An Inconvenient Truth

At stake is our ability to live on planet Earth – to have a future as a civilization.

- Al Gore, Former Vice-President of the United States¹ 

Western Australia would not sign off on any policy or commitment that would disadvantage the state.  That is basically our position on the proposed [greenhouse gas] emissions trading scheme.  If it is regarded as disadvantaging Western Australia, we will not be a part of it.

- Alan Carpenter, Premier of Western Australia²

Economically, it is a golden time in the West.  Our growth rivals China’s.  Unemployment is at an all time low.  Money is flowing into the Treasury’s coffers, thanks to stamp duty revenue from a booming property market and mining royalties.

This is all driven, of course, by the growth in energy-intensive industries – such as iron ore mining in the Pilbara, gas extraction and processing in the North West and mineral refining through operations such as the Wagerup alumina refinery, which has been granted approval to double its production.

At this point we come across the uncomfortable and inconvenient truth that while the economy is running hot, so are Western Australia’s greenhouse gas emissions.  The same activities that are bringing us prosperity are also helping to fuel what is now widely acknowledged to be one of the greatest global challenges of the 21st century.

Treasurer Eric Ripper has likened the Western Australian economy to a V8 car.  The problem is that the analogy holds true for pollution as well as speed.  So what are the chances of trading in the V8 for a new, more efficient and less polluting model?

Until recently, the indications have not been good.  No targets have been set for reductions in greenhouse gas emissions and no mechanisms have been put in place that would achieve substantial emission reductions from any sector of the economy.

The release, in August this year, of a discussion paper on a national greenhouse gas emissions trading scheme offered a ray of hope.  The paper, which was prepared by a working group representing state and territory governments, proposes a national target for a 60 per cent cut in greenhouse gas emissions from 2000 levels by 2050.  It also seeks comment on a proposal for a trading scheme designed to reduce greenhouse pollution from the stationary energy sector, which includes electricity generation.

The Carpenter Government’s response to the discussion paper has been disappointing.  It initially raised a number of concerns with the proposal, including its impact on Western Australia’s ability to rely on coal, and subsequently went  further to rule out involvement in the scheme unless the Commonwealth government also joined.

This paper considers the key provisions of the proposed emissions trading scheme and analyses the State Government’s response, before making some observations on the changing politics of climate change in Western Australia.  It concludes that there is a strong case, in both policy and political terms, for the State Government to change its stance and support the proposed scheme.

Emergence of a greenhouse gas emissions trading scheme

Emissions trading schemes, involving an overall cap on emissions coupled with the ability for participants to trade emission entitlements, have been commonly used over the last two decades to address air pollution problems.

Perhaps the best example is the United States program, established under the Clean Air Act in 1990³, to reduce sulphur dioxide emissions from power plants.  This program is widely acknowledged to have been a success, having reduced acid rain by a third since 1990  at half the cost that could have been expected from a traditional command and control program.⁴

In recent years, momentum has built behind the use of emissions trading to help deal with another air pollution problem – greenhouse gases.  The European Union Emissions Trading Scheme commenced in 2005.  New South Wales has established its own more limited version, and in the US several northeast states, including New York State, are developing a ‘cap and trade’ scheme. California has signalled its interest in joining to help meet its greenhouse gas reduction targets.⁵  

Emissions trading schemes work best with large polluters, such as power stations, whose emissions can be monitored.  They are therefore a natural policy choice to control emissions in the stationary energy sector.  In Australia, this is certainly a sector in need of controlling.  It already produces half of Australia’s greenhouse gas emissions⁶ and is growing fast.  Between 1990 and 2004 (the last year for which official figures are available) emissions in this sector grew by 35 per cent across Australia and by 62 per cent in Western Australia.⁷

The Howard Government has a long track record of opposing the use of emissions trading, focusing instead on funding for research and development, particularly for the development of ‘clean coal’ technologies.⁸ The shortcoming of this approach is that it does not do enough to encourage industry to adopt emission reduction technologies.  For example, even if technically feasible ‘clean coal’ technologies were developed they would cost more than conventional technologies and would not be taken up without government intervention to provide an incentive for their adoption.⁹

In the face of the Howard Government’s opposition to emissions trading, and recognising the need to send a price signal to encourage the adoption of clean energy, the Australian states and territories developed a proposal for a national emissions trading scheme that could be established under their own laws.  The proposal, which is outlined in the paper Possible Design for a National Greenhouse Gas Emissions Trading Scheme, is out for comment until 22 December 2006.

