Climate madness already hitting electricity supply

An emissions trading scheme has not even started but the Government's hostility to carbon emissions is already choking off the supply of electricity, leading to an inevitable rise in prices. Coal is used to generate 90 per cent of Australia's electricity, but no business can fund new coal-fired power plants under the existing policy settings. The last big coal-based power station built with private funding was Millmerran in Queensland, completed in 2002 by a Shell-led consortium. One other station, Kogan Creek, also in Queensland, has been built with government funding. No others are planned.

Specifying the carbon price that new electricity generators will pay when the emissions trading scheme begins will not solve the problem either, since the carbon price will be set by politicians each year. The Government also has yet to decide when key CO2 emitting sectors such as agriculture and petrol are to be included under the cap. As long as these are excluded, the price will need to be higher for the rest.

The Government also has yet to determine many other elements of an emissions trading scheme. These include the basis on which a reserve price for carbon will be in place (effectively capping the scheme); what, if any, compensation will be provided to big emitters and big users; and whether compensation will be paid to subsidise ongoing production or as a lump sum to allow big coal power producers to close down facilities.

All this is complicated by the sale of the NSW generators. Canberra does not want to jeopardise NSW Premier Morris Iemma's abilities to raise money from the sale, which also allows the Government to exit an industry that would otherwise make substantial calls on public funding. But any bidders for the NSW assets will need cast-iron commitments about what their future carbon credit costs will be. In any case, the value of the assets has already been dramatically devalued by commitments to a future emissions trading scheme.

Before the proposals of Ross Garnaut's climate change report were released, most electricity generators expected to receive free carbon credits. The green paper dangles these before their noses, though it leaves their value unquantified. Free credits could compensate the most carbon-intensive power plants for leaving the market, with those remaining being reimbursed for the costs of buying credits by a higher wholesale price resulting from the capacity reduction.

A carbon tax at the green paper's mentioned range of $20 to $40 a tonne of CO2 should make it possible, theoretically, for gas-fuelled electricity generation (with its lower CO2 emissions) to take market share from coal-based power stations. But gas-fuelled generators would be likely to find their competitive edge eroded because they would face higher gas prices following the increase in demand. Solar-based renewables would remain uncompetitive in any case.

The sword of Damocles hanging over coal-based electricity power stations is causing supply to tighten by preventing new investment. Eventually this will be exacerbated as existing stations become obsolete and are scrapped. And obsolescence will accelerate as businesses see a truncated useful life for their facilities and scrimp on maintenance expenditures. The effect of the discouragement of new supplies is being progressively felt. Generators cannot obtain forward contracts because neither they nor retailers know what the future price is likely to be.

These developments have brought an increase in wholesale prices. Average electricity prices in NSW and Victoria during the past couple of years have been $50 a megawatt hour. Ten years ago they were about $30 a megawatt hour. That increase is already equivalent to the tax of $20 a tonne of CO2 that the green paper estimates will mean a - presumably acceptable - 16 per cent rise in electricity prices. But we have seen with petrol that very high price increases have little effect on demand; it may take a tax on electricity of $100 a tonne of CO2, bringing a 70 per cent price increase, to shave even a modest 10 per cent from demand.

Though the price increases foreshadowed in the green paper are already happening, most consumers are largely insulated from them because their retailers have contracts with generators at the previously prevailing prices. Soon, however, the higher current prices will be reflected in consumers' electricity bills. At that stage, the rhetoric about the need for higher prices will meet the reality, and test the support of the Government, the media and ordinary people for a trading scheme designed to bring deep cuts in CO2 emissions.

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Rudd talks about markets but practises bone-headed regulation

The Prime Minister stands at the mouth of the Murray and proclaims Australia must act now if we are to save our environmental heritage.

At the 2020 Summit, the best and brightest in the land demand bosses allow employees 30 minutes a day for exercise. Climate Change Minister Penny Wong and economist Ross Garnaut equate an emissions trading scheme with financial deregulation and tariff reform. Australian Competition and Consumer Commission chairman Graeme Samuel tells us a scheme based on far-reaching price regulation (FuelWatch) is a good idea because the ACCC's "rigorous assessment" of its effects found weekly average petrol prices in Perth fell by 1.9c a litre after itsimplementation.

