Rudd thrown an emissions time bomb

AUSTRALIA'S business leaders have thrown a political time bomb into the Rudd Government's lap.

Business rejection of the Government's emissions trading system model has lethal consequences.

It signals that Australia is moving into dangerous territory for individual corporates, the economy and investor confidence.

The analysis unveiled yesterday by the Business Council of Australia says the Government's ETS green paper "leaves too much scope for uncertainty for business to continue to invest in existing and new facilities".

This warning constitutes a degree of commercial threat dangerous for any government to ignore.

It is contained in the commissioned report by Port Jackson Partners on the application of the green paper's ETS to 14 businesses across Australia's trading sector, the first such corporate analysis.

This was led by former federal government senior economist Rod Sims.

Its sharpest conclusion projects the Rudd model to 2020, assumes a $40-a-tonne carbon price and concludes that corporate boards "will be unlikely to invest while such outcomes are possible".

The graphic shows a series of financial disasters.

The Rudd Government's response to climate change now becomes a diabolical challenge. It is trapped between its political pledge to price carbon to alter investment flows and this business analysis showing that under Rudd's model, a range of Australian-based companies will struggle to stay viable, facing hefty profit declines, a crippling of new investment and significant carbon leakage offshore at Australia's economic cost.

The Government will rely upon the imminent Treasury modelling to quell such concerns.

The BCA document demands assessment for its three different messages. First, it argues the proposed ETS with its compensation mechanism is untenable. Second, it proposes an alternative model, different in conception.

Third, it offers an overview of Australia's climate change strategy that finishes, in effect, suggesting a carbon tax is probably the best way forward.

In its concluding overview, the report supports either a modest abatement target until global deals are done or the alternative of a fixed carbon price of $10 to $20 a tonne, meaning there would be no annual cap pending a global agreement. It leans towards the de facto carbon tax option.

The analysis for the electricity generating sector warns that any 10 per cent emissions reduction target by 2020 involves a "major risk" to power supply, a lift in retail prices of 25 to 40 per cent and stretches to the limit investment capacity in alternative energy. It suggests that a lower 2020 emissions target may be required.

The business community also insists that any ETS must see the removal of all retail electricity price caps and abolition of the renewable energy target scheme.

While Kevin Rudd and senior ministers are attached to their green paper ETS model, such support will be severely tested by this document. The BCA analysis rejects the formula under which 30 per cent of carbon pollution permits would be issued for free.

It finds the threshold mechanism based on tonnes of emission intensity in relation to revenue is "quite simply, the wrong starting point". This is a problem not of numbers, but of design.

The analysis finds the green paper compensation "is inadequate and contains significant anomalies". Businesses with average profits and modest emission intensities of 500 to 2000 tonnes of carbon dioxide per million dollars of revenue "will face significant profit declines".

Anomalies are such that firms at 1490 tonnes per million dollars of revenue get no compensation while firms at 1500 tonnes per million dollars of revenue get 60per cent of their permits free.

The BCA wants an entirely new compensation model. It seeks 90per cent compensation for trade-exposed companies. It proposes full compensation above a threshold defined as 3 to 5 per cent of industry value added.

And it wants permits issued outside the national cap to allow for growth in trade-exposed industry in the absence of a global carbon price.

This will strain government-business ties to the limit.