The Matter of Public Interest I wish to raise is the heavily compromised Treasury modelling of the government’s proposed Emissions Trading Scheme. I refer Senators, the media and the public to the former head of ABARE Dr Brian Fisher’s review of the Treasury modelling which was commissioned by the Senate Select Committee on fuel and energy and released this week. He found that many of the really important conclusions reached by the Treasury modelling were basically out of the ballpark because the underlying assumptions were totally unrealistic. The modelling is only as good as the inputs that go in. And Dr Fisher has raised serious questions about the validity of those assumptions not least because the government won’t tell us how those key assumptions were arrived at and by whom. A cynical exercise in political manipulation has gone on here. Dr Fisher’s review shows how the assumptions used by Treasury, at government orders, were so wrong that they materially affected the outcome of the modelling. As Dr Fisher states at page 6, “the interaction of these assumptions is likely to result in the treasury modelling seriously underestimating the economy-wide and sectoral challenges associated with particular emissions reduction targets, particularly in the short to medium term. The implications are especially important for Australia’s emission-intensive, trade-exposed (EITE) industries and for the electricity generation sector.” Dr Fisher reveals on page 21 that “Treasury officials have advised the committee that ‘the scenarios that were modelled by Treasury were done at the direction of the government’.” As one example, on page 9, Dr Fisher found that “in the case of agriculture, it is unclear how the large emission reductions would be achieved in the face of substantial increases in output relative to the level in 2008 as suggested by the sectoral results of the Treasury modelling. In a country where competitiveness will continue to depend on extensive rangeland agricultural production of sheep and cattle it is difficult to imagine that technology will become available in the near future to enable major reductions in methane output from rangeland agriculture.” As the former head of ABARE, Dr Fisher knows what he is talking about and points out on page 30 that “just because agriculture is excluded from the scheme in the first five years does not mean that farm costs will not rise. Suppliers of inputs such as electricity and diesel will have to purchase permits and a large share of those costs will be passed on. In the cropping sector, almost 40 per cent of input costs come from emission-intensive inputs, while in livestock the share is about 17 per cent. Competitors in key developing countries will not be subject to such cost increases.” He also notes on page 31 that the competitive impact on EITE industries of an ETS is likely to be felt most keenly in regional and remote Australia, often in locations with limited alternative sources of economic activity of such high value. So rural Australia is being asked to pay for the green guilt of those in the leafy suburbs. The rural vote is of far less weight to Rudd than the green vote. That’s what this is all about in the end. Dr Fisher’s review highlights the utter absurdity of the Treasury modelling relying on the assumption that the world implements emissions reduction arrangements through a global emissions trading scheme with ‘strong coordinated global action’. He notes on page 18 that “this is fundamental to results that yield relatively modest emission prices and aggregate economic costs of mitigation policies in Australia. It also helps to determine core conclusions about Australia’s ‘early mover’ benefits, posited improvements in the competitiveness of many EITE sectors and the ease with which Australia’s economy (including the electricity sector) transforms to a low emissions future…. From this premise, Treasury’s analytical framework yields a self-reinforcing, virtuous circle of domestic and international benefits. …the international action assumptions of the two Garnaut scenarios in the Treasury modelling are particularly optimistic based as they are on a global emissions trading scheme covering all economies and sources of emissions from 2013.” Just how realistic is it that the US, China and India will move together – with us – to commit to binding carbon reduction commitments? Just last week the new US President Obama stated “to protect our climate and our collective security, we must call together a truly global coalition. I've made it clear that we will act but so too must the world.” And Hillary Clinton, the Secretary of State, on Monday argued that “No solution is feasible without all major emitting nations”. That doesn’t sound to me like Obama is going anywhere without China or India. So why is Australia putting jobs at risk by going ahead with a flawed scheme well before the rest of the world?  Why are we selling out Australian jobs to our competitors? At a time of global financial crisis? Dr Fisher concludes, on page 35, that “there is little in the recent experience of international climate change negotiations that points the way to the Treasury scenario of ‘strong coordinated global action’ involving all major emitters. If anything, the position of rapidly growing developing countries in global climate change forums has hardened…. In reality, there is almost no prospect of non-annex B countries taking on binding emission restraints …the best that could be hoped for in coming years is for developing countries to engage gradually in an international framework via policy-based commitments.” Yet Treasury was told to assume that if Australia reduced emissions by 5%, the US would agree to 19% reductions while allowing China to increase their emissions by 172% and India to increase theirs by 99%. I don’t think that would go down well in Congress.    