Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley THE REGIONAL EFFECTS OF PRICING CARBON EMISSIONS: AN ADJUSTMENT STRATEGY FOR THE LATROBE VALLEY FINAL REPORT TO REGIONAL DEVELOPMENT VICTORIA SALLY WELLER PETER SHEEHAN JOHN TOMANEY NOVEMBER 2011 Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley © SALLY WELLER, PETER SHEEHAN, JOHN TOMANEY THIS WORK IS COPYRIGHT. APART FROM ANY USE AS PERMITTED UNDER THE COPYRIGHT ACT 1968, NO PART MAY BE REPRODUCED FOR COMMERCIAL PURPOSES WITHOUT THE PRIOR WRITTEN PERMISSION OF THE AUTHORS. REQUESTS AND ENQUIRIES CONCERNING REPRODUCTION SHOULD BE ADDRESSED TO THE CENTRE FOR STRATEGIC ECONOMIC STUDIES, VICTORIA UNIVERSITY, PO BOX 14428, MELBOURNE, VICTORIA 8001. AN APPROPRIATE CITATION FOR THIS REPORT IS: WELLER, S., SHEEHAN, P. AND TOMANEY, J. (2011) THE REGIONAL EFFECTS OF PRICING CARBON EMISSIONS: AN ADJUSTMENT STRATEGY FOR THE LATROBE VALLEY. REPORT TO REGIONAL DEVELOPMENT VICTORIA. CENTRE FOR STRATEGIC ECONOMIC STUDIES, VICTORIA UNIVERSITY. NOVEMBER. i Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley EXECUTIVE SUMMARY This report examines the social and economic impacts that a carbon price is likely to produce in Victoria’s Latrobe Valley and in the wider Gippsland region. The Latrobe Valley, the brown-coal rich area that generates most of Victoria’s electricity, is acknowledged as one of the principal areas likely to be affected adversely by the introduction of a carbon price in 2012 and the planned introduction of carbon trading in 2015. The report’s content is based on a review of reports and submissions on the regional effects of emissions-reduction policies, interviews with key stakeholders in the Latrobe Valley, detailed analysis of ABS Census data and critical examination of other statistical data. The Latrobe Valley is one of Victoria’s key economic regions and in 2009 was home to over 75,000 Victorians. Its power stations, which dominate Victoria’s electricity generation sector, are fuelled primarily by the area’s plentiful but emissions-intensive brown coal resource. The introduction of a carbon price aims to increase the cost of electricity produced using fossil fuels, in proportion to their emissions intensity, and will therefore reduce the competitiveness of the Valley’s brown-coal power generators. The Federal Government’s 2011 Clean Energy Future plan recognises this reality and provides compensation for generators, for trade-exposed high-emissions industries and for low income households. It also offers modest regional adjustment assistance to regions, such as the Latrobe Valley, that will bear more than their fair share of adjustment costs. This report views the Latrobe Valley economy as a part of a more diversified Gippsland economy, reflecting efforts in the region to consolidate a Gippsland-wide vision, identity and model of governance. Nonetheless, since the highly specialised economy of the Latrobe Valley faces the largest immediate adjustment pressure, it remains the report’s primary focus. The strategies proposed in this report aim to strengthen the Valley’s integration with other Gippsland towns and increase the extent to which its industrial trajectory is articulated with that of wider Gippsland. Various attempts to model the impacts of policy change using general computable equilibrium modelling agree that the Latrobe Valley will be one of the regions most affected by the carbon price and subsequent emissions trading systems. This report argues that because modellers begin with optimistic assumptions about population and economic growth rates, they exaggerate regional economies’ capacities to adjust to policy change. This is because the new jobs required to redeploy workers displaced by structural change are less likely to be created when growth is slow. Moreover, in computable general equilibrium modelling, the assumption of costless inter-regional transfers of capital and labour underestimates the impacts of policy change in more geographically isolated places. Although skilled workers are likely to move in search of better jobs, less skilled workers and already disadvantaged groups are ii Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley more likely to remain in places with fewer job opportunities. This may lead to the creation of entrenched pockets of disadvantage, as witnessed in the United Kingdom’s coal mining regions in the 1980s. It is important that regional responses to the carbon price avoid such outcomes. The Latrobe Valley is familiar with the local effects of State and Federal scale policy changes. Its economy was slow to recover from the structural adjustment processes associated with the privatisation of the electricity sector in the early 