AUSTRALIAN VIEWS ON EMISSIONS TRADING AND UNFCCC

C O N F I D E N T I A L CANBERRA 000902

NOFORN
SIPDIS

STATE FOR OES/EGC WATSON, WHITE HOUSE FOR CEQ SCHULTZ

E.O. 12958: DECL: 09/13/2018
TAGS: SENV KGHG PREL AS
SUBJECT: AUSTRALIAN VIEWS ON EMISSIONS TRADING AND UNFCCC

REF: A. CANBERRA 897

B. CANBERRA 819

Classified By: Deputy Chief of Mission Daniel A. Clune, Reasons 1.4(b)(
d)


1. (C/NF) Summary: Department of Climate Change (DCC)
Secretary Martin Parkinson, who is in charge of developing
Australia's emissions trading plan, highlighted the
challenges of dealing with Emissions Intensive Trade Exposed
(EITE) industries and the importance of the U.S. role in
international negotiations during a September 8 lunch hosted
by the DCM. Acknowledging calls for a consumption based
system (now termed a Carbon Pollution Reduction Scheme aka
CPRS),Parkinson, said that any shift away from
production-based carbon pricing schemes would wreck
international negotiations toward a post-2012 framework. It
would also open the door to rampant trade protectionism.
Though convinced that their methods for addressing
compensation for EITE industries will work, Parkinson and his
colleagues suggested that the Prime Minister has set the
government back by indicating so early in the process a
willingness to negotiate with business on this issue. In
international negotiations, Australia is very concerned that
progress toward an agreement by December 2009 will be
seriously hampered by the change in administrations in the
U.S., and that domestic action in the U.S. is more likely
before agreement to a binding international treaty. End
Summary.


2. (SBU) A well-respected former Treasury official, Parkinson
heads DCC under Minister Penny Wong, and was selected by the
Rudd Government for his expertise developed as the head of
the Prime Ministerial Task Group on Emissions Trading under
former PM John Howard. He was accompanied to the September 8
lunch by Deputy Secretary Blair Comley and Ambassador Jan
Adams. Comley is responsible for developing the nuts and
bolts of the CPRS. He is a transplant from Treasury, where
he worked with Parkinson in developing and implementing the
General Services Tax (GST) scheme (Ref B). A career
diplomat who has served in Washington, Ambassador Jan Adams
is the senior international negotiator under Deputy Secretary
Howard Bamsey. She has been carried over by the Rudd
government to continue working towards an international
agreement to succeed the Kyoto Protocol in 2012.

Consumption Function
--------------


3. (C/NF) The DCM asked why there had been so little
discussion of consumption-side measures in Australia, which
has placed its focus entirely on pricing carbon at the point
of production through its CPRS. Parkinson said that while
there were some theoretical attractions to pricing carbon at
the level of consumption, the practical challenges are
overwhelming. This is because of the complexity of
determining the carbon emissions represented by a given good
depending on the source of energy and the production
techniques. As a result, any move to a consumption-based
system would run contrary to the current international
framework and trading system. Since the inception of
international climate change negotiations in the early 1990s,
Parkinson said, the focus has always been on pricing carbon
in production. To switch now, or to suggest that consumption
Qin production. To switch now, or to suggest that consumption
measures would be a more effective mechanism of reducing
emissions, would fundamentally undermine progress towards a
new global agreement. Australia would be "laughed out of the
room" if they now suggested that consumption measures be
considered in the global context, he said. Further, the
development of rules of origin and other monitoring tools to
determine the carbon content of widely-traded goods in the
international trade arena was a "stalking horse" for
protectionism. Those tools, Parkinson said, would be crafted
by special interests seeking trade protection, not emissions
reductions. He noted that it is no coincidence that some of
the support in Australia for such measures comes from those
who opposed trade liberalization in the 1980s and 1990s.