What links these disparate events is one of the great paradoxes of Australia in 2008. Rarely has an Australian government spoken so adamantly about the cause of deregulation and the need for more market-based economic reform. Yet we seem to have in Kevin Rudd and his team a group of people with more faith in their own wisdom and far-sightedness than any government in memory. As a result, Australia seems less at the dawn of an era of greater liberty than locked in a new age of all-seeing, all-knowing government. Paul Kelly, take note: the end of uncertainty is nigh.

If all you do is read the speeches of Lindsay Tanner and Craig Emerson, you would think we have a federal Government that recognises the limits of government and spends its days cutting a swath through regulations. But, when you read your newspaper every morning, it's politics as usual, with a hyperactive Government coming up with a new plan to fix a problem that is bedevilling what now has been extended to working families, pensioners and carers.

Everywhere, it seems, market failures abound, due to the collusion of big corporations or the unadulterated ignorance of people beyond the political class, unable to understand their own self-interest. And so it goes. Teenage drinking: let's jack up taxes on alcopops and get states and territories to harmonise their licensing laws (without explaining why this issue should be dealt with uniformly). Transport sector carbon emissions: let's write a cheque to the world's largest car manufacturer for a green car. High fuel prices: let's stop petrol stations reducing their prices during the day.

In short, set out a sweeping vision for the Business Council. Marshall an army of bureaucrats into Council of Australian Governments' working groups. Write yet more laws and regulations. Then dribble out a daily diet of itsy-bitsy programs that give the impression that government can do things better than markets. And spin away. This is, of course, the essence of the ABC's The Hollowmen. But if life imitates art, this form of politics imitates farce. Nowhere is this clearer than in the FuelWatch saga.

The first step involves creating an impression that governments can do something material to reduce petrol prices. Announce that you will appoint a petrol commissioner to focus 24/7 on a market that countless government inquiries have judged fundamentally competitive. Having done that, latch on to a scheme - FuelWatch - with claims it will disrupt a cosy relationship between the oil companies (a relationship successive ACCC inquiries have failed to find).

Now comes the delicate part. Take what initially was a highly qualified assessment of the merits of FuelWatch in an ACCC report and harden it up into incontrovertible evidence of the need for nationwide government action. Elevate as the "evidentiary basis" for a cabinet decision some highly dubious econometric results that claim FuelWatch has lowered petrol prices. Ignore all the caveats and suggested flaws with the analysis and dismiss critics as being in the pocket of "big oil".

Once it is clear you have gilded the lily on the benefits of the scheme, move the goalposts by claiming FuelWatch isn't really about lower petrol prices but about better consumer information. Then find another initiative - any one will do - to get the sorry tale off the front page. The trouble is, of course, FuelWatch hasn't gone away. It is due to come into effect in December.

If the FuelWatch saga seems depressingly based on its ridiculous faith in government, at least it is confined to only one industry. We are only starting to come to terms with the big Kahuna of inordinate faith in government: the wonderfully renamed Carbon Pollution Reduction Scheme.

The signs were never good based on the foundations laid by Garnaut. When it comes to addressing what Britain's Nicholas Stern described as the greatest market failure, Garnaut is Stern on steroids. Take this quote from the interim Garnaut report: "Occasionally the cost of a market failure will be less than the cost of government intervention, with all of its political economy and other risks and costs.

"But even in these cases, regulatory or fiscal intervention by government may be required to ensure an optimal response." Excuse me? The cost of government intervention is greater than the cost of the market failure, but the government must act anyway. Put "optimal response" at the end of the sentence and all is hunky-dory.

Twenty years ago, governments finally recognised that even the best policies have unintended consequences. Those consequences undermine the certainty with which we can claim that interventions will make things better. Now, however, that recognition seems to have disappeared.

A good example surrounds the distortionary effects from various arbitrary thresholds built into the emissions trading scheme. The Government has said that it will only place obligations on about 1000 liable firms, so that "more than 99 per cent of all firms in Australia will not need to be directly involved". The suggestion is that this will be a lighter touch than something like the GST. What this conveniently ignores, however, is the degree to which small firms that are not covered will gain an advantage over large firms that are, with all the potential distortions to firm decision-making that surrounds this sort of threshold. As output shifts from the larger (covered) firms to the smaller (uncovered) firms, what happens then? The answer is simple: coverage and the administrative costs expand remorselessly. This is, in other words, a scheme ripe for unintended consequences, but with supreme faith in itself the Government charges on regardless.

As we await the public release of yet more reports to the Rudd Government - on grocery prices, car assistance and innovation - expect to hear even more about market failures, wise intervention and government solutions to problems. Talking about deregulation and less intervention is one thing. Doing it is something else again.

