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SPEECH

AUSTRALIA’S EMISSIONS TRADING SCHEME –

AN OPPORTUNITY

Keynote address to CEDA

3 July 2008
Shangri-La Hotel
Cumberland Street
Sydney

Greig Gailey
President
Business Council of Australia

The single most important decision

The introduction of a national emissions trading scheme is the single most important
policy decision the Rudd Government will make before the next election.

The introduction of an Australian emissions trading scheme and a price on carbon

will affect business, industry and households in ways that many of us are yet to fully
understand.

The right design will allow Australia to contribute to reducing global emissions in a
manner that does not lead to excessive costs to our domestic economy.

Getting the policy right requires balancing often competing but interdependent
demands. This includes fostering economic growth while cutting emissions,
providing assistance to households and industries adversely affected, and aligning
Australia’s strategies with global action.

Business Council of Australia

ABN 75 008 483 216
Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

Business wants to be involved in getting a national emissions trading scheme right.

And business must be involved in getting the policy frameworks right, as it is
business that will enable the long-term transition to a low-emissions economy.
Business controls the means of production and, under the right policy frameworks,
will make the long-term investments in low-emissions solutions.

A very complex issue

What should not be underestimated is the complexity associated with the

introduction of a national emissions trading scheme in Australia, particularly as our
economy and high standards of living have been built on an abundance of energy
and mineral resources. This complexity is compounded by the absence of a
common global approach to emissions reduction.

Implementing an Australian emissions trading scheme which recognises that, in the

early years at least, we will be moving ahead of our competitors and managing the
risks associated with this requires a considered approach. An approach calibrated to
manage the short and long-term impacts on the economy and households.

Given the complexity of many of these issues, it seems likely that some will be put in
the ‘too-hard basket’. Or that the simplest solutions will be sought. But simplicity at
the expense of effectiveness increases the likelihood that we will get the policy
wrong – at a tremendous cost to households, businesses, the economy and
environment.

Significant alignment between business and government

Let me say at the outset that the Business Council of Australia (BCA) is wholly
supportive of the government’s plans to introduce an emissions trading scheme.

The priority for the BCA and its Members is to work with the government on the
design and implementation of an emissions trading scheme that is credible and
effective – in the near and long term – and which achieves reductions at least cost.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

This task of working together is made easier by the strong alignment between the
approach and principles advocated by the BCA and the government.

At the highest level, this includes the fact that the government does not see climate
change as an environmental issue to be addressed at any cost. Rather climate
change is seen fairly and squarely as an economic issue to be addressed through
economic policies and market mechanisms. That is, in a way that balances the
costs of inaction with the costs and benefits of action.

Business and government know the solution to this problem is not to arbitrarily limit
economic growth or aspects of economic activity as some would have it. On the
contrary, growth will provide the resources and opportunities, through investment
and technological advance, to reduce emissions. The solution is to create the right
conditions through markets and policies to ensure that resources are directed to the
activities most valued by society.

This is of course the aim of a national emissions trading scheme.

Business and the government also agree that this issue is not a zero-sum game, or
one to be tackled in isolation. The pursuit of the best policies in collaboration with
key stakeholders, including business, is critical to the success of an emissions
trading scheme. And it is important to ensure that domestic policies more broadly
are consistent with the objectives of an ETS.

Business and government also know that while Australia can play its role in reducing
emissions, global action is the only way to address climate change.

Finally, business and government see climate change and the introduction of a price
on carbon not just in terms of risks posed – but as an opportunity to develop new
ways of doing things, to improve efficiency, and ultimately to enhance prosperity.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

Recognising the realities

The challenge we face now stems from the failure historically to price carbon to
reflect the potential costs of accumulated greenhouse gas emissions. Much of the
world’s post WWII prosperity has been built on cheap energy – or more accurately,
energy that has, with hindsight, been too cheap.

A significant part of Australia’s comparative advantage has of course been built on

cheap energy. We must recognise that shifting from this way of life represents a
major transformation for the Australian economy.

By putting a price on carbon, we are raising the cost of energy – and not just at the
margin.

Even though the cost of purchasing carbon credits will fall to business in the first
instance, business cannot be expected to absorb these costs. Business will respond
in the usual way that it does to higher costs:

• business will seek to use energy more efficiently; and

• business will pass higher energy costs onto consumers – households, other
businesses, and government.

Efforts to force business to absorb these costs or to limit the extent to which
business can pass on carbon costs will only result in less investment, fewer jobs and
lower growth.

