Labor's Climate Policy? "It's Shit!"

The funniest part of the Chaser's election coverage, which kicked off last night, was surely the point at which the team formed an impromptu "Citizens' Assembly" from the Lateline studio audience. "What do you guys think of Labor's climate policy?" they asked "It's shit!" came the unified reply.

The gory details of Labor's policy started to emerge over the weekend, but the Herald Sun has just picked up a new hole in the plan: "Gillard defunds award wining solar science".

Here's a summary of why I think Labor's climate policy is a balls-up:

1. The US 'Cash for Clunkers' Scheme wasn't about the Environment

I haven't written here previously about why I think the "Building the Education Revolution" program is getting a very unfair wrap - but I've thought about it. Unfortunately, people look at BER and say "that's not the most efficient way to give schools new infrastructure". I agree - but BER's primary driver wasn't about giving schools new infrastructure.

The construction industry is big, cyclical and highly interconnected, meaning that an economy-wide downturn can hit the industry hard and the flow-on effects can be persistent. A sharp downturn means that firms have to lay off a large number of workers, many of whom are unskilled (or all have similar, specialist skills that aren't in demand) . This means there are few short-term re-employment prospects and a lot of panic. Consumer confidence takes a hit and it could well be the start of a downward spiral.

So how does this relate to Climate Change Policy?

Given Julia Gillard was the Minister responsible for BER, I can only assume that she would have a well-founded understanding of the distinction between the rationale of a a stimulus project and the key auxiliary benefit that justifies the expenditure (and helps sell the scheme to a populace with limited economic literacy). For BER, construction industry stimulus was the main game, school infrastructure was the auxiliary benefit.

A 'Cash for Clunkers' program involves trading in an old car for a cash payment to put towards buying a new car that is more efficient. The Obama administration implemented a similar system in 2009, called, the "Car Allowance Rebate System" (CARS). Unlike Australia, the US still has an auto-manufacturing industry. In the case of the US scheme the environmental benefits were auxiliary - the main game was supporting car manufacturers.

These days, Australia doesn't make a lot of cars. Not only are we no longer in need of urgent economic stimulus for this economy in general, this policy would suggest that we're trying to stimulate an industry that doesn't exist. The cost will be bourne by Australian taxpayers, but most of the benefits will flow to overseas manufacturers.

So how did the CARS program wash up? Well, lots of Americans got new cars - so many, in fact that the $3 billion US program had to be closed early. And the economic benefits? Even with a sugnificant auto-manufacturing industry in need of some support, some cost-benefit analysis research suggest the project had a net cost of US$1.4 billion.

2. Screwing the Good Guys

If you asked me a week ago for an opinion in the "bright spots" of the Australian solar power industry, here's what I would have been thinking:

First, the Solar Flagships program that the Government has committed to funding to the tune of $1.5 billion. I don't know whether large-scale solar generators will ever be cost competitive - even with a carbon price they're still a long way off. However, I think large scale systems have a better chance of being cost-competitive than small scale systems and if utility-scale solar is ever going to be competitive, there is a massive need to start addressing the technology risk (if no one has built one before, there are much greater risks things won't work - this pushes up the cost of funding to the point that the funding cost alone can make something uncompetitive). Solar Flagships is a good inroads to addressing this.

Second, I think there's potential for some Australian researchers to build some great capabilities in high-end solar technology. A few months ago while doing some research into solar panels i came across some interesting marketting references to Australian researchers. Solar panels generally fall into two camps; "branded expensive and reliable" or "so cheap you'll take the risk". The type that I was looking at was from a large manufacturer based in China that fell firmly into the latter camp.

Unsurprisingly, the solar manufacturer sought to provide some reassurances of the quality of the technology. In the marketing material where they did this, the key selling point was references to their use of technology and research collaboration with programs from the University of NSW. Developing this type of capability clearly made sense from an Australian industry perspective; we're not a mass-manufacturing country, but if we can maintain the research programs in these sorts of areas it's possible to become a specialist in this niche of the research industry.

Guess who's paying for the "Cash for Clunkers" program? $220m comes from Solar Flagships and the Herald Sun article reports that the UNSW Photovoltaic Centre of Excellence has lost its funding.

3. A Scheme that Could Do Something Useful Appears to have Disappeared

The CPRS had problems, but I get the feeling that I'll look back on the CPRS White Paper in years to come and contemplate that it was the closest thing to a functional carbon pricing mechanism that this country is likely to get. Coal generators were getting comfortable with how much it was going to cost them. Shareholders were aware of the issues and it had become regarded as a foregone conclusion. It was already been written into asset prices.

For those with the 'Resources Super Profits Tax" fresh in their mind - consider this: the aggressive response of the mining industry to the proposed RSPT was exactly the type of response a government should expect when looking to hit companies' profit margins. The only reason the power sector couldn't be as aggressive in relation to the CPRS is because Labor was given such a clear mandate from the 2007 poll. Even if Labor can get re-elected (and right now that's looking questionable), the perceived public mandate is gone. Expect industry to come out with all guns blazing.

4. Climate Policy is Complex

150 randomly selected citizens should not make decisions about climate policy. Here's why:

JG: "so, Fred, what do you think is an appropriate allocation of compensation to cover generators' increased working capital requirements that result from needing to take a long position on carbon to hedge their short power position, given the mismatch in the contract settlement dates?"
Fred: "I think power prices are too high."

These issues are complex and they're difficult even if you have a relatively good understanding of the power industry. Simplifying them may be convenient, but it has no hope of producing a meaningful outcome.