As energy generators and other energy intensive industries scramble over each other to convince Climate Change Minister Penny Wong that they deserve compensation for the impact of the establishment of an emissions trading scheme (ETS), Australian consumers are asking - what would such compensation mean for us? If the European Union (EU) experience is anything to go by, it would mean a significant increase in the cost of electricity services without any reduction in carbon emissions.
In his discussion paper on an Australian ETS, Professor Garnaut suggested that permits to emit carbon should not be given away freely, but auctioned. Garnaut also suggested that any compensation provided to the energy sector should be limited to “trade exposed energy-intensive industries” (TEEIIs), such as aluminium and steel producers. The justification is that the price of goods and services of TEEIIs are determined on international markets, these companies will have a limited ability to compete internationally due to the extra costs of paying for carbon emissions locally.
From a consumer’s perspective, very limited “transitional” compensation for TEEIIs might be justifiable, but compensation for energy generators or all large energy users would mean windfall profits for these sectors, while ordinary consumers would pay more for basic electricity services.
The purpose of an ETS in Australia is to limit greenhouse gas emissions by putting a price on carbon. This in turn fundamentally changes the cost-benefit equation for delivery of goods and services that involve carbon emissions.
As it applies to the stationary energy sector, an ETS is primarily designed to change how those in control of fossil fuel energy production - the large energy generators - go about their business. For example, other generation alternatives, such as renewable generation or even more efficient coal generation, will become more attractive as the production of carbon-intensive energy becomes more expensive. If generators receive compensation (through, for example, the issuing of free permits to emit greenhouse gases), the incentive to look at sustainable investments evaporates.
The impact of an ETS is not limited to the electricity generation sector. In the short to medium term, energy generators will pass on the cost of emissions to end-users. This is appropriate - consumers, too, have a role to play in paying for the cost of their emissions. However, at the residential household level, a price signal alone is unlikely to encourage residential consumers to change their behaviour to become more energy efficient.
It is widely acknowledged that the price elasticity of demand for electricity is very low. After all, electricity is a commodity like no other. This is because electricity has no value in itself, but is valuable for the service it can provide, for example, lighting, heating, cooling or cooking. Many, if not most, of the household services that electricity enables are not discretionary. If a price premium is placed on the carbon emissions involved in the delivery of these services, households will just pay more to receive the same level of service.
While an increased price might provide some incentives for householders to use electricity more efficiently, their ability to do so is limited by a range of structural factors. Barriers to household energy efficiency include the efficiency standards of buildings and appliances, the split incentive that exists between landlords and tenants, and the inability of low-income households to pay more to be efficient. Perhaps the most significant barrier is the cultural change necessary to convince consumers of the need to consume far less.
More complex solutions are required to overcome these problems. A mere price signal through an ETS will not, and cannot, be the silver bullet for delivering residential energy efficiency.
The Government has said that Garnaut’s final suggestions about an optimal ETS will form just one “input” into the final design of Australia’s ETS. Chief executives of fossil fuel companies and their lobbyists have interpreted this as the door being left ajar to deliver the outcome they desire - a shoring up of their profits. These lobbyists have seen the profits made by their sector in the EU after the establishment of the ETS there, and they now want their share of the pie.
The EU electricity industry was successful in its pursuit of “grandfathering” - where polluters were compensated through free allowances, instead of being made to pay for their carbon emissions. Not only did free emissions credits result in dollars being diverted away from investment in sustainable technologies, consumers were still forced to pay for ETS “costs”.
A European Commission study, as stated in Garnaut’s discussion paper, found that generators largely “priced in” the value of carbon permits into their pricing decisions, despite the free allocations. Free permit allocation has been estimated as delivering over £9 billion in windfall profits to energy generators, all at the expense of electricity consumers.
Senator Wong must not be fooled by the powerful industry lobbyists. She must not fall for the argument that energy generators and other energy intensive industries will shoulder the burden of climate change unfairly.
To date, these sectors have enjoyed a massive public subsidy for emitting carbon without consequence. If this historical subsidy is not removed through the mandatory auctioning of carbon permits, consumers (who are, after all, the voters) will have no confidence that an ETS or the Government can play its part in limiting carbon emissions and ultimately protecting us from the dangers of climate change.