Where costs cannot be passed on and energy efficiencies are not available,
business will simply cease to exist if this prevents them from earning an adequate
return on their investment. This is a particular risk with trade-exposed, emissions-
intensive industries (TEEIIs).

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

If we want to achieve lower emissions we must reduce our consumption of emissions

intensive products, services and activities – and that means raising their relative
prices.

Raising the price of energy, including petrol, is not going to be politically popular, as
has been made clear in recent months. Local oil industry estimates suggest an
emissions trading scheme is likely to add another 10 cents per litre to the price of
petrol.

But raising the price of energy and those goods and services which use a lot of it is
what has to be done if we are going to achieve a lasting reduction in emissions.

Business will provide the solutions

Our success in reducing emissions and maintaining living standards will depend on
how business responds to the introduction of carbon pricing.

What is required to significantly reduce emissions is:

• restructuring of current business processes and operations;

• greater deployment of low-emissions technologies that exist now;
• further development and commercialisation of emerging low-emissions
technologies; and
• discovery of new, breakthrough technologies.

The critical role played by an ETS is creating the framework for carbon to be priced,
which in turn drives these changes.

We are more likely to achieve the best outcomes from a national emissions trading
scheme if that scheme is built around a solid understanding by government of
business processes and investment decision making. The more informed
policymakers are about investment decision making in business, the better will be
their policy decisions.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

Investment decisions are of course based on expected returns which are driven by
costs and revenues and risks related to both. How a carbon price impacts expected
returns depends not only on the carbon intensity of production but also the extent to
which these costs can be passed on.

The introduction of an emissions trading scheme will add significant investment risk
and uncertainty, and a key priority should be to minimise unnecessary risk and
promote the smoothest transition to the achievement of longer-term objectives and
targets. The effectiveness of policy in shaping incentives and hence investment will
determine whether policy objectives are achieved.

Government can encourage investment and innovation and provide better incentives
through the right design and implementation of Australia’s emissions trading
scheme.

But it will be business which delivers this investment and innovation. That is to say,
business, motivated by the right incentives and price signals, will provide the lasting
foundations for success in the transition to a low-emissions economy.

Devil in the detail

The design, implementation and operation of these incentives and price signals will
be critical to an emissions trading scheme achieving its desired objectives.

There is still a lot of uncertainty around important design and implementation details
that will be very important for business.

Two areas are particularly critical:

• managing the circumstances of trade-exposed, emissions-intensive industries in

the absence of a global price on carbon to ensure ongoing competiveness and
prevent carbon leakage; and
• ensuring there remains an environment in which business can confidently invest.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

Competitiveness and trade-exposed emissions-intensive industries

People have asked why Australia should consider the competiveness impacts of the
introduction of an Australian emissions trading scheme. It matters on two counts.

The only reason Australia is introducing an emission trading scheme is to play its
role in reducing global emissions. Establishing a scheme that results in emissions
simply shifting elsewhere – along with the jobs and economic activity – benefits
neither the environment nor the economy. In the language of climate change this is
referred to as ‘carbon leakage’.

Secondly, at the end of the day global action, and specifically a global price on
carbon, is what is needed. If businesses currently operating in Australia would
remain competitive if their overseas competitors faced a price on carbon, why would
we establish a national scheme that causes them to close or relocate simply
because we have introduced a carbon price ahead of others? The gain to the
environment and to our economy is unclear.

Many of the countries that Australia competes with in energy-intensive industries do

not have a carbon price in place – and will not soon – and their production methods
are typically more energy intensive e.g. cement production, or based on more
emissions intensive inputs e.g. the different thermal coal calorific values.

Sectoral competitiveness concerns are legitimate for trade-exposed, emissions-

intensive industries such as cement, paper, steel, minerals processing, LNG, and
aluminium. Careful analysis is needed to determine the best approach to
understanding the underlying causes of competitive vulnerability in these industries
and businesses, and to ensuring competitiveness.

Lessening the burden of adjustment on any one sector for a period of time does
imply that a larger burden falls on other sectors but that does not mean the
competiveness issues can be ignored.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

On the other hand, crudely carving out sectors for political reasons without robust
analysis can have as much of an adverse impact as doing nothing.

What this highlights is there is not a simple policy response available. We are calling
for a policy response that meets the twin objectives of contributing to a reduction in
global emissions and maintaining Australia’s economic capacity to respond.

An environment for business investment

Transitioning to a low-emissions economy will take substantial investment and time.

Ensuring the public policy framework facilitates ongoing investment in new low-
emissions technology is critical.

