The warnings were clear and now it’s happened: bending over backwards with carbon tax compensation to appease Australia's dirtiest electricity generators, the Gillard government has handed big coal billions in windfall profits, whilst consumers are effectively paying twice for the carbon price.
Anybody with any sense — from Professor Ross Garnaut to the Greens — warned two years ago that Labor's carbon tax package was far too generous in compensating Australia's dirtiest, brown-coal-fired power stations in Victoria and that, rather than providing reasons for them to be phased out, the package would perversely provide financial incentives to keep generating dirty power even longer.
And now the damning evidence is in.
A new study released on February 20 — “Transitional assistance or windfall profits?” — by consultants Carbon and Energy Markets (CME) shows how far overboard the Gillard government has gone in appeasing Australia's dirtiest coal power station owners. The report is the first analysis based on market outcomes, as opposed to predictions and models.
In an eerie parallel to the mining tax disaster — which has produced revenue of just $126 million in six months as against a giveaway of $1.7 billion in tax credits to the big miners — the report found that:
• In the first six months of the operation of the carbon price, generators have passed on more than 100% of the carbon price to electricity retailers. That is, despite the carbon tax, their profits from the sale of Australia's dirtiest electricity have increased.
• Victorian brown coal generators have already received $1 billion in cash compensation payments from the Energy Security Fund.
• They are due to receive billions more in compensation from that fund, with the next payment due on September 1 this year.
• The combination of full carbon price pass-through and compensation will deliver windfall profits for generators estimated at between $2.3 billion to $5.4 billion, depending on the future carbon price.
Report author Bruce Mountain of CME says that in the first six months since the introduction of the emission price, generators in Victoria "seem to have been able to pass on all of the cost of the emission permits, through higher electricity prices in the spot market".
Assuming the generators are able to pass on a similar proportion of the carbon price in future, he estimates “the Victorian brown coal generators, which receive over 90% of Energy Security Fund payments, can expect to accrue additional operating profits somewhere in the range of $2.3bn to $5.4bn (Present Value) depending on emission prices in future.”
“Professor Ross Garnaut and others warned against compensation payments for generators stating they were unnecessary. The level of pass-through that has been observed so far has been unexpectedly high, and seems to vindicate their concerns.”
The report, commissioned by Environment Victoria, leaves the Labor Gillard government little choice but to urgently review and reduce or abandon these compensation payments. The report's findings are embarrassing and damaging to a government already suffering public odium for its cave-in over the mining tax.
Together, these events paint Labor as a party which has capitulated to the miners and brown coal generators at a cost of many billions of dollars a year in tax revenue. The practical consequence is that Julia Gillard's newly described "modern families" will pay the price through a combination of more taxes and lower government services.
It adds to the picture — contrary to rosy claims about "clean energy futures" — of a government beholden to the fossil fuel industry. At the launch of Environment Victoria's "Paid to pollute" campaign last Sunday, the results of detailed analysis by the Australia Institute of fossil fuel industry subsidies in Australia painted a startling picture. The research found total government subsidies to the fossil fuel industry of around $13.3 billion a year, compared to revenue from the carbon tax of just $7.7 billion a year (on fossil fuel industry pollution).
For all the pain associated with its struggle with the mining and carbon taxes, Labor has little to show if this compensation bonanza to Australia's dirtiest generators isn't quickly remedied. It's hardly surprising that these generators refused to negotiate seriously (and there is evidence that Martin Ferguson didn't try) under the proposed "Contracts for Closure" arrangements. If this compensation had been taken off the table as the Greens, Garnaut and many others advised, then we would now likely be watching Australia's dirtiest generators receiving some compensation to close down, rather than reaping windfall profits of $2.3–5.4 billion to keep pouring greenhouse gases into the atmosphere.
[This article first appeared at ClimateCodeRed.org on February 20.]