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Henry Thornton - Politics: A discussion of economic, social and political issues Power play distorts reality Date 24/08/2009
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Kevin Rudd's determination to introduce a renewable energy mandate for electricity use in Australia is sure to create great distortions in electricity provision - and cost.
By John Roskam Email / Print

Apparently Australia has just got a brand new $28 billion industry. It's in renewable energy. Media outlets have breathlessly reported that billions of dollars will now be "unleashed" following agreement between Labor and the Coalition on renewable energy targets.

According to the Clean Energy Council (CEC), the industry group of the renewable energy companies, we'll get $28 billion of investment and 28,000 "clean" jobs.

If Australia's renewable energy industry gets anywhere close to being a $28 billion industry with 28,000 jobs we'll have a big problem. We'll then have an industry that is too big to fail. And we'll have an industry that is so big it will ensure that the government doesn't allow it to fail.

The renewable energy industry only has to follow the game plan of Australia's $50 billion car industry.

Future governments will find it next to impossible to change the renewable energy regulatory regime once it is fully established and companies' investment decisions have been made. To see just how difficult, all you need to do is look at the saga of changes to telecommunications regulations.

Naturally there'll be those claiming higher electricity charges are a small price to pay for saving the planet. Whether Australia's renewable energy targets make the slightest bit of difference to saving the planet is anyone's guess.

It might, but on the other hand it might not. We simply don't know. As with so much of the "climate change debate," we're dealing in hypotheticals.

What we do know is that the renewable energy legislation has handed the Federal Government yet another mechanism that will allow it to pick winners, reward favourites and parcel out largesse.

It's not quite as bad as the command and control economy that will be established if ever Australia gets an emissions trading scheme (ETS), but it's not far off it.

The "compensation" arrangements for energy-intensive industries are yet to be determined and already the jockeying and lobbying has begun.

Prime Minister Kevin Rudd has made industry policy look easy. It seems that all you need to create an industry overnight is the stroke of a minister's pen and a willingness to force people to pay more for their electricity. In the 20th Century, this kind of thinking gave us a domestic shoe industry.

Significantly, the Federal Government hasn't attempted to justify its renewable energy targets on the basis of saving the planet. Instead Rudd, and Climate Change Minister Penny Wong, have claimed that the benefit of higher electricity prices is that it will create jobs.

A domestic shoe industry certainly created jobs - but it came at the cost of completely distorting the country's economic activity.

A century ago, at least the Federal Government didn't actually use legislation to compel consumers to buy locally made shoes. What it did was put a tax on imported shoes to make them more expensive.

In the case of renewable energy, people are being forced to buy 20 percent of their electricity from renewable sources by 2020.

It's no wonder the CEC has welcomed the legislation; its members have a market for their product that's guaranteed by law. In effect, renewable energy companies have been granted a monopoly over the supply of a share of the country's electricity.

After the states spent the past few decades trying to break up and sell the government-owned monopoly suppliers of electricity, it's ironic that the Federal Government is creating a new series of privately owned monopoly electricity suppliers.

That's not the only irony.

Before the 2007 Federal Election Rudd famously said he didn't want to be the Prime Minister of a country that didn't make things any more. If he is still passionate about Australia making things, he's got a funny way of showing it.

The renewable energy targets he's championed will make the cost of making things in Australia more expensive. A conservative estimate is that electricity prices will rise by at least 3 percent. One of the things electricity is used for is to make things.

So while Rudd says he wants to save Australia's manufacturing industry, at the same time he's making manufacturing less competitive. And in acknowledgement that he's making manufacturing less competitive he'll compensate some, but not all, manufacturing firms by giving them cash handouts.

It would be much simpler to not increase electricity prices and not pay the handouts. But if the Prime Minister left things as they were he wouldn't be able to claim the electoral credit for being seen to be doing something about Climate Change.

Originally published in the Australian Financial Review, 21 August 2009,

John Roskam is the Executive Director of the Institute of Public Affairs (IPA).

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