Speech - A Price On Pollution: The Next Step Forward In Economic Reform




"A Price on Pollution: The Next Step Forward In Economic Reform"




Thanks Laurie [Wilson] for that introduction and thanks for welcoming me here so soon after my post-Budget speech.

The theme of that speech a month ago, and a theme of the Budget, is making the most of the tremendous opportunities presented by the enormous change underway in the world. Recognising that rather than being on the periphery of the global economy, in coming decades we will be closer and closer to its centre. The impact is most vividly apparent today in the mining boom, but in years to come it will be apparent in many other areas of our economy.

As I said when I was last here, to accept that challenge, to make the most of our opportunity, we need to modernise our economic infrastructure, increase our capacity, and invest more in the education and training of our workforce. But crucially, we also need to price pollution, so that we can drive new investment in clean energy. That's what I'm here to talk about today.

I start from a conviction that no first-rate, first-world economy will be anything other than a clean-energy economy into the future. Just like the global economy was propelled forward in the decade to now by rapid development in communications technology, success in the coming decades will be powered by cleaner energy innovation.

The only way to drive investment in this technology is to put a price on pollution. Only a market mechanism does the job. You can have a first-rate modern economy and a carbon price, or you can have neither.

As Treasurer I refuse to let this country become an old-world, high-polluting technological backwater. There is no excuse for this as a forward-looking country in the most dynamic region in the world.

Now, each of us who believe in taking action – including the many thousands of Australians who attended rallies on the weekend – has come to this conclusion in different ways.

For me, having grown up on Queensland's Sunshine Coast, I'm driven by the impact climate change could have on our standard of living and our lifestyle, the sort of impacts outlined in the report into coastal communities that Greg Combet released on Sunday. But what also really inspired me in this area was a meeting I had five years ago, which I described at the time as the most important public policy discussion of my life.

As shadow treasurer, drawing up our alternative economic policies, I went to the UK to talk with Gordon Brown and Nicholas Stern about the ground-breaking climate change report that Sir Nicholas was about to hand to the UK Government. Stern convinced me then – and I remain convinced today – that we have a narrow window of opportunity to act, and that the costs of doing nothing far outweigh the costs of building a low-pollution economy.

The five long years that have elapsed since that meeting – despite all the ups and downs – have not dissuaded me one bit.

As Treasurer, I see a price on pollution as the next crucial frontier in economic reform. It is the type of progress that future generations will speak of in the same terms as the big reforms of the '80s and '90s. It is the most cost-effective way to decouple economic growth from emissions growth, building a low-pollution economy by making dirty energy relatively more expensive, and clean energy relatively cheaper.


The consequences of doing nothing are clear. The science is convincing, the threat is real, the economic and environmental benefits are tangible, the need for action imperative. And as the Prime Minister says, this is not something that gets easier the longer we leave it. Ignoring it is akin to refusing to visit a doctor until the pain is overwhelming, and the treatment more drastic.

As Ross Garnaut reported in 2008, world GDP would be 8 per cent lower by 2100 in a world with climate change compared with a world without climate change. Our own real GDP could be around 6 per cent lower over the same period, and real wages would suffer.

Without global action, we will experience severe water shortages and higher temperatures, and the Murray Darling Basin could lose half of its annual irrigated output by the middle of the century – with consequences for food prices and the cost of living more broadly. Extreme events, permanent changes to local climate and loss of parts of our coastline could severely damage our water supplies, electricity networks, ports, homes and commercial buildings.

As global growth slows, the engines of our prosperity would switch down to second gear as demand for our mining resources falls as well. Overall output from Australian mining could be 13 per cent lower by 2100, and – with a poorer world demanding less – coal and other mineral prices would fall. Tourism would also be hit harder by fewer overseas visitors due to widespread environmental damage and a weaker international economy.

So as one of the nations likely to suffer more than most others from unmitigated climate change, we can't afford to sit on our hands.

Global Action

Today, instead of trying to cover every aspect of this debate or going over all the ground covered by Professor Garnaut last week, I want to make three key points, ahead of new material from the Productivity Commission and the Treasury.