Dr Fisher observes on page 36 that “there is little doubt that the Chinese government has adopted an ambitious climate change related domestic policy program but this should not be taken as an indication that China is prepared to adopt binding targets in an international regime.” In other words, he says, “China’s position in global climate change negotiations revolves around: 1) demands that industrialised countries first commit to massive reductions in emissions; 2) demands for large-scale technology transfers and financial support; and 3) using the legal framework of the UNFCCC to avoid any attempt to see it take on commitments sooner than other developing economies. The Treasury modelling assumptions appears to regard China’s position in international climate change negotiations as a giant bluff.” India is the world’s fifth largest GHG emitter accounting for about 5 per cent of global emissions. Dr Fisher makes the point on page 37 that “In general, India’s stance in international climate change negotiations is viewed as less accommodating than that of China. India has maintained a firm position that developed nations must first commit to very large emissions reductions (in the order of 80 per cent by 2050) before developing countries take on commitments to constrain emissions. At this stage, India has pledged only that its per person GHG emissions ‘will at no point exceed that of developed countries’.” When you consider that India’s emissions are 70 per cent below the world average on a per person basis, India has a long long way to go before it commits to any real reductions. Meanwhile back at the US ranch, Dr Fisher reports on page 38 that “President Obama’s envoy, Senator John Kerry, made it clear that large developing countries such as China and India would have to take on some kind of target before US ratification of an international agreement. This is not consistent with Treasury modelling.” On page 39, Dr Fisher concludes, “In short, there is little prospect of the United States agreeing in the near term to anything approaching the national emissions allocation framework modelled by the Treasury. The modelling relies on especially heroic assumptions in terms of the timing and nature of future US commitments to emissions reduction targets within an international agreement.” And because the government told Treasury to assume there was strong coordinated global action, the problem of carbon leakage simply disappears. So green commentators and government Ministers can get up and say Treasury modelling found carbon leakage is not a problem. But that is patently false  - in the real world where there is no global strong action it will be a huge problem. As Dr Fisher says on page 27, “With its international action assumptions, the Treasury modelling largely assumes away what Garnaut described as the ‘truly dreadful problem’ of Australia’s EITE industries facing a carbon price while their international competitors take no action.” Following my Estimates questions, everyone now knows that the Treasury modelling did not factor in the global crisis. The world has now fractured timewise into pre-global crisis and after global crisis. This Treasury modelling that the government is pinning all its arguments on is pre GC. It belongs to another world – not the one we’re in now where no one knows what tomorrow will bring – not even Treasury. The folly of using pre-GC modelling must be recognised. As Dr Fisher states on page 42, “The Treasury modelling exercise and much of the decision-making on scheme design has assumed, often explicitly, a continuation of strong global and domestic growth, both in the implementation phase of the ETS and in the longer term…” It seems so obvious, yet the government has not recast its modelling or assumptions but continues to run with the pre GC scenario. Events are moving fast as we all know. Budget forecasts are obsolete practically from the day they are released. And yet Senator Carr and Senator Wong and Senator Conroy all want us to sign up to an ETS justified by ancient history. Not only that, their modelling isn’t even based on their white paper policy. The government’s policy in the white paper is that even if the rest of the world does nothing, Australia will go for a 5% reduction in emissions on 2000 levels by 2020. But the Treasury 5% scenario assumes equivalent climate change policies in overseas countries. Moreover, as pointed out by Dr Fisher on page 63, Treasury’s modelling, published prior to the release of the white paper, does not analyse the revised shielding scheme for emissions intensive trade exposed industries. Neither does it analyse the effect of a permit price cap in the first 5 years. “In summary” says Dr Fisher, “the Treasury modelling does not actually model the government’s preferred policy approach. A complete analysis and assessment of the economic costs and benefits of the government’s preferred policy approach has yet to be published by Treasury.” The sleight of hand used with the Treasury modelling has served to conceal the hard facts about the very real burden if Australia pursues carbon reductions alone and ahead of the rest of the world. On page 34, Dr Fisher concluded that more realistic assumptions on global action mean higher emission prices, higher cost of emission reductions, less or no gains from early action, greater competitive disadvantage for our trade exposed industry and the risk of serious disruption in our energy sector. Dr Fisher worked out how much the ETS will cost in today’s dollars. Using a discount rate of 1.4 per cent (used by Professor Garnaut), in present value terms, the cost of mitigation for the lowest 5% scenario is $1.264 trillion – which is greater than the entire value of our GDP. And the Rudd government wants to put us through all this at a time of global financial crisis.