Key elements of the proposed scheme

Who would the scheme apply to?

The emissions trading scheme proposed by the states and territories would apply to large emitters in the stationary energy sector.¹⁰ As currently proposed, only the electricity generation sector would be included for the first five years of the scheme.  After this period, gas retailers and operators that directly combust fossil fuels would be added to the scheme.  It is also proposed that fugitive emissions from gas transportation and distribution would be included at this point. 

How would the scheme work?

The scheme would put in place a cap and trade system, under which an overall cap is placed on emissions and tradeable permits to emit greenhouse gases are created.  It is proposed that permits would be allocated in three broad tranches:
• Some permits would be allocated for free to existing generators estimated to be significantly adversely affected by the scheme;
• Some permits would be allocated for free to firms in trade-exposed, energy-intensive industries; and
• The remainder of permits would be auctioned, with auction revenue divided among the states and territories.

The scheme would also allow permits to be generated by “offsets”, such as forestry projects that absorb carbon dioxide and landfill projects that collect and combust methane. 

What effect would the scheme have on emissions?

In order to provide certainty for investors while retaining some flexibility, it is proposed that firm annual caps for greenhouse gas emissions would be set for 10 years, and a range of possible future caps would be established for the following 10 year period. 

Under the two main indicative scenarios for the electricity sector outlined in the discussion paper, annual caps would follow a curve that would ensure slowing growth in emissions to 2013, modest declines until around 2020 and more substantial reductions to 2030.  By 2030, emissions would have come back down to 1997 levels under one scenario and to 2000 levels under another. This represents a reduction in emissions of 33 to 43 per cent from a business as usual scenario.¹¹  

While these scheme caps would do more than any existing policy measures to control greenhouse gas emissions, it is questionable whether they go far enough.  It seems unlikely that a 60% reduction on 2000 levels by 2050 could be achieved with these caps, let alone the 60-80% reduction on 1990 levels recommended in the Stern Review on the Economics of Climate Change.¹² 

Reaction of the Western Australian Government

A media release of 16 August 2006, timed to coincide with the release of the discussion paper, stated that the Premier ‘would not commit Western Australia to any form of national greenhouse gas emissions trading until there was more evidence that WA interests would not be adversely affected’.

The media release referred to four concerns that would need to be addressed before the government would consider entering into a national emissions trading scheme:
• The impact on the Western Australian economy;
• The impact on electricity costs for Western Australian consumers;
• The impact on the State’s capacity to rely on energy sources such as coal; and
• The level of acceptance of the emissions trading model by Western Australian industry.

Associated with these concerns are a number of political factors.  Primary amongst these factors is the need for the government to be seen as a good economic manager that will ensure the boom times continue.  There is also a desire to protect the Premier from industry criticism, because he holds the industry development portfolio.  The Government wants to keep electricity prices as low as possible for fear of a voter backlash, especially since it has assured voters that its restructuring of the electricity industry would exert downward pressure on electricity prices.  It is also anxious to avoid damaging the coal industry as this may affect the Government’s prospects of retaining the marginal seat of Collie, where the coal industry is a major employer. 

The media release of 16 August also indicated that ‘while all States and Territories had been active participants in the National Emissions Trading Taskforce, the lack of engagement by the Federal Government would severely weaken the prospects of the proposed scheme being successful.’  By 4 November, this had hardened into a statement by the Premier that Western Australia would join the proposed emissions trading scheme only if the Commonwealth also joined.¹³  

Response to the State Government’s concerns

Impact on the Western Australian economy

A traditional argument against taking action on climate change is that it would cause our industries to flee offshore to developing countries that give a free reign to greenhouse pollution.  However, this argument ignores the fact that policy instruments can be designed to ensure that energy-intensive, trade-exposed industries are not disadvantaged.

The proposed national emissions trading scheme provides a good example of how this can be done.  The discussion paper proposes that permits be made available for free to firms that can demonstrate that they:
• Are highly energy intensive;
• Would experience higher energy costs as a result of the introduction of the scheme;
• Are subject to a high degree of international competition; and
• Face international competition mostly from countries that impose no comparable emission constraint. 

There are three points to note about this arrangement.  First, it answers any argument that energy-intensive, trade-exposed industries like aluminium smelting and gas processing would be forced to move offshore.  Second, these industries will still have an incentive to reduce their emissions because they can sell their excess permits.  Third, the supply of free permits can be reduced as comparable emission restraints are introduced in other countries.

