VZCZCXRO5935
PP RUEHPT
DE RUEHBY #0757/01 2070733
ZNR UUUUU ZZH
P 250733Z JUL 08
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC PRIORITY 9912
INFO RUEHBJ/AMEMBASSY BEIJING 9113
RUEHJA/AMEMBASSY JAKARTA 5248
RUEHUL/AMEMBASSY SEOUL 9508
RUEHGP/AMEMBASSY SINGAPORE 1506
RUEHKO/AMEMBASSY TOKYO 3139
RUEHWL/AMEMBASSY WELLINGTON 5404
RUEHBN/AMCONSUL MELBOURNE 5464
RUEHPT/AMCONSUL PERTH 3738
RUEHDN/AMCONSUL SYDNEY 3664
RHEHAAA/THE WHITE HOUSE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 04 CANBERRA 000757 
 
SENSITIVE 
SIPDIS 
 
STATE FOR OES/EGC TALLEY, WHITE HOUSE FOR CEQ VAN DYKE 
 
E.O. 12958: N/A 
TAGS: SENV ECON ENRG AS
SUBJECT: CLIMATE CHANGE: EMISSION TRADING PAPER REACTIONS 
 
REF: A. CANBERRA 719 
     ¶B. CANBERRA 686 
 
¶1. (SBU) Summary: The July 16 release of the Rudd 
government's Green Paper setting up the Carbon Pollution 
Reduction Scheme (CPRS) emissions trading system has laid out 
the banquet for an escalating round of maneuvering by 
industry, government and the Opposition.  The details 
provided in the 532-page tome (ref A), although leaving key 
questions unanswered, have given all sides enough ammunition 
to begin to take their cases public.  While everyone has room 
to find fault with the plan, the general outlines set by the 
government have left little ground for outright opposition, 
and only the far right-wing of the opposition is suggesting 
that it might not be a good idea to implement emissions 
trading at all.  Public polling indicates strong support for, 
but little understanding of, the planned scheme.  NGOs are 
withholding complete endorsement and waiting to see how the 
government moves ahead. End Summary. 
 
A Resounding Thud 
----------------- 
 
¶2. (SBU) Those expecting either a vague, noncommittal 
document or one that maps out clearly the trajectory for 
jumping into emissions trading were disappointed.  While many 
agree that the document was more detailed that expected, it 
leaves open many key issues, including when exactly it will 
go into affect.  Sources tell us that the government 
originally had drafted an even more comprehensive plan, which 
was rejected by Cabinet because it did not match with 
promises being made about household, coal industry, and 
petrol price relief.  This draft is generally more in line 
with the role of serving as a starting point for 
negotiations.  "We have to keep reminding ourselves this is a 
green paper," BP Australasia's Mark Proegler told us.  "It's 
not the final plan."  This has left interested parties on all 
sides assessing where they stand in an ongoing discussion, 
rather than outright approving or rejecting the CPRS. 
 
¶3. (SBU) The plan was, however, significantly less aggressive 
than the approach proffered by Australia National University 
(ANU) Economist Ross Garnaut earlier this month (ref B).  The 
scope of assistance to industry and consumers has been 
perceived as a clear denunciation, and in fact a clever 
manipulation, of Garnaut, who has been completely absent from 
the public debate on the green paper.  ANU Professor Warwick 
McKibbin, a long-time rival of Garnaut's who has been working 
on climate change issues since the late 1980s, told us that 
the Green Paper approach is far more moderate than Garnaut's 
because it builds in more flexibility in the first few years 
of implementation.  This recognizes that Australia has a 
particularly carbon intensive economy, according to McKibbin. 
 
