The Senate Select Committee on Climate Policy Report June 2009 © Commonwealth of Australia 2009 ISBN 978-1-74229-135-2 Printed by the Senate Printing Unit, Parliament House, Canberra. Senate Select Committee on Climate Policy Members Senator the Hon Richard Colbeck, Chair Tasmania, LP Senator Christine Milne, Deputy Chair Tasmania, AG Senator the Hon Ronald Boswell Queensland, NATS Senator Doug Cameron New South Wales, ALP Senator Michaelia Cash Western Australia, LP Senator David Feeney Victoria, ALP Senator Mark Furner Queensland, ALP Senator the Hon Ian Macdonald Queensland, LP Senator Louise Pratt Western Australia, ALP Senator Nick Xenophon South Australia, IND Participating Members participating in this inquiry Senator the Hon Eric Abetz Tasmania, LP Senator Catryna Bilyk Tasmania, ALP Senator Mark Bishop Western Australia, ALP Senator Bob Brown Tasmania, AG Senator Steve Fielding Victoria, FFP Senator Mary Jo Fisher South Australia, LP Senator the Hon Bill Heffernan New South Wales, LP Senator Barnaby Joyce Queensland, NATS Senator Scott Ludlam Western Australia, AG iii Secretariat Mr John Hawkins, Secretary Mr Andrew Bray, Principal Research Officer (WISE Programme) Dr Richard Grant, Principal Research Officer Mr Greg Lake, Principal Research Officer (WISE Programme) Mr Ivan Powell, Acting Principal Research Officer Mr Glenn Ryall, Acting Senior Research Officer Ms Lauren McDougall, Executive Assistant Ms Clare Guest, Executive Assistant Ms Hana Jones, Executive Assistant Assistance was also provided throughout this inquiry by Dr Shona Batge, Ms Christine McDonald, Ms Cassimah McKay, Mr Alex Wilson and Mr Bill Bannear. PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3540 Fax: 02 6277 5719 E-mail: [email protected] Internet: http://www.aph.gov.au/senate_climate/ iv TABLE OF CONTENTS Membership of Committee iii Recommendations ix Chapter 1 1 Introduction 1 Terms of reference 1 The conduct of the inquiry 1 Structure of the report 2 Chapter 2 3 Science and emissions targets 3 Climate science 3 Greenhouse gas concentrations and future temperatures 9 Ethical and moral dimensions 11 The economics of global climate change 13 Committee view on risk management 13 Australia's fair and equitable share of global emissions targets 14 Australia's targets in the absence of (adequate) global agreement 25 Economic modelling 29 Other modelling 41 Chapter 3 43 Policy options to reduce greenhouse gas emissions 43 A cap and trade scheme 43 Qualified support 45 A carbon tax 46 A consumption-based carbon tax 49 The 'baseline-and-credit' and 'emissions intensity' models 52 v The McKibbin hybrid model 57 Regulation and incentives—ad-hoc approaches 59 Purchasing global permits 62 Summary 63 Committee view 63 Chapter 4 65 The effectiveness of the CPRS as an emissions trading scheme 65 Coverage of the scheme 65 The timing of the CPRS 66 The mechanism of setting caps 72 Carbon leakage and arguments for assistance for trade-exposed firms 76 Additional assistance to the coal mining industry 86 Assistance to electricity generators 88 Treatment of voluntary/additional emission reductions 89 Other design flaws 98 The interim price ceiling 99 Adequacy of assistance to households 100 Implications for jobs 104 International linkages 107 Chapter 5 111 Complementary measures 111 Impact of a cap and trade approach 112 Criteria for selecting complementary measures 113 Reducing demand for energy 116 Transition to less polluting technologies 121 Sequestration 143 Chapter 6 147 vi Agriculture and land use 147 Agriculture 148 Committee comment 160 Reforestation 162 Committee comment 171 Deforestation 172 Committee comment 176 Soil carbon 176 Committee comment 179 Carbon accounting 179 Committee comment 185 AUSTRALIAN LABOR PARTY 187 SENATOR MICHAELIA CASH 223 Minority report by the Australian Greens 229 Minority Report by Senator Nick Xenophon 235 APPENDIX 1 261 Submissions Received 261 Additional Information Received 270 APPENDIX 2 275 Public Hearings and Witnesses 275 vii viii RECOMMENDATIONS Recommendation 1 2.120 The committee notes that the Treasury modelling was conducted in economic circumstances that were markedly different to those in which the legislation is proposed to now be introduced. Since the modelling was conducted the global financial crisis has led to a marked deterioration in the short-term economic outlook. Whilst the CPRS package has been revised on two occasions, the modelling continues to fail to take into account the impact of these changed economic circumstances. The committee considers the modelling undertaken by Treasury to be inadequate and recommends that the Government direct Treasury to undertake further modelling. The further modelling should: • consider in detail the short-term adjustment costs; • respond