Recently, the Climate Institute released a report comparing the climate and energy policies of six major economies. The joint Climate Institute/Vivid Economics report (PDF) calculates the ‘carbon price equivalents’ of non-price-based initiatives like clean energy investments, renewable energy mandates, feed-in tariffs, and other regulatory measures, for example. Whether it makes sense to shoehorn these distinct policies into the carbon price model is worthy of discussion, but for now I’d like to look at the key talking point in the communications surrounding this report.
The Climate Institute claim that carbon pricing is key for ‘driving competitiveness in the clean energy economy.’ This might be the case. But is it the same thing as driving progress towards a clean energy economy? To gain a perspective on this question, I asked leading energy policy expert Alan Pears what he thought.
Q. Is ‘driving competitiveness in the clean energy economy’ the same thing as driving a competitive clean energy economy?
The answer is no. A key reason is that each separate market involves subsets of the economy, so it can actually distort the overall optimum outcome. If you accept market theory, it will be the participants in each market, acting in their own interests who shape the outcome. So if you exclude any important groups, or set up two separate markets that have to compete with each other, you can end up with far from optimal outcomes. The design of the Carbon Pollution Reduction Scheme created many distortions – for example power stations are seen as ‘covering’ the stationary energy sector, but they will not voluntarily encourage consumers to use less electricity or to shift to cogeneration or other forms of distributed generation, as that undermines their profits (see submission 186 to the Prime Minister’s Task Group on Energy Efficiency).
Indeed, the Renewable Energy Target REC (renewable energy certificates) trading scheme is in many ways a response to the distortions caused by the main energy market structure. And the way it has been set up brings its own distortions. For example including solar hot water and photovoltaics in the main market (complete with ‘phantom’ RECs) has led to solar dominating the RECs market and delay in investment in other large scale renewable energy technologies – hence the plan to separate the small and large RE schemes from next January. But Large-scale Renewable Energy Targets may still not support development of emerging renewable energy technologies such as geothermal or large-scale solar, as it is focused on the cheapest renewable energy now.
However, if you don’t do something to intervene, then the structures of the existing markets will drive the outcome, and they tend to work against new entrants and positive societal outcomes. But you could use a wide range of policy tools apart from competitive market models, or in parallel with them.
The Climate Institute’s study is interesting because it looks across a range of policy areas to identify ‘equivalent’ carbon prices’ so that the overall policy influence on carbon emissions (at least relating to renewable energy) is seen. But it still doesn’t look at the overall picture. Factors such as subsidised prices for coal for power stations, the historical contribution of public funds to development of much of our existing electricity supply infrastructure, etc, are significant. Chris Riedy from Institute for Sustainable Futures has published a couple of studies that look at the subsidies to fossil fuels. Clearly these dilute the impact of the policies considered in the Climate Institute study. It is likely that removal of existing subsidies to fossil fuels would be very cost-effective – but it is politically difficult.