The Carbon White Paper: Real Politic, Business Opportunities and What to Do

NOW that the heated first round of responses to the Rudd Government’s carbon trading White Paper is cooling, it is worthwhile looking at how businesses can do two very important things in the face of inevitable climate policy progress.

The first is to play it smart – by safely negotiating this ‘bigger-than-the-GST’ exercise in economic restructuring without suffering unnecessary harm. The second, and most important, is to be proactive – seeking out the new business opportunities on offer and moving on them ahead of competitors.

To this end, our article addresses three main dimensions:

  • The real politic of emissions trading – in spite of ongoing arguments around its final form, Australia is now committed to a carbon market and getting on with it in the field may be far more important than trying to make it perfect in the laboratory (a senior federal bureaucrat charged with implementing the scheme has described this challenge as ‘how to make sure the best is not the enemy of the good‘).
  • Finding the business opportunities – almost everyone agrees that there are great low-carbon options and opportunities for the future – if ‘the future’ means in two or three decades rather than a few years. But all the argument revolves around relatively short-term pain, which the White Paper proposes to address with a multi-billion dollar array of transitional measures. Businesses that can maximise the compensation or transitional support they receive while sizing up and pursuing new opportunities are among likely winners.
  • Working out what to do – there are a number of things businesses need to do to be winners on the path to what the White Paper highlights as ‘Australia’s low pollution future’.

1. Framing the real politic of emissions trading for Australia
For the main part early responses to the carbon trading White Paper matched reasonable expectations. Environmentalists and others who embrace an imperative for massive early action on climate change attacked it as a weak approach to cutting greenhouse gas pollution. They warn of a voter backlash in Australia and of ridicule internationally. As with the enduring forest protests of the late 20th century, the clear threat is a strategy of unrelenting activism aimed at denying certainty for industry, whatever the latest round of official policy settings promises to deliver.

Moderate voices had a buck each way – ‘a good start, but more to be done’, and ‘not enough to trigger a revolution in clean energy investment and new green jobs’. Industry hardheads kept on insisting how ruinously difficult even a relatively modest 5 percent cut by 2020 will be, seeing peril for traditional assets and jobs in spite of the prospect of big subsidies for the heaviest polluters and transitional support for everyone from coal mining companies to motorists, and small businesses to low-income households.

By standing back from the initial frenzy of partisan responses to the White Paper, it’s possible to put what’s happening and where climate policy may be headed into a useful context. There are several key points that frame the political reality:

1: It’s only a little over two years ago that the dominant ‘right of centre’ position on a price on carbon, whether through an emissions trading scheme or a carbon tax, was officially ‘no way anytime soon’, and Australia was refusing to ratify the Kyoto Protocol. The then Prime Minister John Howard said as much on the ABC-TV Four Corners program broadcast on August 28, 2006, but had to change rhetoric as the electorate moved decisively in following months to demanding real climate action.

2: A little over one year ago the election of the Rudd Labor Government locked in its commitment to ratify Kyoto and to develop a national emissions trading scheme, since rebadged the Carbon Pollution Reduction Scheme (CPRS). Suddenly the new political middle ground for climate policy was yes to Kyoto and yes to carbon trading. Now, the mainstream debate is about the scale of the target and the speed and substance of implementation, not whether to have carbon trading at all.

3: In a little over a year from now the Rudd Government will be entering an election year of 2010 (or possibly very early in 2011), seeking a second term in office. At the same time it plans to be implementing the CPRS – economic restructuring of bigger-than-GST proportions – in what are likely to still be very challenging times for the Australian and global economies. Inevitably critics on all sides will find plenty not to like, and the process will get politically bloody at times, so achieving the Government’s preferred outcome will require significant political skill, determination and endurance.

4: At the same time, the Government is a busy one and has much else on its mid-term reform agenda, including a ‘root-and-branch’ overhaul of the Australian taxation system with its own climate/carbon aspects, and the outcomes of all manner of other reviews it instituted in the first year of its term. This will be a dynamic decision-making environment and the potential for political stand-offs and the demand for deal-making in the Senate will extend well beyond the CPRS.

5: On January 20 2009, Barack Obama will be inaugurated as the new President of the United States of America. That could change a great deal in terms of global climate politicking, with 2009 the watershed year for negotiations on the post-Kyoto Protocol climate action regime beyond 2012. No-one can be sure what Obama can and will do on climate policy as yet, although a CPRS-like ‘cap-and-trade’ scheme is highly likely as America shifts from Bush-Cheney Administration thinking. (It’s worth recalling that the previous Clinton-Gore Administration originally forced emissions trading on to the agenda for the Kyoto Protocol negotiations in 1997 – with Australia’s support.)

