Don't Cry Over Contracts For Closure

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Martin Ferguson’s decision to abandon the "Contracts for Closure" program yesterday was both surprising, and unsurprising.

It was surprising, because the Rudd-Gillard government has never met a fossil fuel polluter it hasn’t wanted to throw money at. Every time Labor has come up with a policy to reduce Australia’s greenhouse gas emissions, it has always included big dollar compensation packages for big polluters, often in cash. Just this June, for instance, Greg Combet’s Department of Climate Change handed over a cool billion dollars to brown coal generators under the rubric of "energy security". Those who question the value of corporate lobbyists should have a look at some of the sums handed over to our nation’s dirtiest power stations, simply to ensure they didn’t close down. We’ve detailed them in a table below.

Until yesterday, Energy Minister Martin Ferguson’s department was expected to hand out billions more, under its so-called "Contracts for Closure" program. This program would have paid brown coal generators to shut down. The idea was to call for tenders to retire approximately two gigawatts worth of generation capacity from the most polluting parts of Australia’e electricity sector. The program was part of the clean energy package that the government negotiated with the Greens, as part of its efforts to price carbon.

Contracts for Closure has now been abandoned. Ferguson apaprently decided that the government can’t afford the extortionate prices international energy companies were demanding from the taxpayer for the pleasure of shuttering their planet-warming power stations. "I have said throughout this process that we had a set envelope of funding and were not willing to enter into contracts at any cost — this is about the responsible expenditure of public funds," he said yesterday.

The background behind the decision is the weakness of the government’s price on carbon. Owing to low international carbon prices, and especially now that Australia has linked our emissions trading scheme to Europe, there is a real possibility of a dramatic fall in the carbon price after 2015. As a result, the value of these polluting fossil fuel assets was suddenly a lot higher than the government had expected. The international energy companies running these plants knew that, and negotiated hard for every cent. In the end, Ferguson was unwilling or unable to pay them what they asked.

And that’s the bit about this decision that is not surprising. As we know, the government’s coffers are bare just now. Abandoning Contracts for Closure saves billions down the track. While this decision may not have an impact on the forward estimates (the money wasn’t due to flow until 2016-17), it’s hard to read this as anything other than a cost cutting measure.

Environmentalists and the Greens are predictably furious. Brown coal power generators like the notorious Hazelwood power station — Australia’s dirtiest power plant — have long been prominent targets for the climate change movement. "The Government’s decision to determine their contracts of closure is a breach of the faith with the multi-party climate committee and it really goes against the spirit of everything we’ve been trying to do, and that is close down the dirtiest power stations in Australia, particularly Hazelwood in Victoria," Christine Milne said yesterday.

One of the reasons environmentalists wanted to shut down Hazelwood and the other dirty power plants was that, on its own, the carbon price is not high enough to force a rapid transition from burning brown coal for power. Brown coal is cheap; so cheap, in fact, that even after paying the federal government for the privilege of polluting the atmosphere, power stations like Loy Yang and Hazelwood are still profitable. The logic behind Contracts for Closure was that retiring two gigawatts of dirty brown coal would have shifted Australia’s energy mix towards less-polluting sources, such as black coal, gas and renewables.

This decision also highlights the illogical mess that climate change policy has been twisted into by the power of vested interests in the fossil fuel industries. At the same time that the government is taxing brown coal generators for their carbon pollution, the government has also been paying brown coal generators hundreds of millions apiece to keep operating, using the rhetoric of "keeping the lights on". As it turns out, demand for electricity is falling anyway, so there is no risk of the lights going out any time soon.

Green groups are now calling for the generous compensation packages being received by these dirty power stations to be cut back. "Give us back our $5.5 billion", Environment Victoria is already saying.

On economic grounds, Contracts for Closure was always pretty suspect anyway. Closing down Hazelwood and the two Loy Yangs would have been expensive, but not particularly effective at reducing pollution. The reason, as Paul Hyslop, from ACIL Tasman told the ABC’s Gregg Borschmann, is that the winners from the demise of the La Trobe Valley power stations would have been black coal facilities in New South Wales. These are only slightly less polluting than brown coal generators. "The modelling we’ve done basically indicates it gets displaced by fairly heavy black coal generation, it basically just swamps down from NSW across the border and displaces the brown coal," Hyslop told Borschmann. "And so you actually maybe only get 0.3 or 0.4 tonne a megawatt-hour saving which is actually pretty small bang for your buck in my view".

The debate over brown coal compensation might even backfire for the big energy companies, as environmentalists mobilise to use other means to shut down these dirty plants. One tactic might be to restart the anti-Hazelwood campaign. The "social license to operate" for brown coal generators is tenuous, at best. These companies now run the risk of more public protests and perhaps even blockades in the style of the Tasmanian forestry debate.

There is a win-win strategy for both the government and for those wanting less pollution of the atmosphere, although it seems unlikely the government will adopt it. This would be to stop handing out free permits to dirty industries like brown coal. Currently, these generators receive 94.5 per cent of their pollution permits for free — meaning they only pay one twentieth of the true price for carbon in this country. Free permits have always been the least defensible aspect of the emissions trading scheme. The whole point of pricing pollution is to reduce its harmful impact on the atmosphere. Handing out free passes contradicts that goal.

By re-opening the debate on carbon compensation, Minister Ferguson might just have done everyone a favour. Given that the price of carbon is lower than expected, and given that Australian electricity demand is falling, most of the arguments made by the brown coal generators look overblown. Making the coal plants pay the full price of their carbon permits would make for a healthier carbon market, a better emissions trading scheme, and a healthier federal budget. It would also lower Australia’s emissions. In other words, it would be good for everyone except Big Energy.

New Matilda

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