 
¶4. (SBU) Some have gone so far as to argue that there is 
nothing really new in the plan.  Henry Ergas, the very 
respected head of the Charles River Associates consulting 
firm (and generally considered close to the opposition 
Liberal Party) told Econ Counselor July 24 that the CPRS was 
simply a copy of the Prime Ministerial Task Group on 
Emissions Trading (TGET) report put to PM Howard in 2007. 
Ergas argued that while the long-term affects of an emissions 
QErgas argued that while the long-term affects of an emissions 
trading system on the Australian economy were "quite 
alarming," the Rudd government had built enough safety 
mechanisms into the plan to make short-term impacts almost 
nil.  "The one thing they could have done to differentiate 
this from the (TGET) plan, to name a target, and hence a 
notional carbon price, they haven't been able to do," Ergas 
complained.  He was disappointed in the inability of the 
government to release detailed modeling on the costs of the 
CPRS until December, after the public commentary period has 
closed. 
 
Our Emissions Intensive, Our Trade Exposed 
------------------------------------------ 
 
¶5. (SBU) The single greatest lightning rod in the report has 
been the treatment of Australia's industries that have 
 
CANBERRA 00000757  002 OF 004 
 
 
relatively high emissions and generate most of their earnings 
through exports.  These companies will not be able to pass 
through to export customers price increases caused by the 
CPRS.  Australian energy giant Woodside's CEO Don Voelte 
opened fire on July 17 when he argued in an interview in 
Darwin that the plan's criteria for determining what 
constitutes an "Emissions Intensive, Trade Exposed" (EITE) 
industry would leave Australia's rapidly expanding liquefied 
natural gas (LNG) sector out in the cold.  Voelte's complaint 
was the first of many concerned voices from the energy and 
industrial process side about the way the government has 
structured its plans to account for EITEs.  Australia 
Industry Greenhouse Network CEO Michael Hitchens despaired 
over a perceived lack of rigor in making those decisions. 
"They've effectively left EITEs out in the cold,"Hitchens 
told us, "this plan ticks the same boxes as previous plans 
(like the TGET report) and the state plans, but doesn't 
achieve the policy objective.  The determination of the 
amount of free permits, and what determines that level, 
appears to us to be an arbitrary back-of-the-envelope 
analysis.  We've so far been unable to say what an 
appropriate level of adjustment assistance is.  But if we 
went back to a very basic, and unsatisfactory, sectoral 
approach, my back of the envelope math says they would need 
to compensate industry to the tune of about 220 million tons 
worth of free permits.  Their formula provides about 120 
million tons, so they're short 100 million tons, and that's 
just the starting point." 
 
¶6. (SBU) At the end of the day, Hitchens said, the scheme was 
going to make doing business in Australia more expensive. 
"90 percent free permits is still a 10 percent tax," he 
opined.  "60 percent free permits is a 40 percent tax. 
That's acceptable if all parties have the same costs."  But 
not all those looking to invest in Australia are the same, 
Hitchens argues.  "Chevron has a portfolio of possible 
projects - Gorgon (a massive LNG project) is just one.  The 
costs, the sovereign risks and all the rest have all been 
analyzed to death by their business cost people.  The only 
thing that's changed is that Australia is making itself more 
expensive." 
 
¶7. (SBU) Not all energy players were as openly bombastic as 
Voelte and Hitchens.  BP's Proegler told us that the company 
was taking a more cautious approach.  "Frankly, we've 
absented ourselves from the (posturing for position on EITE 
status).  It's too early for that.  We are working with the 
government, which has invited consultation, and waiting to 
see how they develop these ideas."  At first blush, Proegler 
said, neither BP's refining or LNG operations will meet the 
definition of EITE as laid out in the green paper.  The 
decision to remit on a cent-for-cent basis the energy costs 
for motorists and many households has also limited the 
scheme's appeal, Proegler said.  "The government is trying to 
strike a balance, but they've limited the pot of money 
available from the outset to deal with these issues by the 
political choice to neutralize cost growth in petrol, which 
we think is a mistake."  Facing competition from larger, more 
Qwe think is a mistake."  Facing competition from larger, more 
efficient refineries in Asia (often owned by the same 
international companies) Australian refineries will quickly 
feel the squeeze under the CPRS, Proegler said.  Even with 60 
percent free permits, Australia refineries will likely decide 
to close their doors rapidly.  Whether government should, or 
will, prevent that from happening is still to be worked out. 
 
