Yesterday’s carbon price announcement from the Prime Minister was essentially another manifestation of Australia’s Dutch disease – that is the hollowing out of domestic industries as a result of booming resource exports.
If a material carbon tax is imposed on July 1 next year and commodity prices and the Australian dollar have not corrected by then manufacturing will be devastated.
The whole carbon emissions issue is looking more and more like a national emergency as great as any we have faced or a reason for concerted national procrastination.
Australia has perhaps the greatest carbon abatement task of any nation in the world and it is rapidly getting bigger.
If we do something serious about it, which has become more likely with the growing political power of the Greens, domestic industry will have to be rescued or it will be crushed.
Based on government policy and the best, most recent, official projections, Julia Gillard had no choice but to make yesterday’s announcement and as my colleague Giles Parkinson wrote yesterday, it is as momentous as any previous structural reform to the Australian economy … if it happens.
Government and opposition policy is for an unconditional 5% reduction in carbon emissions from 2000 levels by 2020.
Government policy also requires 15% reduction if “major economies” agree to comparable reductions and 25% if there’s global action sufficient to stabilise greenhouse gases at 450 parts per million. The Greens policy seeks 25% unconditional reduction.
On February 9 the Department of Climate Change and Energy Efficiency released new projections for Australian emissions in 2020 which showed that without further policy action emissions in 2020 would be 24% above 2000 levels. But they’re supposed to be 5% below.
The official emission projection the government is now working on is therefore 690 million tonnes of carbon dioxide equivalents in 2020.
The level in 2000 was 558 Mt. Minus 5% of that is 530 Mt which in turn is 23% below the 2020 projection.
The task moves to 15% if “major economies” do something, in which case the reduction task from the 2020 baseline rises to almost one-third.
The document issued by the Department two weeks ago said: “Growth to 2020 is dominated by emissions associated with the extraction and processing of energy resources driven by strong export demand.
“Fugitive emissions from coal mines and oil and gas projects, as well as direct fuel combustion emissions from LNG projects, account for almost half of the growth in Australia’s total emissions from 2010 to 2020.
“While in previous decades emissions from electricity generation have accounted for the majority of growth in emissions, from 2010 to 2020 they are projected to increase by only 6% (or 12 Mt CO2-e), much lower than the historical growth rate. This is primarily due to the increased electricity generated by renewable technologies, promoted by the Renewable Energy Target.”
So Australia’s greenhouse gas problem is switching from brown coal electricity generation to coal and gas exports, thanks to a combination of the RET and China’s demand for energy.
The abatement policies of both the government and the opposition (such as they are) focus almost entirely on domestic electricity generation and transport – the government via a tax on carbon and the coalition through “direct action” which involves paying Latrobe Valley generators to shut down or switch to natural gas – a very expensive and dodgy option, although it has the key benefit of allowing Tony Abbott to condemn Labor’s great big new tax.
But the coalition will have to impose a great big new tax in order to fund its direct action, especially in the light of the latest emission projections.
The only hope for Australia to escape the fate of a huge increase in costs and a loss of employment and wealth is if world demand for coal and LNG weakens, either because of action elsewhere – mainly China – to reduce fossil fuel power generation or because of another global recession.
Right now I’d say the latter is the more likely. With inflation now on the move because of rising oil and food prices, and some kind of serious fiscal adjustment inevitable in the United States, another recession is on the horizon.
Phew.
Australia’s terms of trade and national income would also collapse again but at least we won’t have to tax electricity and transport quite so much and destroy our domestic industries quite so quickly.
This article first appeared on Business Spectator
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
