Garnaut has faith in market forces

Australian
Thursday 27/3/2008 Page: 8

LABOR'S chief adviser on climate change policy believes the market will resolve most problems arising from the introduction of an emissions trading scheme, while power companies claim market forces are likely to cause the greatest disruption. Presenting his blueprint for an emission trading scheme from 2010 to 800 business representatives yesterday, Ross Garnaut said he favoured a simple and transparent system with minimal intervention from government.

While acknowledging the damaging potential of volatility on energy costs driven by speculation in the new permits market, Professor Garnaut said applying price caps would just turn the scheme into a carbon tax. He admitted that the capacity for the Rudd Government to start the scheme gently with a lower price on emissions that increased over time could be disrupted by big emitters aggressively buying permits to use when they were more scarce.

"I would imagine the market would price in some probability of tightening, but nowhere near the whole potential," he said. "So there would be a bit of tendency in that direction, but that means the market is deciding that the lowest cost abatement over time would mean to do a bit more now, and a bit less later." National Generators Forum director John Boshier said Professor Garnaut displayed an "absolute faith" in the market to find the most efficient outcome, but warned that big power stations could close suddenly, sending prices skyrocketing as a result of market forces.

A high price on permits would mean some privately owned power stations in Victoria and South Australia would become commercially unviable and their owners would come under pressure to shut them to minimise their losses, Mr Boshier said. The implementers of an ETS needed to micro-manage the transition from existing power stations to new low-emission sources to avoid power shortages and price spikes that would arise, he said.

"If there's not enough power to take its place, then prices will go sky high," he said. Professor Garnaut reiterated his preference to include transport fuels in the scheme despite comments at the weekend by Assistant Treasurer Chris Bowen that the Government was considering exempting them. In a speech to the Sydney Institute last night, Opposition Treasury spokesman Malcolm Turnbull warned the transition to a low-emission economy would not be simple and called for a reform of the tax system using revenue from auctioning emission permits.