EMILY BOURKE: As the Government hammers out the details of its carbon tax, an environment group is urging it to tread carefully when considering the compensation demands from electricity generators.
The boss of Victoria's largest power plant says the level of compensation offered under Kevin Rudd's failed scheme would not be enough to keep the plant viable.
But Environment Victoria says a compensation scheme risks having a perverse environmental effect – where the most polluting plants outlive the cleaner ones.
Simon Lauder reports.
SIMON LAUDER: Under Kevin Rudd's Carbon Pollution Reduction Scheme most of the $7 billion in compensation for power generators would have gone to those which run on brown coal.
But since then the price of black coal has risen dramatically and brown coal remains relatively cheap.
Energy industry expert from Carbon Market Economics, Bruce Mountain, says that means if the same compensation offer is made now it would have a perverse outcome.
BRUCE MOUNTAIN: I think it's very much harder for the brown coal generators to make a case that the vast bulk of the compensation should be paid to them. It seems now that black coal power stations have a much stronger case for that compensation.
I think the key point is that with the cost of black coal having risen so much, it might be the case that the imposition of a carbon price causes the black coal – which are less greenhouse gas intensive – to close first.
SIMON LAUDER: But it's a conclusion which isn't supported by a major player in the brown coal market. Ian Nethercote is the chief executive of Loy Yang Power which runs Victoria's largest power plant. Mr Nethercote says the level of compensation offered in 2009 wouldn't be enough for brown coal to remain a viable power source.
IAN NETHERCOTE: The offer that was sitting there was going to fall short in terms of being able to keep some of the brown coal businesses viable into the future.
SIMON LAUDER: Mark Wakeham from Environment Victoria is urging the Federal Government not to offer the industry any compensation.
MARK WAKEHAM: Well, we want to be making sure that the most polluting producers of electricity are actually getting the greatest incentive to clean up their act. So by not compensating any of the electricity generators, we're likely to see the most polluting power stations closed first.
SIMON LAUDER: The head of the National Generator's Forum, Malcolm Roberts, says Environment Victoria's argument misses the point. Mr Roberts says generators need compensation for a loss of asset value, which could have dire consequences.
MALCOLM ROBERTS: What's at stake is the continued reliable supply of electricity to Australian households and businesses. A carbon price will destroy billions in asset value. It will put acute pressure on the viability of some businesses which are making a very substantial contribution to our energy supply.
There's also the question of the impact it has on the capacity of those businesses and the willingness of prospective new investors to invest in the new generation capacity we need.
SIMON LAUDER: Those who argue that the sector shouldn't be compensated say that it's known that a carbon price has been coming for years so it should have been built into financial arrangements. Why isn't that the case?
MALCOLM ROBERTS: Well, many of the assets we have here were built a very long time before there were any decisions or agreement that we were going to progress a carbon price. Power stations are long lived assets. They have working lives that are measured in decades.
The assets we have now were built many years ago. The current owners have bought those assets in good faith at a time when a carbon price was not in the offing.
SIMON LAUDER: The debate over compensation is one where complex economic and environmental arguments are hard to separate.
Professor of Economics at the University of Melbourne, John Freebairn, says the Government will find it hard to say no to industry pressure.
JOHN FREEBAIRN: Oh well this is a government that's very subject to industry pressure and rent seeking.
SIMON LAUDER: Professor Freebairn says if generators are directly compensated, costs may be passed down to consumers anyway.
JOHN FREEBAIRN: That's been the experience of Europe, where they were given free permits. They largely passed on the price and it was a nice little transfer from consumers of electricity to producers of electricity.
SIMON LAUDER: What do you make of the argument that compensation under a carbon tax could actually have a perverse environmental outcome?
JOHN FREEBAIRN: I don't think that will actually happen. The cost of producing dirty coal-fired power will rise more than gas, and again that of renewables won't be much at all. There are lots of investors outside in this world, not just the existing Australian electricity generators.
If they see a clear pattern of a rise in carbon price, we'll grab the opportunity initially to bring in gas as a replacement to coal to put in a little bit more of the renewable. And of course invest in making their coal fired plants more efficient.
SIMON LAUDER: He says all compensation should go to households so consumers can make the choice.
EMILY BOURKE: Simon Lauder with that report.