2. Finding the business opportunities
Timely passage of the CPRS legislation is a vexed issue and this is by no means the end of the uncertainty era around climate policy and related matters. The whole area is laced with doubt and is inherently challenging for policy-makers and business alike. So the business opportunity starts with accepting uncertainty as part of the business dynamic; a proposition heightened by the global financial crisis.

Perhaps counter-intuitively, this is a time to seek out opportunities. The Government’s overall climate strategy is built on three key pillars: carbon pollution reduction in Australia, adaptation to address unavoidable climate change impacts, and pursuing a global solution. The first pillar in turn has four key elements being the CPRS, the Renewable Energy Target of 20 percent of all energy generation coming from low-carbon sources by 2020, support for cleaner coal technologies and especially Carbon Capture and Storage (CCS), and a still ill-defined energy efficiency focus.

Each of these pillars and key elements comes with its own set of uncertainties – be it political, scientific, technological, financial or otherwise. Adaptation, just to take one example, opens up lots of problems. An obvious business impact is on the property industry as town planners are given the necessary powers to refuse developments on land prone to sea-level rises, thus hitting valuations. If knowledge of such problems can be translated to market advantage the business opportunity is clear.

Among the key elements, energy efficiency is the sleeping giant of climate policy, with the US state of California offering a startling example of what can be done even without a carbon trading scheme. California has a unique history within the US with regard to two key areas of environmental policy that are relevant to carbon emission reductions, being controlling air pollution from motor vehicles and regulating energy efficiency.

The energy efficiency focus has given California a remarkable 60 percent better performance in terms of per capita electricity consumption (7000 kWh per annum) by comparison with the US average (12,000 kWh). The relevant number for Australia is 11,000 kWh, and finding ways to reduce this would create significant economic value in Australia regardless of what other nations do on global carbon reduction.

As a jurisdiction, California has runs on the board that go way beyond anything Australia has done. The key to these achievements has been an intense focus on regulation-induced technical change rather than carbon trading, although California is now working on its own CPRS-equivalent. The Californian approach has meant forcing powerful energy utilities, oil companies and big manufacturers like the auto companies and appliance makers to clean up their act if they want to trade in the state. It’s also meant encouragement for businesses with clean solutions.

A danger for business of the CPRS being condemned as too weak or too slow to cut pollution is that public and political demand for more direct regulatory measures will escalate, putting more pressure on operations and products, and denying business some of today’s greater freedom to innovate. Market-based solutions take time to take effect and patience is already in short supply among key critics. Some observers see a fundamental lack of faith that over time governments will toughen up targets to drive real cuts in carbon pollution. So if business wants market solutions it has an interest in showing they can work.

3. Working out what to do
Some top-of-mind questions for business leaders to pay attention to in 2009 are:

  • Regulation – Is my business captured directly by the planned CPRS, which only applies to about 1,000 businesses out of 7.6 million in Australia, and are we properly organised to comply including mandatory disclosure obligations under the National Greenhouse and Energy Reporting System (NGERS)? If the business is not directly captured, how else could it be affected?
  • Politics – Is my business vulnerable to the still-unfolding political process? With tough political bargaining over the final shape of the carbon trading scheme set to run through much of 2009, if not longer, there’s a need to be vigilant about any changes that could help or harm your business.
  • Assistance – Will my business be challenged directly or indirectly by the scheme’s introduction and can we be compensated or otherwise supported through transitional arrangements? Most major emissions-intensive and trade-exposed industries (EITEs) will know where they stand, but small and medium-sized enterprises may be eligible for help under the newly-announced Climate Change Action Fund ($2.15 billion over five years).
  • Complementary – How will additional measures – for example the 20 percent by 2020 Renewable Energy Target and a greater national focus on energy efficiency – impact on my business? It’s worth noting that with a relatively low-target, price-capped start to emissions trading, a lot of pressure for more and faster action will fall on complementary measures. Businesses being given free permits or compensated under the CPRS will face particular pressure to perform on energy efficiency and uptake of clean energy options, and there are state-level schemes to take into account as well.
  • Doing extra – If my business is already a beyond-compliance performer on environment, climate and sustainability, or if it has ambitions to become so, how will stakeholder expectations be affected by the climate policy debate and outcomes? For example, if your business is going carbon neutral voluntarily, how will that be best handled and communicated once the compliance carbon market is operating?
  • Focus – Am I being distracted by the carbon pollution reduction part of the climate policy equation when the main issue for my business may lie in another area? A prime example is adaptation to the unavoidable impacts of climate change such as sea-level rise, reduced rainfall or more extremes of weather and heat, and how emerging official policy in planning and other areas will affect property and other valuations.

