Saturday, September 06, 2008

Blame ETS on business

Two weeks ago the Business Council of Australia released a report on the impact of an emissions trading scheme (ETS).  Fourteen companies in the manufacturing and mining sector were analysed.  The report found that even a moderate carbon price would put three companies out of business, and another four would have their revenue cut by between 30 and 60 per cent.

This week BHP Billiton chairman Don Argus made headlines when he warned that an ETS could result in electricity shortages.  These warnings suggest that perhaps the BCA and its leading members should have examined the consequences of an ETS before they endorsed having a scheme in the first place.

The implications of an ETS are dawning on business groups and corporate leaders.  The puzzle is:  what have they been doing for the past few years?  In their rush to embrace Kyoto, chief executives neglected to ask some basic questions like, "How much will this cost?"  I first documented the potential impact of an ETS a decade ago.  It would have been easy enough for any CEO to find out the impact of an ETS on their company, but few bothered to ask.

It speaks volumes that none of the 14 companies in the BCA survey was willing to be publicly identified.  Usually if a government policy is about to send a company broke, the board would do something about it.  You'd expect at the very least some sort of public statement.

And in most cases the company's owners would insist on being informed about the impact of government's actions on the company.  But when it comes to climate change policy, people are happy to carry on as normal.  The shareholders of the three companies that, according to the BCA report, will be forced to shut if there's a carbon price of $40 a tonne, are presumably blissfully unaware of the potential value of their shares.

Supposedly it was the BCA's support for an ETS before the last federal election that convinced John Howard to promise that a re-elected coalition would introduce emissions trading.  One of the arguments used on Howard was that an ETS was an "insurance policy" against climate change.  But you don't take out house insurance if you don't know how much the premium is.  Nor do you take out insurance if it can have no effect unless everyone else takes the same steps, which is the case with an ETS.  And you definitely don't take out insurance if the cost of the premium is more than the value of the house itself.

Opinion polls consistently show that the public believes something drastic and urgent must be done to combat climate change.  Business associations can take some of the credit (or blame) for helping encourage such beliefs.  Because of these beliefs it's now difficult for any company to say, "Hold on a minute, let's go back to the beginning".  It's a problem business has created for itself.  Calls for delay are seen as backsliding and efforts to discuss compensation are labelled as desperate rent-seeking.  The point about compensation for energy-intensive industries that compete internationally has been missed entirely.

It is one thing for a protected industry to demand compensation when the government removes regulation, as happened in the 1980s when tariffs were reduced.  But that's not the same as seeking compensation when government adds regulation, as with the ETS.

An ETS is about to be imposed on an Australian economy that because of our intensive use of energy is especially vulnerable to the adverse effects of the scheme.  Our ETS strategy is based on heroic assumptions.  What if China and India don't commit to reducing their emissions?  Given that Australia is responsible for 1 per cent of global emissions, what will have been the point of the entire ETS exercise?  So far the government has refused to countenance a Plan B.

Business is to blame for allowing the ETS juggernaut to progress as far as it has.  There's not a single significant business association in the country that has opposed the notion that Australia should have an ETS.  As soon as business gave its in-principle support, the government was handed a blank cheque.  Business can now hardly complain if Kevin Rudd and Penny Wong add a few more zeroes to that cheque.


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