¶8. (SBU) The most concerning to many of our industry contacts 
was the formula set out in the report to determine which 
processes would receive designation as EITE's.  "Of all the 
choices they could have made, they made the worst, using 
revenue as a denominator" in that formula, Hitchens said. 
With Australia's economic boom driven largely by record high 
prices globally for commodities and energy, costs in those 
sectors were skyrocketing right behind rising profit margins. 
 As those costs rapidly catch up to high prices, the boom and 
bust cycle will mean that revenues shrink rapidly in the 
future.  Companies that are over the threshold when the 
system goes into effect in 2010 will no longer be taking in 
the kind of revenues for which they are being asked to pay. 
The government has argued that of three choices - employment, 
 
CANBERRA 00000757  003 OF 004 
 
 
value added, and revenue - revenue is the most transparent 
and easiest to account indicator for emissions intensity 
across the industrial landscape.  But economists and industry 
reps agree that it is a "simpler is not always better" 
decision by government that may skew who and what gets 
compensated. 
 
¶9. (SBU) Australia Petroleum Producers and Explorers (APPEA) 
Damian Dwyer said his group shared the concern over the 
apparent lack of rigor in setting up the EITE system and the 
use of revenues as an indicator of emissions intensity.  The 
group has argued for the use of a value-added marker, which 
the green paper says will be too variable across activities 
and therefore impossible to account accurately and comparably 
across industries.  Use of revenue as a determinant will 
leave many key industries like LNG unprotected, Dwyer said, 
and will quickly kill off much of the planned A$56 billion in 
planned LNG projects now on the books.  APPEA, which supports 
other elements of the CPRS, is putting forward a proposal to 
have emissions resulting from new investments not be counted 
under Australia's emissions limits, at least for a period, so 
that companies will still have some incentive to invest in 
the abundant resources off Australia's shores.  Government 
appeared to respond to these concerns on July 25 when PM Rudd 
suggested that the LNG sector could be provided with some 
form of additional assistance to prevent investments fleeing 
Australia. 
 
¶10. (SBU) Electricity generators will already receive 
substantial assistance under even the light details in the 
plan.  Coal fired power producers will qualify for financial 
assistance for cleaner technology development and free 
transitional permits as "most affected" sectors.  That hasn't 
stopped them from crying out for more.  This week, generators 
and their representatives in Canberra brandished modeling 
results from Brisbane consultants Acil Tasman that show a 20 
percent reduction in emissions will drive up household 
electricity costs 28 percent.  Alarming numbers like this are 
the result of the high emissions intensity of Australia's 
coal-fired power sector and by the government's unswerving 
commitment to bring on a higher percentage of costly 
renewable energy sources.  But they will put further pressure 
on the government to protect the electricity generating 
sector before finalizing the plan by the end of the year. 
 
Liberal Party: Chasing its Tail? 
-------------------------------- 
 
¶11. (SBU) The Opposition has done the government a favor over 
the past week by vacillating on whether they support an 
emissions trading scheme, when they support it, and how they 
should fight it.  A conservative slice of the Liberal Party 
sees and opportunity to strike back against a plan they never 
were fully on board with, and have argued this week behind 
party room doors that a harder line against the scheme is the 
right response.  A more moderate group, headed by former 
Environment Minister and now Shadow Treasurer Malcolm 
Turnbull and Shadow Environment Minister Greg Hunt, argue 
that the Coalition backed emissions trading while in power 
and can't back away from that given the strong public support 
Qand can't back away from that given the strong public support 
for action.  They do, however, argue against implementation 
in 2010, seeing the government's "ambition" to kick off the 
scheme as a political vulnerability.  By delaying 
implementation until after 2011, which they argue is based on 
sound economic advice from government under their watch 
(including Martin Parkinson, who now heads up the Department 
of Climate Change under Minster Penny Wong), they apparently 
see an opportunity to deny Rudd a key element of his campaign 
plank before the next election in 2010. 
 
