" "WITHOUT CERTAINTY ON A FUTURE CARBON PRICE,BUSINESSES WILLNOT INVEST INLONG-LIVED ASSETS, BECAUSETHEY WILL NOTKNOW WHAT THEIR RETURNSWILL BE ompared to the rest of the world, we havestrong growth, employment is expanding,investment flows into Australia are high,and we have record terms of trade. At thesame time as the dollar is so strong, I am also consciousthat electricity prices are rising and that this is also hardfor Australian industry.The current price rises in a number of states have beenprincipally caused by a sustained period of under-investment. Over the past three years residentialelectricity bills have risen by more than 40 per centacross Australia. We continue to see electricity pricesincrease. These increases have been overwhelminglydriven by a lack of investment. Significant investmentis required to replace ageing network infrastructureand deliver energy security.State and Territory Governments have no longer beenable to ignore the need for electricity providers torecoup the costs of these investments through higher prices. The Premier of Western Australia haseffectively apologised for the situation, saying: "Iregret it, but it is something that simply has tohappen." A leading industry commentator -KeithOrchison, previously the CEO of the Energy SupplyAssociation of Australia -put it this way in theAustralian newspaper last week: "After almost twodecades in which Australia has coasted, meeting itspower needs with cheap coal and putting off untiltomorrow a higher level of augmentation of networks,while state Governments have reaped a handy dividendfrom the revenue earned by the electricity businessesthey own, the reckoning is at hand." It is not a prettypicture. We will all live with the legacy of thosedecisions. But my commitment is this. I am not goingto allow a repetition of this problem in another 10 years by allowing another sustained period of under-investment now. That is one reason why I am sodetermined to deliver a carbon price. Obviously, thefundamental motivation for our carbon price policy ispollution reduction. If carbon did not create anexternality by warming the planet, we would not bepricing that externality in. However, the industryconsequences are then immediate. Delaying a carbonprice makes the eventual adjustment shaper and morecostly. And the absence of a carbon price is already aproblem. Producers and consumers accept the scienceof climate change. Because they believe it, they arealready responding, and their responses are alreadychanging our energy economics.Without certainty on a future carbon price, businesseswill not invest in long-lived assets, because they willnot know what their returns will be or what theenvironment will be for their competitors. Investorsalready face perverse incentives for solutions which aredriving them to adopt stopgap solutions rather thanlong term investment. This is particularly the case inthe electricity generation sector where uncertainty willdirect what capacity growth there is towards meetingincremental rises in energy demand, rather than long-term baseload growth.Where his predecessor is critical of some stategovernments for lack of investment and policyprudence, the current CEO of the Energy SupplyAssociation of Australia, Brad Page, is imploring policymakers to underwrite investment by injecting a carbonprice into the economy. He has said that without aclear carbon constraint over the next few years,generators will be forced to make stop gap investmentsin technologies like open-cycle gas turbines to meetimmediate increases in demand rather than take longterm large scale investment decision. In Brad Page'swords: "That is not a zero-cost outcome -our lightsTHE ADVANTAGES OF ACTING ON A CARBON PRICE: AN AUSTRALIAN PERSPECTIVE092 G-20 MEMBERSJULIA GILLARD, PRIME MINISTER, AUSTRALIACPhoto: UN Photo/Mark Garten
G-20 MEMBERS093Below: Australian PrimeMinister Julia Gillard(right) and UN SecretaryGeneral Ban Ki-moon would stay on but power prices will rise. Delaying aclear carbon constraint is going to cause electricityprices to go up anyway."Inaction on a carbon price means higher prices. Thereare other significant advantages to acting on a carbonprice. Revenue from the carbon price deliverstransition support to households and industries. Nosuch revenue is available to assist with the costs of thecurrent price rises around the country - nor for futurerises from an on-going investment strike. That isbecause carbon pricing is a major structural economicreform. So unlike the current catch-up round in thestates, any price rises which do flow from carbonpricing bring with them the dynamic benefits of reformfor the long-term. Real carbon pricing reform willensure industry uses energy more productively -increasing outputs compared to emissions. Decouplingeconomic growth from growth in emissions is a keymicro-reform. This reform will also help us compete in a carbon-constrained global economy. Energyproductivity is an emerging new arena for globalcompetition in production costs and it's one whereinvestment decisions now have an effect for years, fordecades, to come. Like all structural reforms, we needconsensus and discipline to deliver good outcomeswhich are sustained for the long term. I know theClimate Change Committee and the business andcommunity roundtables are working hard to deliver thisconsensus. And the Government is determined tomaintain this discipline, by taking the lead in a richer,deeper reform conversation which encourages thinkingabout the long-term. Australia did not come out of thedownturn as the strongest advanced economy byaccident. Government made good decisions. Andindustry did too. nThe above remarks by Julia Gillard, the Prime Ministerof Australia, are excerpts from the Prime Minister'sspeech to the Australian Industry Group in Canberraon 26 October 2010. For more information pleasevisit: www.pm.gov.au.