On the wrong track: The case for abandoning the promised $7 billion subsidies to Australia's dirtiest coal-fired power stations

The Gillard Government is committed to introducing a price on carbon pollution by July 2012 however the details of the price, the sectors of the economy that will be covered by the scheme and the design features of the compensation package that is likely to accompany the carbon price are currently being negotiated by the Government, the Greens and the Independents involved in the Multi-Party Climate Change Committee (MPCCC). While the details of the compensation package are yet to be finalised, the Government has made it clear that its preferred starting point is the compensation arrangements proposed to accompany the Carbon Pollution Reduction Scheme (CPRS).

The final version of the CPRS was negotiated between Malcolm Turnbull, the then Leader of the Opposition and the former Prime Minister, Kevin Rudd. In addition to substantial household compensation, the final version of the CPRS also included generous compensation to:

• Emission intensive trade exposed industries (EITEs) who would receive up to 94.5 per cent of the pollution permits they required for free

• Coal-fired power stations with particularly high levels of emissions were to be eligible for the Electricity Sector Assistance Scheme (ESAS) which would have provided an estimated $7.3 billion worth of free permits to Australia's dirtiest coal-fired power stations

• Coal mines with particularly high levels of methane emissions were to be eligible for the Coal Sector Assistance Scheme (CSAS) worth $1.5 billion

• Medium and large manufacturing and mining firms were eligible for $1.1 billion through the Transitional Electricity Cost Assistance Program.

The political compromise that represented the final version of the CPRS was described by the Government's own climate change adviser, Professor Ross Garnaut, as "one of the worst cases of public policy making" that he had ever seen. Just why a low point in Australian policy development should serve as the starting point for the latest round of carbon price negotiations has been left unsaid by the current Government.

This paper provides a detailed critique of one of the largest elements of the compensation arrangements proposed by Kevin Rudd and Malcolm Turnbull, the $7.3 billion ESAS scheme designed to assist the owners of Australia's dirtiest coal-fired power stations. Having described, and critiqued, the case for the provision of ESAS the paper then argues that the money saved from scrapping the ESAS scheme could make a substantial contribution to the provision of new investment in renewable energy in Australia. The principles for the provision of such funding to stimulate the further expansion of the Australian renewable energy industry are provided in the final section.