1990s. It faces multiple challenges in addition to the stress that will accompany the introduction of the carbon price. This report highlights a number of areas in which the Valley has under-performed relative to other places in Victoria, including its relatively low labour market participation rates and relatively high rates of unemployment, its depressed housing market and its limited supply of local jobs. The interaction of low incomes and comparatively inexpensive housing suggest that the Valley’s more vulnerable residents are unlikely to be in a position to relocate out of the area in the event of adverse consequences arising from the carbon price and its effects on the area’s core economic activity of producing electricity from brown coal. This report shows that despite significant economic diversification in recent years, particularly into the retailing and community services sectors, the Valley’s economy continues to be dominated by power generation. By reorganising ABS Census data to identify electricity, mining and ‘related’ industries, this report estimates that in 2006 these industries accounted directly for over 3000 jobs in the Latrobe Valley, or almost 11% of all local employment. Importantly, almost one in three of the Valley’s higher paid jobs were held by the employees of the electricity and associated industries. In the context of a local labour market dominated by public and community services employment, the decline or loss of these industries would have adverse effects across the local economy through the loss of income spent locally in retail sales and services. Every job in the electricity and related industries could sustain as many as four additional jobs in retail and service sectors. The new context of the carbon price also creates opportunities for the Valley. Its electricity and related industry workforce is highly skilled and already services national and international clients. This workforce is one of the Valley’s key competitive strengths. There are sound arguments for maintaining this area as Victoria’s centre of electricity production and heavy industrial specialisation. If there is to be any major technological breakthrough that would reduce the emissions of electricity production, distribution or use, that innovation is likely to come from people who know about and care about electricity. Economic theories of agglomeration anticipate that such innovations are more likely to occur when people with a high level of knowledge, expertise and commitment are working proximately, where a plethora of cooperative and competitive processes work to stimulate new ideas and new applications of old ideas. Moreover, despite privatisation, many among the Valley’s energy workforce retain a public service ethos that could and should be harnessed to the task of reducing the emissions generated in electricity production. The least cost means of transitioning to a low carbon economy should seek to maximise the utilisation of the Valley’s electricity-related iii Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley resources. This implies maximising the extent to which new developments utilise the State of Victoria’s investments in transmission infrastructure in the Valley and in the corridor linking it to Melbourne. At the time of writing, the Federal Government’s Clean Energy Future package, which includes a set price on carbon emissions, has passed through both Houses of Parliament. The broad outline of related policy initiatives have been established (Australia, 2011b). However, the fine details of the various initiatives are yet to be determined. The government has announced that the carbon price will be transformed into an emissions trading scheme in July 2015, but its parameters have not yet been agreed upon. Under these plans, the pressure on the Latrobe Valley economy will increase incrementally, as the floor price of permits to emit carbon increases. However, programmes within the Clean Energy Future package, if combined with existing Victorian state initiatives, have the potential to contribute to the revitalisation of the local economy. This report argues that the magnitude of the adjustment task – to achieve lower greenhouse emissions and simultaneously revitalise local economies – is likely to be larger and more complicated than anticipated by the Commonwealth. These are uncertain times. The outcomes of the carbon price for the electricity sector in the Latrobe Valley will depend on many unknowns – how energy firms and investment markets react to the carbon price; whether and when planned closures of high emissions plants are implemented; when technologies to reduce the emissions arising from brown coal are perfected; whether