The first point is that so much is going on around the world that it is ludicrous to argue we are moving in isolation. Acting now does not mean acting alone. The real risk is actually falling behind.

On Thursday this week the Productivity Commission's important piece of work on international action will be released. It will show that all of the countries studied, including seven of our top ten trading partners, have adopted major policies to reduce pollution and support clean energy. The approaches vary from country to country, but the report will make it clear that market mechanisms are a far more cost-effective way than other approaches like regulation and subsidies. So it will deal comprehensively with those who claim we would be striking out on our own, and those who argue for so-called direct action.

The PC will highlight something lost on too many people – that the world is moving, and it follows that if we don't act now we'll be left behind. Countries accounting for around 80 per cent of emissions have already pledged to act to address climate change. Thirty-two countries and ten American States already have operating emissions trading schemes in place. The world's key economies are all taking action of one kind or another.

China's 12th Five Year Plan, which covers the years to 2015, has a goal of "gradually establishing a carbon trading market", while emissions trading is planned to be trialled in six key provinces before 2013. This is on top of existing incentives for low-emissions power generation.

India has begun implementing a national energy efficiency certificate trading scheme accounting for more than 50 per cent of the fossil fuel used there, and a coal tax is expected to raise about half a billion dollars for investments in clean-energy technologies in the first 12 months.

In South Korea, legislation was introduced in April to commence mandatory economy-wide emissions trading from 2015. The South Koreans have also had a trial emissions trading scheme in place since January involving 14 cities and provinces, including Seoul.

And Japan has also operated voluntary emissions trading schemes involving some of its largest companies since 2005.

In Europe, an Emissions Trading Scheme commenced in 2005 and applies in 30 countries, some of which also have a carbon tax, and many of which have additional measures such as renewable energy subsidies.

In Britain – which produces roughly the same total carbon pollution as Australia but has a population three times our own – a Conservative coalition government has just tightened its emission targets to 50 per cent below 1990 levels by around 2025.

In the US, despite a hostile Congress, the President is committed to a new Clean Energy Standard that will double the share of clean-energy sources in the US electricity supply mix to 80 per cent by 2035.

So the world is moving now to reduce pollution, and we need to be part of that if we want to maintain and improve our competitive advantage. Our 2008 modelling indicated the costs of taking action now could be around 15 per cent less than if countries play catch up later on – and we will provide an update of that estimate in the coming weeks.

But it's already clear that with the highest level of carbon pollution per capita in the developed world, Australian exports will become a prime target for trade measures if we fall too far behind. We don't have to worry about going early; we need to focus on staying competitive – ensuring we position Australia as a principal beneficiary of the transition underway in our region and the wider world.

Take coal, as just one example. The world will continue to burn our coal for a long time, especially with concerns over nuclear power. Prices are high, having doubled since the CPRS was proposed. But our job is not just to export cleaner coal at good prices, but to export the technology that makes coal more viable into the future.

Today Australia has a relatively low-emission coal sector, and we expect it to continue to grow as the world moves to cut its emissions. But if we don't innovate further, we run the risk that the rest of world will impose a penalty on our exports in the future. This will inflict a greater economic shock on our economy down the track and undermine our long-term competitiveness.

Scare Campaign

The difficulty here is that the benefits of action will not be felt immediately but in the form of a stronger economy, a cleaner environment, and better jobs for our children and our grandchildren. Just like it is hard for people to feel the job losses we averted during the GFC, it is hard to bring to life the benefits of this reform down the track.

It won't be easy to put a price on something that is currently free. We will be asking almost 1,000 of our biggest polluters to pay for the damage they do to the environment and they'll have a view on that.

Of course, when it comes to the big ticket reforms, there are always those who say the sky is going to fall in. As Bob Hawke reminded us last week, so many of our most important reforms were once described as a potential disaster for our economy. But in time they reaped big dividends for the country, helping secure two decades of uninterrupted economic growth.

