Some desired design features of Australia’s policy response to the greenhouse challenge

1. Some desired design features of Australia’s policy response to the greenhouse challenge Australian Industry Greenhouse Network Rod Sims Director, Port Jackson Partners Limited; and Expert Adviser to the MPCCC

2. SUMMARY MESSAGES • Australia has a difficult challenge in reaching the around 25% against BAU emission reduction target by 2020 (and this target has bipartisan support) • A market-based approach should be the dominant policy mechanism to reach this challenging target • The design of the market mechanism is key; much will depend on aligning our actions with international efforts Port Jackson Partners Limited

3. The science is calling for large and immediate reductions in world emissions ATMOSPHERIC CONCENTRATIONS OF GREENHOUSE GASES No mitigation PPM 550 ppm 450 ppm Immediate, large change required from current trajectory On a BAU basis will be 1000 PPM before 2070 * Kyoto gasses and CFCs only Source: Garnaut Climate Change Review Update, paper 5, page 9 Port Jackson Partners Limited

4. On a BAU basis 70% of emissions will come from developing countries by 2030 GLOBAL BUSINESS AS USUAL EMISSIONS SHARES BY REGION, 2000 TO 2030 Per cent ~ 50% emissions now from developing countries Other OECD Transition EU USA Other Developing India China Source: Garnaut Climate Change Review, Global emissions Trends, 2011, page 31 Port Jackson Partners Limited

5. Australia’s -5% target is in fact around 25% against BAU; and a target of -25% is -40% against BAU Bipartisan support for ~24% reduction against BAU by 2020 AUSTRALIA’S EMISSIONS TRENDS, 1990 TO 2020 Abatement challenge + 24% 108% of 1990 level Mt C02-e 2000 level - 5% - 160 - 15% - 216 - 25% Kyoto period - 272 Note: Trajectories to the 2020 target range are illustrative, they begin in 2011-12 at 108 per cent of 1990 levels (consistent with Australia’s Kyoto protocol first commitment period target) and assume a straight line reduction to the target Source: Australia’s emissions projections, Department of Climate Change and Energy Efficiency, 2010, page 8 Port Jackson Partners Limited

6. The bipartisan around 25% reduction target is a major challenge for Australia NATURE OF EMISSION REDUCTION CHALLENGE Port Jackson Partners Limited

7. At a high level there are 3 ways to meet the challenging ~25% BAU target HIGH LEVEL ALTERNATIVE APPROACHES Port Jackson Partners Limited

8. Advantages of an ETS over a carbon tax PREFERRED MARKET MECHANISM Port Jackson Partners Limited

9. Ultimately the burden of emission reduction will fall on society as a whole WHO PAYS? Port Jackson Partners Limited

10. Most independent commentators did not support the CPRS, often using strange logic CPRS ISSUES Port Jackson Partners Limited

11. Perhaps the most heated debate was over compensation to EITEs Note – largest criticism of EITE compensation not matched by equal criticism of the highest cost abatement measures COMPENSATING EITEs Port Jackson Partners Limited

12. There is now a renewed effort to achieve a carbon price, but the approach creates some additional issues WHERE ARE WE NOW? Port Jackson Partners Limited

13. Allowing any access to international offsets is more difficult with a fixed price INTERNATIONAL OFFSETS Port Jackson Partners Limited

14. The hybrid model raises the issue of investment certainty INVESTMENT CERTAINTY – THE ISSUE Port Jackson Partners Limited

15. We must find a solution to the issue of investment certainty within the hybrid model INVESTMENT CERTAINTY – FINDING A SOLUTION Port Jackson Partners Limited

16. Stepping back, we need to keep in mind what we are solving for KEY GREENHOUSE GOALS – ONE VIEW Port Jackson Partners Limited

17. Given these goals, we should be guided by some key policy principles SOME POSSIBLE PRINCIPLES • Allow a carbon price to substitute for most other “complimentary” measures; particularly the high cost measures • Explicitly link Australian steps to those taken by most other emitters • Do not assume now what steps the international community will take in future (relevant to the EITE compensation issue) • Helps the economics and the politics • Maximise linkages to other carbon markets • Seek a modest start to this difficult challenge • Avoid the “catch 22” of “the longer we leave it the larger the initial steps we must take”; but large steps are harder to sell politically, so we take no substantive action • Instead we introduce appealing but very high cost measures (e.g. solar panels) that cannot address the problem but which raise costs considerably, and without any compensation Port Jackson Partners Limited

18. SUMMARY MESSAGES • Australia has a difficult challenge in reaching the around 25% against BAU emission reduction target by 2020 (and this target has bipartisan support) • A market-based approach should be the dominant policy mechanism to reach this challenging target • The design of the market mechanism is key; much will depend on aligning our actions with international efforts Port Jackson Partners Limited