Taking into account the proposed permit arrangements, modelling indicates that there will be a very small economic impact nationally,¹⁴ and no reduction in Western Australia’s Gross State Product, as a result of the scheme.  In fact, a marginal increase in the State’s GSP is predicted.¹⁵

Impact on electricity prices for consumers

The emissions trading scheme would increase electricity prices for customers on the South West Interconnected System, Western Australia’s main electricity grid.  Depending on the emissions reduction scenario, initial modelling shows that the average residential customer would spend an additional $1.58 to $3.61 more per week on their electricity bill.¹⁶ Equity issues associated with this price increase could be addressed by assistance to low-income households, paid for by the auctioning of permits created under the scheme.¹⁷  

Would increases in electricity costs of this order be acceptable to residential customers?  A poll of a representative group of Australians conducted by the Lowy Institute for International Policy suggests that they would.  In this poll, 92 per cent of respondents wanted action taken to address global warming and 68 per cent of respondents agreed with the statement that ‘Global warming is a serious and pressing problem.  We should begin taking steps now even if this involves significant costs.’¹⁸

Impact on the State’s ability to rely on coal

Modelling indicates that the emissions trading scheme would not stop Western Australia from being able to rely on coal as an energy source.  It would simply mean that no new coal-fired power stations would come on stream until such time as ‘clean coal’ technologies become economic.  Until that time, which is assumed to be 2020 for the purposes of the modelling,¹⁹ there would be no loss in existing coal generation but new generation capacity would be supplied by renewable energy sources and natural gas-fired generators.²⁰  After that time, coal generation capacity would increase.  The key message here is that no jobs would need to be lost in the coal sector due to the introduction of an emissions trading regime. 

A reasonable level of acceptance by industry

It is possible that the proposed scheme will achieve a ‘reasonable level of support’ from Western Australian industry.  Some Australian industry leaders have recognised that action on climate change is inevitable and that gradual early action is preferable to more drastic action later on.²¹ However, the early reaction from industry in Western Australia is not promising.²²

The larger question, of course, is whether it is appropriate to have an ‘industry acceptance test’ for a measure that imposes a cost on industry.  Industry does not often support government measures that may cut into its bottom line, as the Premier found in the debate over reserving gas supplies for domestic use in Western Australian.  A Premier should recognise what a Minister for State Development may not – that a measure might still be in the public interest even if industry does not support it.

Workability of a state-based scheme

It clearly would be possible for the States to establish and operate a national emissions trading scheme without Commonwealth involvement.  As the discussion paper points out, this could be achieved through the use of ‘template’ legislation passed in one State and automatically adopted in others.²³ This is similar to arrangements already used in a number of areas, such as the national consumer credit code.²⁴  

There is a risk, as Premier Carpenter has pointed out,²⁵ of the scheme being overridden by future Commonwealth legislation.  However, this risk can be overstated.  The Commonwealth would take great care to avoid disadvantaging those who hold permits created under the scheme.  This is clear from the example of water extraction in the Murray-Darling Basin, where the Commonwealth’s approach has been to buy back, rather than override, entitlements issued under State law. 

It is important to note the position of the ALP and Coalition on this issue federally.  If the ALP wins the 2007 federal election it will be expected to implement its commitment to establish a national emissions trading scheme,²⁶ and the work by the states and territories will have laid the groundwork for it to do so.  On the other hand, if the Coalition wins the next election the establishment of an emissions trading scheme involving the Commonwealth Government is unlikely in the near term, and a state-based scheme may be the only avenue for significant action on climate change. 

The politics of climate change in Western Australia

The Carpenter Government’s approach to the proposed emissions trading regime has, to date, been marked by a traditional political approach that appeals to the more conservative elements of Western Australian society:  to assess a national proposal in terms of whether it serves the State’s interests and to define those interests in narrow economic and industry protection terms.

We have seen that even if the proposed emissions trading regime is assessed from this perspective it has a lot going for it, in that it protects the State’s trade-exposed industries and would have a marginally positive impact on State GSP.  This is a good deal for Western Australia, and probably much better than it would get if a scheme were imposed on it by a future Australian Government.

