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Right to compensation was folly from the start

In some respects, we should be relieved by the collapse of the Labor government’s negotiations to decommission some of the most polluting brown-coal electricity generation plants. The notion that decommissioning…

Compensation candidate: The Yallourn power plant in the La Trobe Valley. Flickr/Dallas75

In some respects, we should be relieved by the collapse of the Labor government’s negotiations to decommission some of the most polluting brown-coal electricity generation plants. The notion that decommissioning the privately-owned plants would be a relatively easy way to effect a once-off reduction in Australia’s greenhouse gas emissions was folly from the start. For the two biggest candidates for compensation, the Hazelwood and Yallourn power plants in Victoria’s La Trobe Valley, it was money for nothing.

Just why the two companies in question should be offered billions of taxpayers’ money to decommission their plants beggars belief. When the Kennett government privatised the state-owned power plants in 1996, international negotiations under the terms of the UN Framework Convention on Climate Change were well advanced. There was a broad consensus among conference participants that the real economic costs of greenhouse gas emissions should be reflected in the market. They believed this could be achieved by placing a tax on emissions that sought to reflect the cost of emissions, or, and this has been the preferred measure, cap emissions and issue permits which provide the right to pollute, and which could be bought and sold through the market.

The companies that tendered for the Hazelwood and Yallourn power plants are known to have conducted due diligence assessments. These assessments would have included the prospect that, in the not-too-distant future, emissions would be capped and a price paid for the right to pollute. The likelihood that a system of regulating emissions would be adopted and would affect the value of power-plant assets they were bidding for was a real probability. It is outrageous that these companies believe that they have the right to be compensated for decommissioning electricity generation plants that are among the most polluting in the OECD.

The Hazelwood power plant in Victoria’s La Trobe Valley. Flickr/Takver

We can only guess as to the reasons why the Labor government elected to dedicate a billion or two dollars to paying electricity generators to stop burning brown coal and cut emissions. Obviously, given that Treasury modelling had predicted that the magnitude of Australia’s emissions will continue to grow into the foreseeable future, the proposal was little more than a politically opportunist exercise. A seemingly quick albeit very expensive fix to demonstrate that some concrete gains were being made to meet the commitment to reduce emissions by 5% by 2020 from 2000 levels.

That this quick fix has come undone highlights just how poorly thought through Australia’s climate change policy has been. The commitment to dedicate funds was not factored into the Clean Energy Future Policy costings. As the Treasurer has stated publicly, there has been – or was – no allocation for this in the Forward Estimates.

The collapse of the decommissioning plans as a result of the government’s decision to drop the carbon tax floor price, ostensibly to align Australia’s ETS with the EU ETS, is ironic. With the likelihood that the post-July carbon permit price will be lower than has been anticipated, the cost of these generating companies burning coal and polluting local communities and the atmosphere to produce electricity has dropped; the value of companies’ assets appreciated overnight and the financial viability of operations accordingly extended.

Yet these power plants will still have continuing access to further compensation, in the form of free carbon permits and other forms of assistance. And this will be on top of the advances of $266 million that have already been paid to International Power’s Hazelwood power plant and $257 million to TRUenergy’s Yallourn plant under the terms of the Clean Energy Future Policy. Talk about a “win-win” for the companies!

Missing from the media coverage of this debacle is any critical reflection on the case that the companies have put forward to justify compensation that reflects the (appreciated) value of their assets following the abandonment of the ETS floor price. This is an extraordinary sleight of hand because it completely overlooks the costs that these companies are imposing through their polluting activities on local communities and the global community more generally. The fundamental rationale for establishing the ETS, recognising that there are external costs and that these should be valued, has been swept aside in the search of a quick fix.