CEFC: Finally, an opportunity for consensus

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Business needs to know if emission reduction policies are part of a serious and enduring trend, or just a passing fad.

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Amid some torrentially wet days in Sydney last week, on Wednesday there was one notable shaft of sunlight. It was heartening to see the Prime Minister sharing the stage with NSW Premier Barry O’Farrell to announce that the new Clean Energy Finance Corporation (CEFC) would be based in the harbour city.

The announcement itself was no surprise: Sydney is where the financial institutions that will work with the CEFC are based. What was more important was O’Farrell, the most powerful elected Liberal politician in Australia, being willing to both share a stage with the Prime Minister and applaud the benefits of establishing this key element of the federal government’s climate policy in his state.

The business community often talks of the need for certainty in policy and regulation. Certainty would indeed be a wonderful thing for any business, but it is just not in the nature of how policy on climate change is determined. With the climate problem respecting no national boundaries, the development of policy in Australia will continue to be affected both by an evolving understanding of the risks associated with climate change and policy decisions taken through the United Nations by our major trading partners.

Certainty in this complex and ever-changing environment is impossible. Not even the most enlightened and comprehensive policy will achieve it. What business and investors need to understand is whether policies to reduce emissions are part of a serious and enduring trend that they need to understand and respond to, or is it an issue on the wane; just a passing fad? Certainty is too much to ask, but a measure of stability and continuity of policy is what must help guide business decisions and investment.

Experience over the past 30 years in Australia shows that one powerful way of establishing greater stability and continuity on contested issues is through the establishment of institutions. Politicians and political fashion may come and go but institutions such as the Productivity Commission and the Australian Competition and Consumer Commission add an enormous amount to this country’s policy understanding, development and operation.

Private investment will be key to achieving low-carbon growth. And as the work of Lord Stern, the World Bank and the OECD reveal, to achieve this investment, government needs to put in place the right policy framework and incentives to ensure it happens. As with the UK experience of establishing a powerful Committee on Climate Change – reporting to parliament on five-year, economy-wide carbon budgets – and the Carbon Trust – strategically investing in new low-carbon technologies – a number of mutually re-enforcing approaches will be required. This is now being taken to the next stage by the British conservative government, with the establishment of their own Green Investment Bank in Edinburgh.

No one is suggesting that Europe, the UK, or anywhere else has off-the-shelf policies that should be applied here, but much can be learnt from those approaches that have worked well, and those that haven’t. And you won’t find many policy experts and practitioners who will make a case for the market and price alone being able to do all the heavy lifting required to cost effectively reduce emissions at scale.

More than the result of the required deal making between the Greens, Independents and the government, this is a policy lesson apparent in the Clean Energy Future package. The political divide is presented as Tony Abbott’s “direct action” versus the government’s “carbon tax,” but what we now have in Australia is both.

It is rare that a second chance at a major policy reform comes out better than the first. With the carbon price drawing all the political focus, the important differences between Kevin Rudd’s Carbon Pollution Reduction Scheme (CPRS) and current federal policy were lost. The CPRS was more limited and placed too much faith in the power of a carbon market to drive the necessary change. The Clean Energy Future package is altogether more balanced, with a price being one element of a broader set of measures. Through establishing the new Climate Change Authority and the CEFC, the government is establishing bodies that can endure, inform and guide sensible policy into the future.

With $10 billion at its disposal, it may be that the CEFC proves as potent, or possibly more so, than the initially fixed carbon price. The overtly commercial focus of the CEFC will also have other investors keeping a close eye on where this money goes and why. If the CEFC believes a certain clean energy technology or process to be a good bet, there is a high chance additional money will follow.

The required low-carbon transformation of our economy can only be supported by a carbon price, not driven by it. Later this month, federal Treasurer Wayne Swan and finance minister Penny Wong will receive the report from Reserve Bank Board member Jillian Broadbent on how the CEFC will be structured and how it will function. It is then that we can assess the detail.

To be effective, climate policies must achieve a measure of stability and continuity. They must endure beyond electoral cycles. Establishing institutions is part of achieving that. Harmony has been in short supply on climate change in Australia, but for whatever reasons, it was a heartening sign to see some evidence of it last week.

Nick Rowley advised British Prime Minister Tony Blair on climate change and sustainability between 2004-6. He now lives and works in Sydney.

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