Imagine if he and Paul Keating hadn't brought down tariffs, imagine if we were still an isolated, island economy, hiding from the world. China's industrialisation would be booming away to our north – and Australia would still be paying industries to be uncompetitive. Rather than plugging into global supply chains, we would be on the sidelines of the Asian Century, failing to capitalise on the shift in global economic weight that we are now living through.

Imagine if in 1992 the Keating Government had been spooked by the business group that called the superannuation guarantee "irresponsible and ludicrous". We wouldn't have achieved an increase in national savings and retirement incomes, setting the platform for dealing with a global recession and the long-term pressures of an ageing population.

Imagine if we'd given up on reforming resources taxation, just because the miners said it would ruin the industry, close down mines, send companies offshore, and smash profits. Instead we have a deal that will allow us to cut company tax especially for small business, boost super and invest in infrastructure, while mining profits and investment continue to skyrocket.

Unfortunately for this country our proud record of reform is not matched by a proud record of informed, considered, honest opposition. Now we face the same kind of scare campaigns and fear mongering, but we will not be deterred.

Between 1999 and 2007, Robert Hill, Warwick Parer, Peter Costello, John Howard and Malcolm Turnbull did the work on carbon pricing, and came to an understanding of how important it was for our economy. Both sides of politics have been talking about this for more than a decade and it is time to get on with it.

Process and Policy

We are doing our best to counter the scare campaign in a methodical, considered way, and by commissioning new analysis by leading experts:

  • Professor Ross Garnaut has updated his 2008 climate change review, including the latest economic data and developments.
  • The PC has looked at the price a number of our trading partners are paying to reduce pollution, as I mentioned a moment ago.
  • And Treasury is conducting modelling on the expected transformation of the economy.

We have also established new forums to engage the community on these issues, including business and NGO roundtables and an independent Climate Commission to build understanding about the science and the economics.

And so that we can consult and communicate openly with the community, we have already made the basic policy parameters very clear:

  • We are working on an emissions trading scheme with a fixed price for three to five years beginning as early as July 2012.
  • It would then convert to a 'cap-and-trade' emissions trading scheme with a flexible price.
  • And as the multi-party committee said in February, the scheme will have broad coverage across the economy.

We have also made clear that every cent raised by the scheme will be directed to three important purposes:

  • Generous assistance to households and families, to help them make the transition to clean energy;
  • Support for businesses, to protect jobs, investment and energy security, without affecting the incentive to reduce pollution;
  • And we are also examining new ways to support investment in clean-energy projects and provide additional support for innovation in a way that is supported by unions, environmental groups and superannuation funds who want to invest in the technology.

The household assistance will be targeted to pensioners, and low- and middle-income households.

  • More than half the revenue raised by the scheme will be allocated to household assistance.
  • The assistance will be permanent.
  • And millions of households will be better off.

When we announce the carbon price we will ensure we fully inform the community about its impacts on households, businesses, the Budget, and the economy. And our climate package will be consistent with our overall fiscal strategy and our fiscal reporting frameworks. It will demonstrate our continuing commitment to the strong and disciplined economic management that has seen our economy stand tall as one of the best in the developed world.

Economic Impacts

The second really key point I want to make today is that we can have strong economic growth without growth in pollution.

Don't believe the vested interests who argue Australia must choose between a stronger economy and decent environmental outcomes. Jobs will still be created, industries will prosper, and our economy will continue to grow strongly with a carbon price.

When we finalise the modelling I look forward to releasing hundreds of pages of detailed information that bears this out, including an updated assessment of the benefits of acting now versus acting later. But today I'm able to give you a bit of a sense of where it is headed and a handful of key conclusions.

For the purposes of this speech please don't read anything into the fact I've used the numbers for a $20 carbon price, as this is just the example price we've used before. There will be a range of modelled scenarios and nobody should take this example as meaning we have settled on a price, because we haven't.

The first conclusion is this: our economy will continue to grow solidly while making deep cuts in carbon pollution.

The modelling will show real national income growing strongly under a carbon price, at an average annual rate per person of around 1.1 per cent until 2050 instead of 1.2 per cent. This means a carbon price would only reduce annual growth in GNI per person by about one-tenth of 1 percentage point.