To avoid unnecessary and prolonged disruptions to business investment, the

government needs to be very predictable in terms of the:

• principles of its approach;

• targeting national policies to support the objective of reducing global emissions;
• processes by which decisions will be made; and
• consistent application of rules and regulations to all market players.

This is important not just for the businesses concerned but also their employees,
customers and suppliers.

By way of example let us consider Australia’s electricity market.

• It is the major producer of emissions.

• It relies predominantly on coal-fired generation.
• There is little in the way of alternative, low-emissions technologies currently
available.
• Renewable energy sources are currently incapable of meeting demand.
• Energy infrastructure has a 20 to 40 year lifespan.

An emissions trading scheme will change the cost structures and valuation of the
sectors’ assets. The emissions trading scheme is a fundamental shift in the rules

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

bringing with it significant risks. Faced with these risks businesses will put
investment decisions on hold and/or look for more attractive investment
opportunities.

Managing the transition of these businesses will help smooth adjustments and
reduce real economy shocks and costs.

What business must do

To ensure that we get it right, business and government must communicate openly
to build clear and mutual expectations of policy aims and outcomes.

Business must do all it can to understand the impacts of an emissions trading

scheme on its business and to quantify this. Business must then communicate this
information to government and policymakers in a direct, precise and factual way.

Now is not the time to exaggerate the negative impacts of a national emissions
trading scheme – doing so risks government closing its ears to what we have to say.

Nor is it a time to overlook the complexity of the process we are embarking on.
Government must be prepared to listen – even if the message is one it does not
want to hear.

The business and government partnership to address climate change must be built
on confidential information sharing.

What governments must do

Just as there are things that business must do there are related government actions
that are critical if business is going to be able to play its role successfully.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

Other policies must support the ETS and adjustments to it

If we want an emissions trading scheme to be as effective as possible, other policies

must work to support a reduction in emissions.

The ETS should be complemented by R&D, innovation, and policies that support the
development and deployment of low-emissions technologies.

At the least, policies must avoid creating incentives that work contrary to the ETS or
which increase the adjustment burden associated with reducing emissions. As an
example, state-based price caps on retail energy prices will need to be removed.
Our climate change strategies must be national.

Careful consideration will need to be given to how the revenues generated by an

ETS are used. Some will need to be directed to help households and heavily
exposed industries adjust in the transition to a low-emissions economy. And some
may be needed to address our adaptation to the impacts of climate change.

ETS revenues should not be allowed to become part of a permanently higher

revenue base for government, and we welcome recent comments by the government
that confirm this.

A broader reform agenda is critical

The answer to the risks associated with climate change is not restricting growth –
growth will provide the resources and opportunities, through investment and
technological advance, to reduce emissions.

It is far easier to modernise plant and equipment, to develop new production

processes and drive structural adjustment when a business is growing.

If we are going to sustain strong growth we must lift our productivity performance.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

We need a broad reform agenda to turn our productivity performance around and lay
the foundations for long-term growth.

The government has outlined an ambitious reform agenda. If it is implemented it will

provide a significant boost to productivity and growth.

Key priorities include:

• implementing a seamless economy for business regulation;

• raising the effectiveness and efficiency of our tax system;
• lifting educational outcomes and skills;
• better enabling innovation;
• improving the coordination and planning of infrastructure investment; and
• strengthening our global engagement.

Achieving these reforms will enable us to better respond to the challenges of climate
change and the introduction an emissions trading scheme and carbon price.

Concluding comments

The introduction of an emissions trading scheme is the single most important and
complex policy decision that the government will make ahead of the next election.

There are no short cuts or simple solutions.

The introduction of an ETS will raise costs and these will flow to consumers.

We need to manage the transitions sensibly – and all policies must work together
towards this goal.

How well we deal with this will depend on how business responds through
investment and innovation.

Business needs to communicate the implications of an ETS clearly and factually.

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Australia’s Emissions Trading Scheme – An Opportunity Greig Gailey, BCA President
Keynote address to CEDA – Shangri-La Hotel, Sydney 3 July 2008

All of our efforts to deal with the risks of climate change will be better supported by a
comprehensive reform agenda to lift productivity – the sooner progress is made on
implementation the better.

We cannot see climate change only in terms of the risks and challenges – there are
tremendous opportunities.

Australia has a real opportunity to achieve better social, economic and

environmental outcomes based on higher productivity – and carbon productivity in
particular.

Through its broader reform agenda, the government has the opportunity to support
our transition to a low-emissions economy.

The government can lead the way in the implementation of a credible and successful
national ETS that provides an example of what can be achieved for other countries
to follow.

Business has a critical role to play in this process and it is committed to playing that
role.

[Ends]

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