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Australian energy policy: getting the balance 'right'

By Geoff Carmody - posted Thursday, 15 June 2017


What outcomes do we want our energy policy to deliver?

Australia needs reliable and affordable energy, consistent with our emissions reduction commitments.

When balancing reliability, affordability and lower emissions, trade-offs are inevitable.

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Australia's current policy balance between these goals is badly wrong.

Two realities drive the 'right' balance. First, reliability and affordability are goals our governments can and do affect. Second, acting alone, Australia cannot reduce global greenhouse gas (GHG) emissions.

For a fair while, governments have dropped the ball on reliability and affordability. Now we don't have either. This is a big deal. We have huge, diversified, energy resources. They drive our living standards. Without them, we cop lower incomes and fewer jobs. Australia must get reliability and affordability sorted ASAP.

Lowering local emissions has overwhelmed policy debate in the last decade or more. Yet lowering global emissions is beyond our control, no matter what we do. We are 1.4% of global emissions and falling.

We've focussed on a global goal we can't control and ignored goals we can.

Worse, ignore reliability and affordability, and our own puny efforts to turn back any global warming tide themselves become politically unsustainable. Nervous politicians plus preservation of votes equal quick and dirty fixes to unreliable energy supply. The political equation for blackouts is simple:

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Lights out = emissions up.

So moving from older energy supply, to newer, must deliver reliability and affordability on the way.

A comprehensive review of energy policy, carefully balancing all three goals, is needed. Now's our chance.

Two opportunities to improve our energy policy have emerged

On 1 June, Donald Trump announced he would pull the USA out of the non-legally binding 2015 Paris Agreement and seek a better deal for the USA. On 9 June, the Chief Scientist, Dr Alan Finkel, delivered his electricity review Report to Commonwealth and State governments.

These provide opportunities to reform Australia's unbalanced energy policies – if we want to. Can we use the Finkel Report to re-balance domestic policies, giving much greater weight to local matters we can control? Can we use Trump's decision to reconsider what sort of global agreement we should support?

We can restore our own energy reliability and affordability – if we want to

The Finkel Report is generating strong debate. People are arguing about what it means, and what it should mean. The Report provides a framework. Politicians must agree on the detail and join up the dots.

We could use this framework to achieve a better balance between reliability, affordability and sustainability than the blackouts and soaring prices seen recently and in prospect – if we want to. But Alan Finkel can't force us to do so. That's the community's call. It will be too easy for our political leaders (sic?) to stay in their Tower of Babel, squabbling over detail and labels, driven by perceived short-term political advantage.

If they do – the signs are not good – more reliability/affordability crises will emerge. The 'Rome of the South' will continue burning, beset by blackouts and price hikes, as politicians fiddle the electorate.

For our incomes and jobs, we should seize opportunities afforded by the Finkel Report.

There are sensible proposals in the Report. Here are two examples:

  • Requiring all new intermittent renewable energy investments to have matching back-up, however supplied, to ensure reliability, is a good idea. This will also put the true cost of intermittent renewable energy supply in better perspective. If we want reliability, it's nowhere near as cheap as some 'levelised' cost measures imply. Let's be up-front about that.
  • Having a 'technology-neutral' approach to emissions reductions (and other policy goals) helps affordability. With a level playing field, we can get closer to the most cost-effective sources of supply.

A big political fight about where the Finkel Report's Clean Energy Target (CET) subsidy thresholds are struck has started. Will any coal make the cut? The political disagreement on this issue could be a deal-killer.

Sadly, too, politicians will continue tippy-toeing around whether emissions reduction policies put a price on carbon. They all do, of course. There's no reward for transparency. There's a political price on it instead.

Most of the energy policy debate will be on what we are doing locally.

But, wrongly, most of that will focus on emissions outcomes Australia cannot deliver alone, no matter what we do. It shouldn't. That's a global matter.

Shouldn't we be advocating a global climate deal that has a chance of succeeding?

On global emissions abatement, Trump's hit the headlines. Is there substance behind the sizzle?

  • Are there any grounds on which, objectively, his claims could be justified?
  • Could remedies for these be applied, not just to the USA, but to all other nations?
  • Would those remedies mean a better chance of an effective global climate Agreement?

On the Paris Agreement, Trump has a powerful point:

  • Trump says it erodes USA competitiveness relative to competitors such as China.
  • Given the differential emission abatement pledges made by signatories, he is right. Why?
  • Because delivering these pledge centres on national emissions production.
  • Those with the largest pledges lose competitiveness compared with others; trade shifts to the latter.

Differential abatement undermining national trade competitiveness is a potent barrier to making promises or actually delivering them. The Paris Agreement and the Kyoto Agreement both feature this barrier.

What would Trump want in 'a better deal'?

1. Trade competitiveness neutrality

Any new agreement that ensured trade competitiveness neutrality while allowing for differential emissions reduction commitments over time should appeal to Trump and many others.

2. How? Border tax adjustments that are WTO-compliant

Trump's team talk about 'border tax adjustments' as part of his tax reforms.

WTO-compliant 'border tax adjustments' deliver trade competitiveness neutrality. And they're already here.

Hiding in plain view has been the value-added tax (VAT), or GST, to use the Australian label. Such tax design, using consumption-based emissions pricing, can do the job.

3. Letting technology leaders lead with 'no regrets' on trade competitiveness

We should encourage the march of technical progress. I hope Trump would agree.

Time, as well as policy not getting in the way, is needed to drive emissions and costs down while restoring reliability. The worst thing we can do is have a policy that politicians fight over, generating policy uncertainty, 'sovereign risk', and investment uncertainty.

I can't talk for the USA, but that's what we have, right here, right now. We are delivering 'the worst thing we can do' in Australia. It's a big 'own goal'.

4. Application of 'a better deal' comprehensively, not just to the USA

This stuff is not just for the USA. If it appeals to Trump, he can't oppose its application globally.

5. 'A better deal' must be a genuinely global deal: Australia 'going it alone' is ineffective at best

To argue that, unless we act (1.4% of global emissions), the Great Barrier Reef will die and the Opera House will be drowned is ridiculous. Australia should not cut off its economic nose to spite its employment face.

Assumingthere is a global warming problem, it needs a global solution. I hope Trump would agree.

6. The misdirected 'moral' argument: consumers or producers?

Under production-based emissions reduction policy, rich consumers can choose not to pay by importing cheaper substitutes. 'First mover' countryproducers are forced to close. Poor country suppliers choose to sell into higher-priced export markets, and poor consumers areforced to pay higher (incl. import) prices.

The European evidence shows just this result. Emissions production shifted offshore, and then EU consumers imported the emissions (and more) right back, carbon price-free.

How is this 'moral' or 'fair'? If we want lower emissions, and if we want 'morality', rich consumers should pay more, not poor consumers. Producers shouldn't be the 'fall-guys'.

This is fairer. A consumption-based emissions reduction policy delivers this result. It's also more efficient in cutting global emissions. Producers don't suffer trade losses, so I'm pretty sure Trump would agree.

My 'bottom line'

At home, we need to focus much more on energy reliability and affordability. We've failed badly on these.

Globally, advocacy of a national emissions consumption-based policy is our primary responsibility. In a world of creeping protectionism, only a protection-neutral policy will have more than a snowball's chance in hell of global acceptance, while being trade policy-respectable. Emissions production-based policies, with their intrinsic negative protection effects, should not be considered further. They have already failed.

Control what we can control locally. Persuade others to agree to control what we jointly affect globally.

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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