Real national income per person would be 16 per cent higher than current levels by 2020, which is an increase of more than $8,000 in today's dollars. By 2050 the increase is about 56 per cent, or more than $30,000.

That's before you take into account the long-term benefits of carbon pricing – like protecting tourism icons such as the Great Barrier Reef or Kakadu, or the agricultural wealth of the Murray Darling Basin.

The second conclusion is just as important: employment continues to grow just as strongly after we put a price on pollution.

Today I can say that the modelling shows aggregate employment is approximately the same with or without a carbon price. By 2020, national employment is projected to increase by 1.6 million jobs, while at the same time growth in domestically-produced pollution slows. For a Government obsessed with jobs, this conclusion is crucial.

The third key outcome of the modelling is that demand for low-emission goods and services increases dramatically with a price on pollution, so that there will be stronger growth in sectors, such as less-emission-intensive or renewable electricity.

As I mentioned in my economic note on Sunday, gas-fired electricity is projected to increase by between 150 and 300 per cent over the period to 2050, with the renewable electricity sector projected to be 600 per cent bigger than it is today.

Market Mechanism

But the only way to get these kinds of outcomes in a cost-effective way is with a market mechanism. This is my third key point today.

It is a view shared by the Productivity Commission, by Professor Garnaut, and by every serious economist including the 13 who were moved to pen an open letter last week.

True to form and despite all the evidence and analysis, our political opponents will have you believe the sky will fall in if we price carbon. The bipartisanship of earlier years has been unwound by the most negative Opposition we have seen, with a leader who thinks it is all "crap" and a shadow treasurer who abandoned his principles.

They say they can deliver abatement through what they describe publicly as direct action and privately as trying to look like they care. But it can't deliver the 5 per cent target except at enormous cost. To paraphrase Malcolm Turnbull, it's a plan where the taxpayer pays the polluters to keep polluting.

This will either fail utterly to deliver the large-scale pollution reductions needed or it will impose high and often hidden costs, or both. The Liberal Party knows direct action policies cannot entrench fundamental economic and behavioural changes, but they don't care.

Without a market mechanism, governments will continually subsidise emissions reductions. The fiscal costs of the Liberal Party's phony alternative would break the Budget and risk future tax rises.

As Greg Combet has said, their inability to hit the 5 per cent target means international permits would need to be purchased at a cost of over $20 billion. So the Coalition's Direct Action policy would cost over $30 billion rather than the claimed $10.5 billion, leaving households $720 per annum worse off on average.

That's probably why the best thing Malcolm Turnbull can say about his leader's approach is that "it can be easily terminated".

Only a market mechanism will get us to our targets in a cost-effective way, and everyone who is serious about this issue knows it.

Getting on with it

So enough of the opportunistic scare-mongering. Let's get on with the hard yards of getting a market-based mechanism in place.

I believe that every quality, sustainable, growing economy in the years that come will be powered by cleaner-energy technology. The businesses that will succeed in this century – and the countries that will succeed – are those who get this right. So this really is a defining moment for our economy and our country.

There was a line once, a point in time when nations learned how – with the benefit of cheap and plentiful carbon – they could transform their economies, and lift living standards dramatically. There's another line in front of us now, another economic frontier. Crossing it means harnessing markets to power a new generation of prosperity more sustainable than the last.

We can't let Australia become a country incapable of reform. A country where the deniers, the dinosaurs, the vested interests and partisan commentators destroy the reforms we need to prosper together. Australians have a right to expect a bit more consistency from those voices in the debate who claim they are pro-reform but spend most of their time trying to defeat it.

It should not be beyond us to turn the necessity of cutting pollution into big opportunities for Australia, like our major trading partners are doing. As Gene Raciti, a great young activist from my electorate wrote on his blog after we met last month, there are opportunities waiting for us beyond this horizon, and we need to be strong enough and passionate enough to say we won't be left out of them.

Our vision is for a strong and sustainable economy. A modern, lean, low-pollution economy where markets encourage new investments that keep us in the first rank of countries. An Australia confident and competitive and prospering in the world.

This is a crucial step forward for our economy, and I thank you for having me here today to talk about it.