to criticisms made of Treasury's initial modelling including: - taking into account the deterioration of the Australian economy - the likely effect of the CPRS upon jobs and upon the environment - the absence of any modelling of the impact of the CPRS on regional Australia; and • model other types of schemes that have been proposed as alternatives to CPRS, including: - a conventional baseline-and-credit scheme - an intensity model - a carbon tax - a consumption-based carbon tax, and - the McKibbin hybrid approach. Recommendation 2 4.41 The committee recommends that the CPRS legislation not be passed in its current form. Recommendation 3 5.89 The committee recommends any remodelled CPRS legislation clarify future arrangements to provide continued support for methane gas capture and energy generation following the foreshadowed cessation of state based schemes. Recommendation 4 5.90 The committee recommends that the Government work with the NSW, ACT and Queensland governments to clarify, as a priority, transitional arrangements for power generation projects from waste methane which may be affected by the possible cessation of the NSW GGAS and similar programmes. Recommendation 5 5.141 The committee recommends that the Government consider in detail different claims made about the probable expense of the expanded Renewable Energy Target. Analysis of the different cost estimates should be included in the Regulatory Impact Statement (RIS) accompanying the legislation to amend the Renewable Energy (Electricity) Act 2000. Recommendation 6 5.142 The committee recommends that following the decision by COAG on 30 April 2009 to exempt major emitters, the Government should explain in the RIS accompanying the amendment bills: - any differences in costs caused to householders and other industry sectors arising from the decision; - the impact the exemptions will have on the efficiency and effectiveness of the scheme; and - the form which compensation to householders will take. Recommendation 7 6.64 The committee recommends the Government review the impact of the CPRS to avoid the EITE provisions generating perverse outcomes for the agriculture sector and the food processing and manufacturing sector such as scaling down and splitting operations. Recommendation 8 6.68 The committee recommends that, as a priority, the Government develop complementary policy measures for greenhouse gas abatement and mitigation in the agricultural sector; and that such policy measures be underpinned by substantially greater research and development in this area. x Recommendation 9 6.69 The committee recommends that the Government establish an agriculture and land use policy taskforce to accelerate the development of complementary climate change policy measures for the land use sector; and to promote full carbon accounting in land use, agriculture and forestry sectors in international climate change fora. Recommendation 10 6.105 The committee recommends that the Government promote the testing, development and roll-out of environmental restoration and land stewardship schemes, giving priority to schemes that can make a significant contribution to emissions reductions, agricultural productivity and biodiversity conservation. Recommendation 11 6.139 The committee recommends that the Government promote the testing, development and roll-out of soil carbon technologies and schemes, giving priority to schemes that can make a significant contribution to emissions reductions and soil health. Recommendation 12 6.164 The committee recommends that the Government takes steps to ensure that Australia encourages reform of international carbon accounting rules. Recommendation 13 6.165 The Committee recommends that the Government provide greater funding so that recommendations 8, 9, 10, 11 and 12 can be implemented in a timely manner. xi Chapter 1 Introduction Terms of reference 1.1 This report sets out the findings of the inquiry by the Select Committee on Climate Policy into: (a) the choice of emissions trading as the central policy to reduce Australia’s carbon pollution, taking into account the need to: (i) reduce carbon pollution at the lowest economic cost, (ii) put in place long-term incentives for investment in clean energy and low-emission technology, and (iii) contribute to a global solution to climate change; (b) the relative contributions to overall emission reduction targets from complementary measures such as renewable energy feed-in laws, energy efficiency and the protection or development of terrestrial carbon stores such as native forests and soils; (c) whether the Government’s Carbon Pollution Reduction Scheme is environmentally effective, in particular with regard to the adequacy or otherwise of the Government’s 2020 and 2050 greenhouse gas emission