Republished from The Conversation
Thu 28 April 2016
Labor has announced the climate policy it will take to the federal election, including a return to carbon pricing under an emissions trading scheme.
The detailed policy includes multiple market-based mechanisms. Among these are an emissions trading scheme, a domestic electricity cap-and-trade scheme, and a mechanism to close brown coal power stations. The package would also increase investment in renewable energy, instigate a major review of the electricity sector, tighten vehicle emissions standards and create a “trigger” to account for climate change in land-clearing.
Climate policy is the football of Australian politics. So as the election campaign ramps up, grab your popcorn and settle in for the showdown.
World agrees on need for action
Politicians of almost all persuasions, as well as the majority of scientists, now agree that action needs to be taken on a global scale if the world is to continue to enjoy the benefits of a stable climate.
The Paris climate agreement sets out the long-term goal of limiting warming to well below 2℃ and if possible below 1.5℃. It needs to be ratified by at least 55 countries and represent 55% of global greenhouse gas emissions.
To do this, these emissions must eventually reach zero (or be completely offset) by mid-century. This is currently not matched by short- and medium-term pledges by countries to reduce emissions.
So while the Paris agreement was uplifting in terms of its aspirations, it was less inspiring in terms of its practical execution.
What does good climate policy look like?
All countries need to develop strong climate policy to be able to ratify the Paris agreement. This should be about pragmatic action, not ideology. The huge challenge facing the world means that the action taken needs to be strong and urgent.
In Australia, emissions from energy make up 75% and agriculture 15% of total greenhouse gas emissions, so climate policy should be primarily about reducing the combustion of fossil fuels.
As energy and agriculture are key to our economy, economists generally agree the most efficient way to reduce carbon emissions is through an emissions trading scheme (ETS) or a carbon tax.
Alongside strong financial incentives and disincentives for reducing emissions, institutional support is needed to shepherd and adapt policy to ensure it can be applied. This is not just a matter for government; the private sector must be included and committed to both the policy and their part in the pursuit of abatement.
Last but not least, the public needs to understand the problem and be confident of the ability of policymakers to craft policy that will help to resolve it.
In recent years, the game of political football over climate policy has intensified. Labor’s carbon-pricing package lasted just two years before being axed and replaced under the Coalition government. The Renewable Energy Target was introduced with bipartisan support, expanded under Labor, then reduced under the Coalition. Supporting institutions have similarly been created, restructured, defunded and dissolved.
Public support for climate policy, too, has waxed and waned from a high level around 2007 – at the height of the droughts in Queensland and New South Wales – to cynicism about the carbon tax and the perception of its impact on electricity and industrial competitiveness to, more recently, a return to support for renewable energy and climate action.
How will Labor play the game?
Labor’s plan to resurrect an ETS is an attempt to return to a policy supported by economists, but with a tentative introduction.
Labor has announced that multiple market mechanisms will be introduced. Phase one, to run from 2018-2020, includes a scheme for the electricity sector that will simply cap the emissions of high carbon emitters according to an industry benchmark and encourage generators to trade with each other to meet their cap. This will aim to stop emissions increasing to 2020, and make cuts after that.
This differs from the previous carbon tax in that initially there will be little cost for electricity generators and therefore electricity consumers. There will be greater pressure on emissions reductions after 2020. But if it is opened up to international schemes the cost of emissions reductions will be in line with prices overseas, reducing impacts on competitiveness.
Other large emitters will be part of a separate ETS, also with caps on emissions but the ability to offset or trade internationally.
Phase two of the ETS will link the ETS with other international emissions trading schemes. The detail on phase two for the electricity sector is less clear. There is also a plan for a market mechanism to close brown-coal-fired power stations.
While the Coalition’s Emissions Reduction Fund seeks to buy emission reductions from agriculture and vegetation management out of tax income, it ignores emissions reduction from electricity generation. This is an important point of difference between the two policy approaches.
Beyond emissions trading
Labor also intends to prevent further land clearing in Queensland and New South Wales. This may may well put Labor offside with the NSW Coalition government, which is considering land-clearing laws. Land clearing can add significantly to Australia’s greenhouse gas emissions, so it is an important element of national climate policy.
As with all policy, though, the detail will define the ability of the Labor policy to deliver the emissions cuts required.
For now, we know only that Labor seeks to decrease emissions by 45% and increase renewable energy to 50% of electricity generation by 2030.
Labor’s policy depends on how the party sells it to a public weary and wary of climate policies after relentless campaigning against the carbon tax by the Coalition during the last election. Labor is at pains to point out that it would like to initiate dialogue with the Coalition to gain consensus on climate policy.
Promisingly, it includes the necessary support and funding of transition for trade-exposed industries (which are disproportionately affected by carbon pricing), community power workers who may be displaced from coal-fired power stations, and solar thermal generation.
Solar thermal generation is important for a large roll-out of renewable energy because of its ability to stabilise the network. While solar panels and wind power are affordable sources of energy, our demand for electricity does not often match availability from solar panels and wind power. For this reason we need electricity to be able to be stored for use on dark, windless nights or oppressive, rainy days.
Hydroelectricity can do this job but Australia has a dry climate and limited hydro resources. The hype around batteries is a little premature in terms of both the cost of battery storage and its ability to integrate with the electricity grid. So solar thermal is an important element of a fleet with large levels of renewable energy.
The use of emissions trading with incentives for increasing renewable energy is crucial for reducing emissions and shifting to cleaner forms of energy. Without an ETS, investment in renewable energy is likely to produce a disappointing reduction in emissions. So it is important that both be rolled out together.
What about electricity prices? Phase one is unlikely to have a large impact on electricity prices and the detail on phase two is too sketchy to predict the impact on prices. It will however depend on how effective the solar thermal funding is at securing baseload power, and the extent to which Labor will be able to garner industry support for closing brown coal power stations.
Ultimately, the success or failure of this policy gambit will depend on whether Labor can calm the public’s nerves over their future power bills.
Lynette Molyneaux, Researcher, Energy Economics and Management Group, Global Change Institute, The University of Queensland; John Foster, Professor of Economics, The University of Queensland, and Karen Hussey, Deputy Director, Global Change Institute, The University of Queensland