduction Scheme proposed cutting 2020 emissions to at least 5 per cent below 2000 levels, alongside expanded compensation for industry. The Prime Minister, Kevin Rudd, painted the policy as a pragmatic compromise between business and environmental concerns, and the few lobbyists who continue to shriek over the scheme are in the minority. Even formerly vocal critics gave muted responses. Woodside Petroleum's chief executive, Don Voelte, missed few chances to knock the scheme after the Government's initial plans excluded liquefied natural gas businesses from compensation. He even threatened to put an LNG plant on a ship in East Timor's waters. But on Monday he refrained from criticism, saying the company was keen to work with the Government "to minimise the impact of the scheme on LNG". The armies of analysts monitoring the risks facing the country's biggest companies - not a group known for their green tendencies - predicted the vast majority of earnings would be virtually unaffected. "White paper not as green as feared," beamed Fitch Ratings. A team from Macquarie Bank called their investment research "White paper Christmas". The executive director of the Australia Institute, Richard Denniss, was far more critical, but reached a similar conclusion: "By 2020 no Australian polluter will live in poverty," he wrote on crikey.com.au. Despite the war on emissions getting off to a sluggish start, the long-term goal remains a 60 per cent cut to emissions by 2050. The scheme, to begin in July 2010, is widely regarded as the biggest change for business and the economy since the wave of financial deregulation in the 1980s. Rudd likens the challenge to turning around the Queen Mary, a metaphor that not only covers the reason for starting gradually but also implies gathering momentum, as other countries agree to cut more deeply. The white paper presents the measures as a first step in telling the country's 1000 largest companies to start cutting emissions - a monumental change after centuries of free polluting. The cost is expected to start at $25 a tonne of carbon - known as a "price signal" - which firms pass on to the rest of the economy. So what implications - big or small - will the signal have on corporate Australia? And since it is such a gentle start, will it send a meaningful message to business that the era of free carbon emitting is reaching an end? CARBON trading aims to cap the total level of emissions by issuing "permits to pollute," which gradually decrease in number. In theory, this punishes polluting behaviour and creates a powerful incentive to develop cleaner ways to produce things. In reality it's a lot messier. Climate sceptics and green groups alike grabbed headlines in recent months - predicting impacts great and small on companies - because this simplified idea of carbon trading is open to endless assumptions. Perhaps the biggest stumbling block is that if other countries don't have a similar price, there is a risk that dirty industries will quit Australia for more relaxed regimes. This is known as "carbon leakage." Industries that release large amounts of carbon as a by-product, such as cement and aluminium, were particularly anxious about this risk and demanded compensation to prevent it. Heavily affected companies are still digesting the white paper's 800 pages, calculating their precise entitlements. Aluminium and cement companies, for example, will receive 90 per cent of permits free, and less-polluting groups will receive 60 per cent. Some industry groups are pushing for further protection but analysts at Citi say the impact of carbon pricing on a heavy polluter such as aluminium is of relatively less concern than the collapse in aluminium prices with the onset of recession. Merrill Lynch is similarly optimistic on the cement industry, predicting makers would have to increase their prices by only 1 to 2 per cent to recover costs. But what about electricity generators, who produce more than a third of the country's emissions, having expanded their total emissions by a whopping 50 per cent between 1990 and 2006? Coal-fired electricity producers will be protected by free permits worth $3.9 billion in the first five years, and gas companies are grinning because their product - up to 70 per cent cleaner than the dirtiest coal - is suddenly much more attractive. Origin Energy says a higher target would not have harmed the industry - but as a gas-heavy utility, this would have served its interests. "We would have been very happy with 10 per cent and we think that the electricity industry could have absorbed that," says Origin's executive general manager of corporate affairs, Carl McCamish. "Given the compensation levels to low-income and medium-income households, we think that they could have absorbed that, too." The risk for energy retailers is that state governments don't allow them to pass on the extra price they are paying for electricity. But the managing director of AGL, Michael Fraser, told the Herald this week it was "critical" that the full cost of carbon pricing be passed on to consumers. "Our intention is to work with government and our customers to implement low-cost energy efficiency measures designed to minimise the impact of higher prices on energy bills." Companies with slightly lower emissions will receive 60 per cent of their permits free. The criteria for this level of protection have widened after protests from the multibillion-dollar LNG sector, led by Woodside's Voelte. With expanded compensation, the effect on LNG now looks modest. In all, emissions-intensive and trade-affected industries should receive 25 per cent of all permits free, rising to a maximum 45 per cent by 2020. For the companies locked out of compensation, a cap has been placed on the carbon price of $40 a tonne for the first five years but it is expected to be about $25 a tonne. Amid the grim economic climate, some business groups protest this is still an unnecessary cost at a bad time. But economic change that involves introducing any new cost will never win unanimous support. An analyst at Goldman Sachs JBWere, Andrew Gray, says the scheme still involves a cost for business, but the generosity of the compensation and the low price on carbon make it a manageable one. As well as penalising polluters, the "price signal" is also intended to tap investment markets and divert funds to cleaner production methods. But judging by this week's reaction, the scheme's accommodation of business interests failed to grab investors. The head of mining and energy research at Fat Prophets, Gavin Wendt, says some investors are factoring in companies' carbon exposure but it is "something for a later date". "It's more market circumstances that are weighing on investors' minds at the moment, rather than this climate change legislation," Wendt says. INVESTORS who are watching the space more closely were underwhelmed by the white paper. The Investor Group on Climate Change includes Australian and New Zealand institutional investors with more than $550 billion in funds under management. The chairman, Frank Pagan, says the white paper gave certainty but the 5 per cent target was unlikely to stampede investment into cleaner industries. "The bar may be too low to shift investment, minimise overall costs of climate change and provide Australia with the credibility to be a valued participant in global action to address one of the biggest challenges of our time," he says. McCamish cannot foresee a renewable energy boom and says a Government requirement for retailers to get 20 per cent of their power from renewables is much more powerful. "The 5 per cent target, in and of itself, will make very little difference on whether people build wind or geothermal or solar." Fraser says short-term assistance will not undermine the incentive to invest in new technologies. "A company receiving assistance … will have the incentive to reduce emissions because of their ability to sell surplus permits when emissions are reduced." When the price reaches $40 a tonne, alternative technologies to gas and coal could become more viable. But the coal industry's planned saviour - to capture and bury carbon emissions from a plant - probably requires a carbon price closer to $100, and is a long way from being commercial. If it all sounds remarkably slow, that's the point. Ross Garnaut's modelling found earlier action is the cheapest, but he also said it could harm industry unless overseas competitors follow a similar path.' Source: smh.com.au