If a broader perspective is adopted, which considers the costs of inaction as well as the costs of action, then there is an even stronger case for supporting the national emissions trading scheme.  Climate change carries significant economic, social and environmental costs for Western Australia as human settlements, agricultural operations and threatened species struggle to adapt to a changing climate.  Some of these costs are now inevitable.  However, the worst of the impacts can be avoided if Australia, in concert with other countries, takes steps to significantly reduce greenhouse gas emissions.  In the absence of leadership by the national government, Australian states and territories should take up this challenge.

There is also a strong case in political terms.  The electorate is concerned about climate change, and knows that not enough is being done to address it.  Concerns and calls for action will grow as the early impacts of climate change become more apparent and scientists’ predictions of local impacts accumulate.  There will continue to be reports from around the world about global warming symptoms such as melting icesheets and island nations being affected by rising sea levels. In addition, attention will increasingly focus on the local issues including the following.   

• A drying Perth

Water, the big issue of the last State election, will continue to attract attention.  CSIRO projections indicate that there will be a 5-11 per cent reduction in rainfall to 2030,²⁷ which is likely to translate to around 30 per cent less runoff to Perth dams.²⁸  This is on top of the reduction in runoff of around two thirds that has already been experienced since the mid-1970s,²⁹ which scientists say can be attributed, at least in part, to climate change.³⁰ 

• Heat waves

The average number of summer days in Perth over 35 degrees is projected to rise from the current 15 to 16-22 in 2030 and 18-39 by 2070.³¹ This may be associated with an increase in heat-related deaths in older people.³²

• Species extinctions

Habitats for all frog and many mammal species in the southwest would be significantly reduced with only a 0.5Co warming,³³ which is expected by 2030 at the latest.³⁴

• Droughts and lower crop and pasture yields

More frequent and intense droughts can be expected in the wheatbelt due to climate change.³⁵ Reduced rainfall and higher evaporation will lead to lower crop and pasture yields, unless offset by technological improvements.³⁶ The eastern wheatbelt will be hit the hardest – one study predicts profitability declines in the Merredin district of up to 75 per cent by 2050.³⁷

• More bushfires and extreme weather events

Drier and hotter conditions in the southwest will lead to an increased fire risk,³⁸ while in the north of the state more extreme cyclones and storm surges could put Broome and other population centres at risk.³⁹

• Dying reefs

Coral reefs, like the iconic Ningaloo Reef in the northwest, have evolved in a narrow temperature band and are highly sensitive to water temperature changes.  Projections from global climate models indicate that sea temperatures could rise beyond the survival limit of corals in 40 years time.⁴⁰

Conclusion

Climate change is an inconvenient truth for a State Government presiding over economic boom times, but it is one that it needs to face – in its own political interests as well as the interests of the planet.  Public opinion now recognises climate change as a challenge that has to be addressed, even if this involves significant costs.  This call for action is likely to grow stronger as the costs of climate change continue to emerge and there are more scientific predictions of local impacts.  The good news for the State Government is that by supporting the proposed national emissions trading scheme it can take substantial action on climate change, at no net cost to the Western Australian economy.  It is to be hoped that the Carpenter Government will reassess its position on this issue as it prepares the “climate change action plan” it has foreshadowed for release early next year.  At the very least, it should leave the door open to implementing a state-based scheme in the event that the Coalition wins the next federal election and remains opposed to a national emissions trading scheme.

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1. Al Gore, An Inconvenient Truth: the planetary emergency of global warming and what we can do about it, Rodale, 2006, p298.    
   