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New chief justice Robert French a straight choice

A far cry from the politicized U.S. judiciary

The Rudd Government yesterday rejected the option of radical change on the High Court by appointing an orthodox black-letter lawyer, Robert French, to be the new chief justice. Kevin Rudd chose the 61-year-old Justice French ahead of the other leading candidate, former Labor staffer Jim Spigelman, the Chief Justice of NSW.

Justice French, who takes over after Murray Gleeson retires on August 29, becomes the first West Australian chief justice of the High Court and the first from outside NSW, Victoria and Queensland. "The honour of the appointment carries with it great responsibility, which I willingly accept," Justice French said yesterday.

Constitutional law expert George Williams said the appointment indicated the Government was not interested in attempting to change the direction of the seven-member High Court, which now has three Labor appointees on the bench. "French has progressive views, but he is a legal traditionalist in terms of how he goes about deciding cases," Professor Williams said. "I doubt he is going to be a really progressive, creative judge because he would see quite strict limits on what a High Court judge should do - and that would be different to other people who might have been appointed.

"But I don't think Spigelman would have fitted into that category either. He left his political connections in the past and his judgments don't indicate anything other than a really strong adherence to legal method, even in areas like human rights. "He is not in the Lionel Murphy mould or even in the Michael Kirby mould - neither of them are."

Justice French, who was been a judge of the Federal Court since 1986, will become the 12th chief justice of the High Court since its establishment in 1903. He has been president and deputy president of the Australian Competition Tribunal, president of the National Native Title Tribunal and a member of the Trade Practices Commission. The Government will have the opportunity to appoint another judge in March next year when Justice Kirby reaches the compulsory retirement age of 70.

Justice French's appointment helps erode the Sydney-Melbourne dominance of the High Court by denying NSW a fourth judge on the bench to replace Justice Gleeson, who is from Sydney. After Justice French is sworn in, NSW will have three of the positions on the court, followed by Victoria with two and one each from Queensland and Western Australia. Legal academic Andrew Lynch said the appointment of a West Australian - only the third to sit on the nation's highest court in its 105 years - could be seen as a commitment to federalism.

He believed that Justice French's views about federalism and the role of the states "is quite distinctive from the views of most of the Gleeson court". "What you see from French is an understanding that the Constitution is fundamentally about federal co-operation," said Dr Lynch, acting director of the Gilbert and Tobin Centre of Public Law at the University of NSW. Professor Williams said some of Justice French's recent speeches had placed more emphasis on federalism and the role of the states than some other judges.

The appointment of a judge with such views might also indicate that Canberra believed it had won most of the important fights with states. Professor Williams said the Government might, therefore, believe it could afford to appoint a judge who was not a clear centralist. While Justice French was not as committed to states' rights as former High Court judge Ian Callinan, he was also not as centralist as the retiring Chief Justice Gleeson.

His appointment was praised by the Opposition and the legal profession. Chief Justice Gleeson yesterday welcomed his successor. 'Justice French is one of Australia's most outstanding judges," he said. "He will bring with him to the High Court a wealth of ability and experience, and the goodwill of the entire Australian judiciary."

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Your government will protect you -- NOT

Moronic "security"

A large bag with "BOMB" written across it passed through Qantas check-in and security screening for oversized luggage at Brisbane domestic airport yesterday, the Transport Workers Union said. Baggage handlers preparing to transfer the bag raised the alarm and stopped work for about 40 minutes as security staff and managers attempted to remove it.

However, TWU national airline official Scott Connolly said the situation "deteriorated" when managers dragged the still unscreened bag towards a more populated area of the airport. "What happened today is far from ideal and if the device was actually a real bomb the way it was handled would have been a disaster," Mr Connolly said.

It was the latest in a string of security scares at the airport reported by The Courier-Mail in which weapons - including guns and knives - have passed through security scanners without being detected.

A Qantas spokeswoman confirmed a bag with "inappropriate language" caused an incident at the airport but refused to answer any questions. She read out a statement attributed to Qantas group general manager security Jeff Askew. "There was an incident today at the Brisbane domestic terminal with a bag with an inappropriate comment written on the side," she said. "After it was security screened it was deemed not to be a risk and the matter was referred to police." She refused to say if there were any delays and when asked how a bag marked "bomb" could get checked-in by staff said: "That's the extent of our comment, sorry."

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