¶12. (SBU) Opposition Leader Brendan Nelson, having publicly 
come back to the fold last week and endorsed the concept of 
emissions trading with a delayed start, is reportedly leaning 
towards opposing implementation of the scheme.  He may be 
swayed by rumors that former Treasurer Peter Costello is 
returning to political discourse and floating the idea of a 
very loose system, where almost all permits are free until 
China and India take on a binding commitment to reduce their 
own emissions.  Media statements by Nelson and others on the 
 
CANBERRA 00000757  004 OF 004 
 
 
right of the Party over the week continued to leave room to 
oppose implementation.  Turnbull's econ adviser, Paul 
Lindwall, told econoff on July 23 that the moderate faction 
was doubtful that China or India would ever take on a binding 
commitment, making Costello's supposed idea an empty promise. 
 That could be overcome, Lindwall said, if the Liberals 
instead tied such a promise not to China or India, but to 
U.S. adoption of a reduction target. 
 
¶13. (SBU) According to Lindwall, the July 29 Shadow Cabinet 
and July 30 party room meetings will be dominated by debate 
on this issue, and he was "very certain" that the Liberal 
party would coalesce around a strong campaign against 
implementation in 2010, but not against the overall concept. 
This would force Labor to either accept their views, or try 
and turn to the Green Party, who would be unlikely to 
negotiate away their demands for action that would increase 
pain on consumers beyond what Labor can bear.  This would 
logically dovetail with industry views.  Hitchens told us his 
members would be far more comfortable with a CPRS backed by 
the Liberal party instead of one "put together by the Greens 
and Nick Xenophon (an independent in the Senate)." 
 
Petrol and Lack of International Focus Cause NGOs to Shrug 
--------------------------------------------- ------------- 
 
¶14. (SBU) The leading NGO voice on climate in Australia 
called the release of the green paper "a good day, not a 
great day," for the fight to reduce greenhouse gas emissions 
in Australia.  Climate Institute CEO John Connor agreed with 
the chorus of those seeing this as just the beginning of a 
complicated negotiation.  "This is all at play now," Connor 
said.  The Climate Institute expressed dismay that the plan 
gave away a huge chunk of raised revenue back to motorists as 
excise relief, but said that it was now almost impossible to 
claw that back.  They were also disappointed that the plan 
did not include any hint that some of the revenue raised 
would go to international efforts, like REDD and other global 
facilities to fight deforestation, as proposed in the 
Warner-Lieberman bill in the U.S. and under consideration 
elsewhere.  "We need targets and financing to get the 
developed world to the table," Connor said.  The green paper 
delivers neither. 
 
¶15. (SBU) Comment:  The CPRS is an opening bid by government, 
with enough flexibility to provide relief to most of those 
who will face higher costs, at least initially, under an 
emissions trading scheme.  It is the beginning of a dialog, 
and we expect that many more special considerations will be 
tacked on to the plan before it becomes law.  The 
comprehensive effort to lay a solid foundation has drawn 
grudging praise even from those contacts with a lot to lose. 
The biggest loser so far is the Opposition, which is in the 
position of  opposing emissions trading, even after 
committing while in Government to a similar plan to take 
effect in f 2012, or simply offering a tepid opposition to 
the timing, not the substance, of the plan.  The government 
appears confident that it has successfully split the 
opposition, and the absence of major industry players 
Qopposition, and the absence of major industry players 
fighting against any form of emissions trading means that 
they can carve out enough acceptable protections to put the 
system in place.  End Comment.