Overview of the Australian government’s proposed carbon-pricing scheme prepared for the Breakthrough Institute. 

Marketing Best PracticesLast week, the Australian government unveiled the details of its long-anticipated carbon-pricing scheme, which include a fixed-carbon price of $23 per tonne as well as several measures to encourage the research, development, and deployment of renewable energy technologies. In contrast to the death of cap-and-trade in the United States last year, the passage of Australia’s national carbon price legislation is virtually guaranteed. Unfortunately, much of the legislation rests with the magical thinking that international offsets will drive the country’s decarbonisation, rather than full-scale efforts to drive the development and deployment of clean energy technologies.

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Under the proposal, Australia will have a fixed-carbon price of $23 per tonne from July 1 2012, before moving to a cap-and-trade scheme in three years time. A Climate Change Authority will be established to advise the government on emission reduction targets and a minimum target of 5 percent below 2000 levels by 2020 has been agreed on. Starting in July of next year, the nation’s 500 largest emitters (excluding the agricultural sector) will be charged for each tonne of carbon they emit. To assuage voters, petrol is excluded from the scheme and compensation will be available for nine out ten households. Industry will receive $9.2 billion to manage the introduction of the carbon price.

Carbon pricing was not an issue the centre-left Labor government chose to champion. It is well known that as Deputy PM, Julia Gillard advised her predecessor Kevin Rudd to drop Labor’s first attempt to price carbon–the Carbon Pollution Reduction Scheme. Under Julia Gillard’s leadership, the party contested the 2010 election with an explicit pledge not to pursue a carbon tax, but after an inconclusive election result the measure was reluctantly accepted as the price of forming a minority government and hanging on to power.

Throughout the carbon price debate Labor politicians have propagated the myth that a carbon price alone will decarbonise the economy. Addressing the Committee for Economic Development of Australia earlier in the year, the Prime Minister claimed “a carbon price will drive another sweeping technological revolution like Information Technology did in the 1980s and 90s.” As I have argued previously, when it comes to clean technology innovation and deployment, carbon price is no silver bullet. Now, with The Greens holding the balance of power in the Senate, the government was forced to concede the limits of carbon pricing and adopt additional renewable energy support measures.

Provisions for Renewable Energy R&D and Deployment

The planned carbon price scheme includes the following energy-related measures:

  • Establishment of two new statutory bodies–the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC)–to administer $13.2 billion worth of investment in renewable energy programs to 2020.
  • Require the national energy regulator, the Australian Energy Market Operator (AEMO), to prepare plans for a 100 percent renewable electricity network.
  • Government buy-outs for 2000MWe of the nation’s most inefficient coal generators by the end of the decade.
  • The exclusion of native forest woodchips from being counted as a renewable energy source.

Let’s take a closer look at the independent investment-centred bodies set up to drive renewable energy research, development, and demonstration.

The Australian Renewable Energy Agency (ARENA) will administer $3.2 billion of existing government programs for renewable energy R&D, demonstration and commercialisation. The most notable of these programs is Solar Flagships, a grant program for large-scale solar demonstration. The new body will streamline administration and strip decision-making responsibilities from Energy Minister Martin Ferguson–who has a dubious record when it comes to supporting renewable energy.

The proposal would also establish the Clean Energy Finance Corporation (CEFC)–effectively a green bank endowed with $10 billion to encourage investment in deployment and commercialisation over five years. From fiscal year 2013- to 2014 the CEFC will provide loans, loan guarantees and equity to help renewable energy and low-emissions projects get off the ground. Half of the CEFC’s budget is reserved for renewable energy projects.

To put this into perspective, the CEFC’s proposed $2 billion annual investment is the equivalent of about 0.15 percent of Australia’s current GDP. Proportional investments in the United States would equate to about $21 billion per year–close to the $25 billion annual investment the Breakthrough Institute, the American Enterprise Institute and the Brookings Institution argue is necessary for the United States to accelerate energy innovation in their 2010 report Post Partisan Power.

Replacing Fossil-Fired Electricity

Fossil electricity will continue to provide a substantial proportion of Australia’s electricity into the future. The carbon price is expected to drive the construction of new gas-fired plants to supply baseload power. As University of Melbourne Energy Research Institute fellow Patrick Hearps points out:

Analyses from the Australian Energy Market Operator (AEMO, PDF) and Melbourne Energy Institute numbers show that if carbon costs around $25-70/tonne the electricity sector will switch from coal to gas-fired power, and would not drive any extra investment in renewables beyond the Mandatory Renewable Energy Target.

In an interview earlier this year, the Australian climate change minister conceded as much: ‘For baseload electricity generation,’ said minister Greg Combet, ‘it will be gas-fired electricity that we see emerge, and for that investment to be committed, we need a carbon price in the economy.’

In this context, it would be sensible for the Gillard government, the Greens and the Independents to amend the legislation to guarantee that scarce investment resources do not flow to the fossil fuels that are already set to benefit from the carbon price. Currently, the legislation would allow for half of the Clean Energy Finance Corporation’s budget to be used for hybrid renewable/fossil plants and perhaps even ‘bolt on’ renewable additions to existing fossil electricity installations. As well, the legislation does not include mandates to replace retired coal generators with renewable energy technologies. Commitments by each party to do so would provide the much needed market-pull for the deployment of large-scale renewable energy projects.

As I previously mentioned, the passage of the carbon price legislation is virtually assured. The next battleground for Australian climate and energy policy will take place around the shift from a fixed carbon price to a cap-and-trade system.

In a detailed analysis, climate change lawyer and policy analyst Fergus Green draws attention to the proposed scheme’s excessive reliance on international offset allowances. According to Green, the Treasury’s own projections indicate that nearly half of the approximately 900 million tonnes of abatement that will be needed to bridge the gap between Australia’s business-as-usual projections (an 80 percent increase of 2000 levels) and the 80 percent reduction by 2050 could be achieved through imported international offsets. This would leave ‘Australia’s actual emissions in 2050 almost exactly where they were in 2000, at around 550 million tonnes.’

Australia’s massive coal-export industry is another elephant in the room. The emissions generated from Australia’s coal exports–around 750 million tonnes annually–are greater than those currently generated by domestic economic activity (around 600 million tonnes). Even so, the government’s climate policy does not address this issue. And despite the coal export industries’ significant contribution to global emissions, the Labor party is committed to doubling the industry’s output over the next decade.

The Gillard government seems to think that a national emissions-trading scheme underpinned by international offsets and the expansion of coal exports is consistent with a credible response to climate action when it is little more than magical thinking. The inclusion of renewable energy support measures is a positive development, yet ultimately, the Australian government will have to revisit and reform its climate and energy policy to drive decarbonisation.