2. Parliamentary Debates (Hansard), 16 August 2006, p 4751.
3. Greg Easterbrook, ‘Some Convenient Truths’, The Atlantic Monthly, September 2006, p30.
4. Pew Center for Global Climate Change, Market Mechanisms for Greenhouse Gas Emission Reductions: Lessons for California, < https://www.pewclimate.org/working-papers/ca-mech>.
5. ‘Schwarzenegger pushes markets for global warming initiatives’, San Francisco Chronicle, 15 October 2006.
6. Australian Greenhouse Office, National Greenhouse Gas Inventory 2004 (May 2006), pp16-17.
7. Ibid.
8. The most commonly discussed proposal for ‘clean coal’ technology is geosequestration - capturing carbon dioxide from electricity generation and storing it underground in either depleted petroleum reservoirs or saline aquifers: see Australian Government, Securing Australia’s Energy Future (2004), p143.  At the time of writing the Howard Government’s position on a national emissions trading scheme was unclear.  The Prime Minister has formed a business-dominated ‘Prime Ministerial Task Group on Emissions Trading’, but the focus of this group is on ‘advise[ing]on the nature and design of a workable global emissions trading system in which Australia would be able to participate” (emphasis added) rather than on establishing a national scheme: see Media Release: Prime Ministerial Task Group on Emissions Trading, 10 December 2006, <https://www.pm.gov.au/news/media_releases/media_Release2293.html>.
9. As the Stern Review found, “establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate change policy”: Nicholas Stern, Stern Review on the Economics of Climate Change (2006), <https://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change>, p.xvii.  
10. The stationary energy sector covers combustion of fuel for energy purposes in all uses other than transport.
11. National Emissions Trading Taskforce, Possible Design for a National Greenhouse Gas Emissions Trading Scheme (August 2006), p47 (henceforth referred to as “Discussion Paper”).
12. Supra n9, Executive Summary, xxii.   
13. Robert Taylor, ‘WA can cash in on climate catastrophe – Premier’, West Australian, 4 November 2006, p10.
14. The modelling indicates that at worst, it would take 2.2 months to recover business as usual growth to 2020: Discussion Paper, p110.
15. The Allen Consulting Group, The Economic Impacts of a National Emissions Trading Scheme: Final Report (June 2006), pp28, 30, 34.
16. McLellan Magasanik Associates Pty Ltd, Impact of a National Emissions Trading Scheme on Australia’s Electricity Markets (July 2006), p32 and see also p.31 for projected increases for commercial and industrial customers.  
17. Discussion Paper, p144.
18. By contrast, only 24% agreed with the statement that: “The problem of global warming should be addressed, but its effects will be gradual, so we can deal with the problem gradually by taking steps that are low in cost”.  Ivan Cook, Australia, Indonesia and the World, October 2006, p10.
19. Supra n 16, p 36.
20. Ibid, p 38.
21. Australian Business Roundtable on Climate Change, The Business Case for Early Action (April 2006)
22. See for example the negative response of the Chamber of Commerce and Industry cited in Amanda Banks, ‘State rejects greenhouse scheme’, West Australian, 17 August 2006, p9.
23. Discussion Paper, p148.
24. Discussion Paper, p147, n84.
25. Supra n 13.
26. ALP, Protecting Australia from the Threat of Climate Change: Policy Blueprint Number 6 (7 March 2006) < https://www.alp.org.au/download/now/climate_change_blueprint_no_6.pdf>, p10.
27. Stephen Charles, Climate Science Overview (1 June 2006), < https://www.greenhouse.gov.au/impacts/pubs/riskworkshops-perth.pdf>
28. A Department of Environment Report has predicted a 31% decline in inflows the 2035–2064 period for the Stirling Dam, and has suggested that this is likely to be representative of runoff for other dams: Department of Environment, Climate Change, Catchment Runoff and Risks to Water Supply in the South West of Western Australia, Department of Environment (WA), 2004.
29. Water Corporation, Integrated Water Supply Scheme Source Development Plan 2005, p11.
30. Brian Sadler, Informed Adaptation to a Changed Climate State: Is south-western Australia a national canary? < https://www.ioci.org.au/publications/reports.html>
31. Supra n 27
32. Anthony McMichael, Rosalie Woodruff,Peter Whetton, Kevin Hennessy, Neville Nicholls, Simon Hales, Alistair Woodward, Tord Kjellstrom, Human Health and Climate Change in Oceania: A Risk Assessment (Commonwealth of Australia: 2002).
33. Allen Consulting Group, Climate Change: Risk and Vulnerability (2005), p69.
34. The CSIRO has predicted a 0.5-1.1 increase in temperature by 2030: Supra n 27.
35. Supra n27
36. Michele John and Ross Kingwell, ‘Effects of Climate Change on Optimal Farm Plans in a Low Rainfall Mediterranean Environment of Australia’ SEA News, Issue 16, July 2004 at <https://www.crcsalinity.com.au/newsletter/sea/SEANews16.html>; Department of Agriculture and Food Resource Management Technical Reports 295, 302, 303, 304 and 305.
37. Michele John and Ross George, Vulnerability of broadscale agriculture to the impacts of climate change, 2005 (published on the Grains Research and Development Corporation website at <https://www.grdc.com.au/growers/res_upd/west/w05/john.htm>).
38. Supra n27.
39. Supra n33 p138.
40. Ibid p70.