A key observation is that climate policy and its implications cannot be addressed as fringe environmental issues. They need to be treated as part of core business.

Embedded uncertainty
To the extent that business in Australia has been supporting the CPRS delivery process, its overwhelming desire in pragmatic terms is for maximum certainty on climate policy and the carbon pricing path. This would allow companies to get on with their operations and investments, especially in the energy sector where projects typically are massively expensive and very long-term, and hugely affected by carbon pricing.

If certainty is meant to include peace in our time with climate change and environmental campaigners, and securing broad community support for the CPRS, then there’s a problem – at least for next two years and probably beyond. Although the White Paper provides more clarity and certainty than we’ve had, it’s nowhere near as much as business would like.

The CPRS will start on July 1, 2010 – as long as the Government can get its way with the legislation. The 2020 reduction target has been given in a range of 5 to 15 percent of the 2000 baseline – with 5 percent locked in whatever happens, but anything up to 15 percent still possible if the world moves decisively on global action at the key United Nations’ meeting in Copenhagen in December 2009. The carbon price is modeled to kick in at around $25 a tonne of CO2-equivalent, although it could in theory at least test the $40 price cap that’s being imposed for the first five years (rising by 5 percent in real terms after inflation per annum).

A high-level timetable from here looks like this, with a number of uncertainties built in:

  • 2009 – Release of an exposure draft of the legislation early in the New Year, with a Bill going to Parliament in May. This will be followed by intense political and public horse-trading around reaching the final form of the CPRS as it progresses from White Paper to final legislation. Assuming the Government’s own resolve and discipline is strong, then the three main options for an outcome appear to be:
    • A negotiated outcome in the Senate with the Balance of Power players – the five Greens, Family First’s Steve Fielding and the South Australian Independent Nick Xenophon – supporting final passage of a modified Bill. It should be noted the Greens are among the Government’s harshest critics on the White Paper formula and stand to gain politically by picking up votes from traditional Labor supporters who are disenchanted on environmental grounds
    • A negotiated outcome in the Senate with the Opposition, or at least the Liberals led by Malcolm Turnbull if not the Nationals and their CPRS-hostile Senate leader Barnaby Joyce, supporting final passage of a modified Bill. The early interpretation by political pundits is that the Government is positioning itself to seek a deal with the Opposition on the CPRS in preference to the Greens et al
    • Failure to gain any agreement, perhaps creating a trigger for Prime Minister Rudd to call an early election, or to go to the polls in regular time in 2010/11, carrying to voters the Government’s frustrated ambitions to deliver on its 2007 election promise of an emissions trading scheme.
  • 2010 – Assuming legislation passes in some form, the Government’s clear commitment is to announce the final 2020 reduction target early in 2010 – a minimum of 5 percent and a maximum of 15 percent against the 2000 baseline – with a start to the scheme from July 1, and an election either later in the year or early in next
  • 2011 – This has been Malcolm Turnbull’s favoured start-up timeframe for emissions trading, but agreeing to lose a year would be a big back down for the Rudd Government. If the scheme has not started by 2011 it will have become a key election issue once again.

With the release of the White Paper, most commentators saw the Government as comfortable with being lashed from either end of the eco-political spectrum while taking a moderate climate policy path. It has to negotiate both domestic and global hurdles, in the hardest economic times in recent memory, to get started. To the extent that Prime Minister Rudd has indicated willingness to canvass more dramatic targets for carbon pollution reduction beyond 2020, perhaps as scientific evidence of dangerous climate change escalates, he’s clear that this will require a new mandate for action from the Australian people at a 2010 election or beyond.

*Murray Hogarth consults on climate change and sustainability with Hawker Britton. He is a former Sydney Morning Herald environment editor (1997-99) and longtime corporate strategy adviser with sustainability firm Ecos Corporation (1999-2008). [email protected] Mobile 0417 267235.