4. (C/NF) Comley explained current DCC thinking on the
question of how to treat EITEs, saying that while the
reaction from industry was strong and understandable, there
were few better ways to establish clear and transparent
rules. DCC's "Green Paper," released at the end of July, set
out thresholds for determining emissions intensity per
million dollars (Australian) of revenue (Ref B). This left
many of the largest earners in Australia, especially the LNG
sector, below that threshold, where they would receive no
assistance from the government to equalize their prices
against those of international competitors. The claim that
DCC should use value added or some other measure as a part of
that threshold, Comley said, was misguided. While revenue
volatility was high, value added volatility was even higher.
Further, the overhead costs of demonstrating value added to
any given export product was higher than that needed to
calculate revenue.


5. (C/NF) DCC was frustrated, according to both Parkinson and
Comley, that industry was resisting so strongly measures that
would have such a small impact on their current earnings.
For example, LNG developers were haggling over an amount
below two percent of revenues. The DCM noted that even two
percent of revenue can have a huge impact on investment
decisions. DCC is inclined to stick to their guns, but
Comley recognized the difficult political problem created by
even such small estimated costs. The ongoing negotiations,
Parkinson admitted, had not been helped by the fact that PM
Rudd had basically agreed right out of the gate in late July
that there was room to negotiate with industry. Comley's
views appear to conflict with that of industry; Australia
Industry Greenhouse Network CEO Michael Hitchens told econoff
on September 8 that his membership believes that government
has admitted it erred by using revenue as a denominator and
is moving towards using value added calculations instead.

Something Rotten in Denmark
--------------


6. (C/NF) Turning to international negotiations, Ambassador
Adams said she was "very concerned" that the change of
administrations in the U.S. will cripple negotiations on the
UN Framework Convention on Climate Change successor to the
Kyoto Protocol. Adams said the bulk of international
negotiators, including most Europeans, are certain that the
new U.S. administration will be ready to participate
substantively in early 2009, and expect a much more
"cooperative" policy from the U.S. Adams said her view had
always been that this was incorrect, and she had argued
against taking on the December 2009 goal for negotiating an
agreement because of the U.S. political calendar.


7. (C/NF) Adams assessed that any agreement that contains a
specific target for the U.S. will have a hard time securing
67 votes in the Senate, and that it is more likely that the
U.S. will pass domestic legislation on reducing greenhouse
gas emissions before acceding to a treaty that forces it to
do so. The decision to take on an emissions trading system
unilaterally would definitely increase Australia's moral
weight in negotiations, Adams said, but in the end all eyes
Qweight in negotiations, Adams said, but in the end all eyes
were on the U.S. and China, and if neither was prepared to
move rapidly, then she saw little hope of a successful
outcome at Copenhagen. Australia National University
economist Ross Garnaut's call for developed and developing
countries to agree to converge at a common level of per
capita emissions resonates strongly with China, India, and
the G-77, Adams noted, but was unlikely to be unacceptable in
the U.S. or Australia anytime soon. (See more detailed
discussion of their views of Garnaut's Draft Supplemental
Report in Ref A.)


8. (C/NF) Comment: Parkinson, Comley and Adams represent the
best of the Australian public service that plays such a
significant role in Canberra. Parkinson and Comley were major
players in the design and implementation of the Goods and
Services Tax in 2001 -- a politically controversial move
strongly opposed by the Labor Party and now widely accepted
as having been well designed and implemented. Parkinson and
Adams were major players in the Howard Government's climate
change policy, which was widely reviled by the then Labor
Opposition. Now, the three are key players in designing and
implementing the Rudd Government's most complex and
politically sensitive policy initiative. While the decision
to press ahead with an emissions trading system will be made
within Cabinet, it falls on their shoulders to minimize the
harm to Australia's national interests from those decisions.
Although they are charged with designing a system that will
significantly influence Australia's economic future, neither
Parkinson nor Comley seemed nervous that the system would
undermine domestic growth or international competitiveness.
End Comment.

MCCALLUM