Flat White

Corporate subsidies don’t keep the lights on

6 October 2017

2:02 PM

6 October 2017

2:02 PM

A wise man once told me watching business people talk about economics is like watching a dog walk on its hind legs. It’s not that they do it particularly well, it’s just interesting to watch. I wish I could say the spectacle we were treated to in the papers this week on Australian energy policy was at least entertaining. With so much riding on the outcome, an informed individual could only be deeply traumatized by the extent to which it was so dangerously uninformed.

Apparently, the Australian Institute of Company Directors corralled a mob of business leaders into a room to offer up a breathless demand for immediate bipartisan certainty on energy policy. Despite having skipped out on the required reading for the assignment, our band of policy dilettantes descended into a flurry of motherhood statements lacking any semblance of analytical coherence.

The policy ask at the heart of the overture was the introduction of the recommendations of the Finkel Review. That sounds reasonable enough unless you actually understand at a basic level the implications of those recommendations. At the core of those policy prescriptions is the introduction of the Clean Energy Target (CET) to take over from the Renewable Energy Target (RET) as the engine of Australia’s inefficient carbon abatement mechanism. Disturbingly, very few people working in Australian public policy seem to comprehend either the CET, or the RET, in any meaningful way.

At the most fundamental level, the RET and its proposed successor the CET are corporate welfare on steroids, both constitute misguided market distortions that will drive up electricity prices and badly damage energy security. Modelling for the Finkel Review shows that the CET will deliver around $74 billion – that’s right, around $74 billion – in subsidies for the energy sector between 2020 and 2050. It takes all of five minutes to back this out of the data in the modelling report, too hard for most bewildered journalists apparently. Even more confusing, deliberately so, for your average lay person is the fact that the subsidies for low emissions generation are euphemistically called “certificates”.

Not that any of this should come as a surprise. The now-buried Warburton Review showed the RET was on track to deliver a staggering $38 billion in subsidies from 2014 to 2030 before being modestly pared back under Abbott government. The bulk of these subsidies remain in place under the revised RET. A few policy stalwarts at the time were brave enough to point out the firehose of corporate welfare that the scheme represented but had limited success getting the activist press to realize the extent of the rort. Who went out of their way to bury the Warburton Review remains publicly undisclosed by the Turnbull government but the list of suspects is a very short one.

So there you have it. A proposal for an energy policy that at its nucleus is a corporate welfare gravy train that runs for decades, the key beneficiaries of which are yet again, you guessed it, the ever-rapacious wind industry. This is bad for energy users for an obvious reason, the “certificates”, read subsidies, necessary to bring inefficient generation online ahead of its economic feasibility are layered onto the costs paid by consumers. Like its parent scheme, the RET, the cost of the subsidies for the wind industry are added to electricity retail bills and the net effect is an increase in prices.

Knock on effects in terms of jobs destroyed, lost economic output and lower wages were well documented by Deloitte Access Economics in its 2014 report for the Australian Chamber of Commerce and Industry. This modelling report remains the only serious examination of the wider macroeconomic effects of grossly distorting Australia’s national electricity market.

Our fearless captains of industry were heroic enough to point out that “it is very hard to invest without having policy clarity and certainty”, which presumably includes the promised tens of billions of dollars of subsidies being rained down upon the wind industry. Seemingly lost on them though was the fact the CET would drive up electricity prices, that’s not surprising given the Finkel Review’s modelling report failed to include the cost of the subsidy in the electricity market outcomes, which of course was wildly inappropriate and again designed to deliberately mislead.

In light of all this it’s more than slightly annoying to be further misinformed by our intrepid policy crusaders that bipartisan support for the Finkel recommendations will lead to “timely and efficient investment that will lead to significantly improved outcomes from retail all the way through to business”. Since when does investment become efficient because it’s underwritten by defective carbon abatement policy?

More importantly, higher electricity prices and a further deterioration in reliability as expensive wind generation is forced into the grid are the antitheses of improved outcomes as far as business and consumers are concerned. To watch business leaders, so-called, blindly making the case for what is guaranteed to be Australia’s next major energy policy disaster made for a black day. In all honesty though, why would they care about getting it right?

Casually considering their incentives, it’s easier just to go along with what everyone else is telling you is the right thing to do, whether or not they know what they’re talking about, and let the shareholders wear the consequences along with energy users generally. After all, you’re just doing your job as narrowly conceived. It’s not leadership, but that’s an expensive commodity these days and very actively discouraged when it does manifest itself in the energy arena given the toxic nature of the wind industry.

The moral culpability is attenuated significantly by the fact it’s difficult to tell which is up in the policy debate these days because the quality of the public discussion is so degraded and misinformed. Nevertheless, by skipping out on the hard yards of informing themselves about what exactly constitutes sensible reform, business leaders bear a significant measure of the blame for Australia’s current policy torpor. The leadership of the major business lobby groups is woeful and the Boards of these organisations have allowed themselves to be cowed into submission by bullying politicians.

Australia’s managerial class are much like sheep being shepherded through an obstacle course. At the moment, instead of being met by an alert Kelpie, the flock is facing off instead against a rabid Rottweiler that hasn’t eaten for a week. It doesn’t matter how good the handler’s commands, those sheep are in for a rough time. Their custodian is governed by bloodlust rather than stewardship. If it were only a matter of leaving fools to their folly we could wash our hands of the matter. Unfortunately, it’s a problem for all of us given the costs of policy failures are passed on to consumers in higher prices and a steadily compromised standard of living.

Malcolm Roberts is a One Nation Senator for Queensland.

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