JON STANFORD. Australia’s climate change policy mess: quo vadis?

Make no mistake: Malcolm Turnbull’s pusillanimous refusal even to consider the option of an emissions intensity scheme (EIS) for electricity generation represents a massive abdication of responsibility to the Australian community.

At Paris, the government signed up to testing emissions reduction targets by 2030 and 2050. Yet security of energy supply is also a major objective of government policy. Already, Australians are wrestling with blackouts and brownouts in electricity supply. Two expert reports to the government found that an EIS would be the most efficient and least cost means of achieving both the emissions targets and security of supply. Yet for Malcolm Turnbull, the man who crossed the floor in the House of Representatives to vote for Kevin Rudd’s far more comprehensive emissions trading scheme (ETS), all it took was a whiff of grapeshot from Cory Bernardi and his confreres for him to withdraw from the contest.

Worse still, there were no substantial external stakeholders who opposed the scheme. Business in general and the energy sector in particular is crying out for some policy certainty so as to underpin investment in low emissions generation technologies that can replace coal plant and also provide energy security. It is hard to see that there would have been any substantial opposition to an EIS from the general public. The only significant opponents are the climate deniers in the Coalition who, proposing as they do that Australia should withdraw from the Paris agreement, do not support any policy measures to reduce emissions. Given their opposition to what is clear government policy, when it comes to designing measures to implement that policy they should have effectively dealt themselves out of the game.

The problem the government faces is quite simple. While it eschews any explicit carbon price, there is no mechanism in place to deliver the required emissions reductions while maintaining security of supply. The effect of the government’s main policy to reduce emissions in the electricity sector, the renewable energy target (RET), is to impose a significant implicit carbon price. This implicit price is now sufficiently high to begin to drive coal plant out of business, as has occurred with the Hazlewood brown coal generator in Victoria.

Yet the problem is that the RET only supports investment in renewables and not in other lower emissions base load plant, such as gas, clean coal or, potentially, nuclear power. While this delivers reductions in emissions, it does not provide energy security. When the wind doesn’t blow and the sun isn’t shining, there may be insufficient capacity in the market to guarantee supply. An EIS would have avoided this problem by being technology neutral (although nuclear is still ruled out by government fiat).

Yet it’s no use crying over spilt milk. Where do we go from here? Now that the government has rejected the best policy to achieve the twin goals of emissions reductions and energy security, what are the next best alternatives? For although Labor may well win the next election and introduce a rational, market-driven policy, we can’t assume such an outcome and, besides, they are also saddled with a promise to introduce an overly ambitious increase in the RET.

Two options are considered here.

One option, already proposed by the Premier of South Australia, is for the States to get together and implement their own emissions intensity scheme. There is a precedent for this. In 2005 and 2006, State governments were frustrated by John Howard’s refusal to ratify the Kyoto protocol and to establish a market mechanism for reducing greenhouse gas emissions. The States spent significant time and effort in designing their own emissions trading scheme. Eventually this fell by the wayside in 2007, as both Kevin Rudd and John Howard went to the election in that year incorporating an emissions trading scheme, with varying degrees of enthusiasm, in their platforms.

It is not clear that there is any constitutional barrier to prevent the States from doing this. Energy markets lie within the jurisdiction of the States. The eastern States could establish mechanisms to implement such a scheme in the National Electricity Market – the scheme has already been designed – and probably administer it through the Australian Energy Market Operator. Western Australia could implement a similar scheme, but even if it didn’t there would be little downside if it were executed only in the much larger eastern electricity market.

Could the Commonwealth frustrate such a policy? Probably, but why would they want to? Any sensible federal government would breathe a sigh of relief that the States had the cojones to pick up a rational policy that they had rejected because of internal political pressures. The main problem is that some States may not agree. While in 2006 all the States had Labor governments when they were seeking to establish an ETS in opposition to a Coalition Commonwealth government, this is not the case today. If NSW failed to participate in the scheme, it would not be worth doing.

The second option lies with the Commonwealth. Having rejected a market-based solution, one alternative, that need not be significantly less efficient, is to adopt a hands-on, dirigiste engineering solution. A plan would be developed to design a trajectory for the electricity sector to make the appropriate contribution to meeting Australia’s emissions reduction targets in 2030 and 2050. This would establish a schedule for the closure of high emissions coal plant to be replaced with low emissions generation that could replace coal at least cost consistent with meeting the targets. New plant may be gas-fired, for example, or perhaps renewable with battery storage. Investment decisions would be made on the basis of generation costs relative to emissions reductions, with security of supply being an essential element in the algorithm.

The drawback with this is that, in the absence of a market signal, the Commonwealth would almost certainly have to invest in the new generation itself. One advantage in comparison with a market-driven process is that if nuclear were part of the solution, it seems that only the government could provide the necessary investment.

Approving government investment could prove difficult in terms of the budget deficit, although any sensible accounting process would distinguish between investing in productive assets and borrowing to fund recurrent expenditure. In any case, having rejected a private sector, market based solution, the Coalition can hardly complain about the implications. Also, the aim would be to sell the new assets to the corporate sector as soon as they became established.

The two options considered here are inferior to a national market-based solution oversighted by the Commonwealth. Yet, as Danny Price, the designer of the energy intensity scheme, pointed out this week quoting Plato, “the heaviest penalty for declining to rule is to be ruled by someone inferior to yourself”.

Jon Stanford is a Director of Insight Economics. He was Chair of the CoAG gas reform process in the late 1990s. Formerly he was a senior public servant in the Department of the Prime Minister and Cabinet.

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