Australia's Clean Energy Future
Dr Steven Kennedy
Deputy Secretary, Department of Climate Change and Energy Efficiency
Victoria University
7 September 2011
Introduction
I am pleased to be here today to discuss the Australian Government's plan for a Clean Energy Future.
There are four simple propositions that frame the Government's response to climate change.
First, the Government accepts the advice of Australia and the world's premier scientific institutions that climate change presents a significant risk to Australia and the world's peoples.
Second, the world's major economies are acting on the risks presented by climate change and moving to reduce emissions in line with agreement at Copenhagen and Cancun to limit global temperature increases to below 2 degrees Celsius.
Third, it is in Australia's national interest to play its part in this global response.
Fourth, it is also in Australia's national interest to play its part in reducing emissions as efficiently as possible — at least cost.
Today I will focus on the fourth proposition, and in particular, outline the Government's plan for reducing emissions.
But before doing so it is worth noting how the fourth proposition flows from the third.
Australia's contribution to a global reduction in emissions is measured through its pledge to reduce its net emissions and ultimately whether it delivers on that pledge.
This is the metric to consider in the debate over whether Australia is lagging or getting ahead of the rest of the world in contributing to the global reduction in emissions.
However, often the debate of Australia's global contribution is centred on the instrument to reduce emissions and in the current debate the intention to introduce a carbon price.
It helps to separate these two propositions and consider the effectiveness of the instrument to reduce emissions separately from the pledge to reduce emissions.
And in particular consider for a given pledge, what is the most efficient way to reduce emissions.
Of course, the pledge and policy to reduce emissions do interact, with it being more likely that a pledge is met if it is delivered at least cost.
Nevertheless, it would seem that evaluating policies to reduce emissions primarily based on their efficiency is a reasonable starting point.
The release of the Clean Energy Future plan is the result of years of intensive policy development.
Its design reflects on the substantial policy debate over the past decade, from the National Emission Trading Taskforce established by the states and territories in 2004, to the Shergold Report, and the CPRS green and white papers.
And it contains many features of the policy models put forward by Australia's top climate change economists such as Warwick McKibbin, Ross Garnaut and Frank Jotzo.
While the debate over pricing carbon and the response to climate change was and is vigorous, among economists the central proposition that an economy wide price on carbon is the most efficient and effective way to cut emissions is widely accepted.
A recent ground breaking report by Australia's Productivity Commission on Carbon Emission Policies in Key Economies supports this view.
The Commission's report in June of this year examined climate change policies in seven of Australia's top ten trading partners — China, Germany, Japan, New Zealand, South Korea, the United Kingdom and the United States.
The Commission identified over 1,000 policy measures to reduce pollution. The Commission's report found that the policies in place across the world vary tremendously. The costs of these policies ranged from less than $10 for every tonne of greenhouse gas abatement to above $400 a tonne.
The Clean Energy Future plan
The introduction of a carbon price is at the centre of the Government's plan. The key features of a carbon price relate to its coverage, the extent to which it is linked to international markets, the use of revenue generated by imposing a carbon price and governance of the carbon price arrangements.
The Government's plan for a Clean Energy Future Package has four elements:
- introducing a carbon price
- promoting innovation and investment in renewable energy
- encouraging energy efficiency, and
- creating opportunities in the land sector to cut pollution.
1. A carbon price
The Government's carbon price mechanism has broad coverage of the economy's emissions (almost 60 per cent for the scheme and around two thirds when including the application of a carbon price through fuel tax arrangements and levies on certain synthetic greenhouse gases).
Farming and other land-based activities will not be covered. However, the Carbon Farming Initiative will give farmers and other land managers an opportunity to generate income from taking action to reduce their pollution.
Including the CFI, there will be incentives to reduce emissions in place across a significant proportion of Australia's emissions.
The carbon price will start at a fixed price of $23 a tonne in 2012-13, and then automatically transition to a flexible market price under a 'cap and trade' scheme in 2015-16.
The fixed price period allows businesses to become accustomed to the new system, understand their obligations and start planning ways to reduce their emissions.
Under the flexible price arrangement that will apply from 2015-16, businesses will compete to buy the number of permits they need to meet their obligations.
Businesses will be able to meet their obligation in whichever way is most cost-effective for them; for some businesses, it will be cheaper to reduce emissions than buy carbon permits.
Australia's carbon price will be linked to carbon markets around the world from the start of the flexible price period. This will allow reductions in carbon pollution to be pursued globally at the lowest cost.
Safeguards will be in place to ensure international permits are credible and do not undermine the environmental integrity of Australia's pollution reduction efforts.
Until 2020, businesses will have to meet at least half of their annual obligations by buying Australian carbon permits or Carbon Farming Initiative credits.
It will be more efficient and less costly to reduce Australia's carbon pollution by a mixture of domestic reductions and international permit purchases compared with relying on domestic action alone.
International linking allows Australian businesses to pursue credible, cheaper carbon pollution reduction opportunities wherever they are available.
International linking also encourages action to reduce carbon pollution around the world, and plays an important role in helping developing countries adopt clean technologies.
Relying entirely on domestic abatement opportunities would be a much more expensive way to meet Australia's emissions target.
The Treasury modelling shows that to achieve the 5 per cent target using only domestic abatement, a carbon price of more than $60 per tonne in 2020 would be required — more than twice the current projected carbon price of $29 in 2020.
The Treasury modelling shows that the introduction of a carbon price will cause a modest overall increase in prices.
In the first year of the scheme, the $23 carbon price is expected to increase overall consumer prices by 0.7 per cent.
The consumer price impact on goods will depend on the emissions intensity of their production and so will vary between different products.
Electricity and gas are expected to be the most significantly affected, increasing by 10 per cent and 9 per cent respectively. The vast majority of other goods and services will see price increases of less than 0.5 per cent.
The scheme will provide a large proportion of revenue to households to support the transition to carbon pricing, in fact more than any of the other schemes implemented or planned.
The Government will also provide considerable industry assistance while retaining the incentives to lower emissions.
The Jobs and Competitiveness Program will allocate free permits to emissions-intensive trade-exposed businesses.
Initially 94.5 per cent of permits (calculated according to an industry average emissions intensity baseline) will be free for highly emissions-intensive activities such as aluminium, steel and zinc production and 66 per cent will be free for moderately emissions-intensive activities such as tissue paper, ethanol and glass containers.
This assistance has been designed to ensure that recipients retain strong incentives to reduce their emissions. Assistance is not tied to actual emissions; it is tied to output of a commodity. If a company manages to produce that commodity in a less emissions-intensive way, then it will be better off.
This assistance will be worth around $9.2 billion over the first three years of the carbon pricing mechanism.
The emissions trading scheme will be buttressed by three independent institutions to support its operation.
The independent climate change authority will regularly review the scheme and recommend to government future scheme caps. The authority will also review the operations of the Renewable Energy Target and Carbon Farming Initiative on a two- and three-yearly basis respectively.
The Productivity Commission will review assistance to industry and other features of the scheme to ensure that support is both efficient and environmentally effective.
And an independent regulator will enforce and maintain the emissions trading apparatus.
2. Transitioning to cleaner energy
Supporting the emergence of renewable energy is the second element of the Clean Energy Future plan.
One might ask the question why not just put a price on carbon, and leave it at that.
There are two sets of reasons for complementary policies.
The first set of reasons goes to the well known failures of markets to deliver optimal investment in new techniques and capital — investment in innovation.
While the arguments for supporting innovation are well accepted and best delivered through a broad based technologically neutral mechanism, there is also a strong case for further support for innovation when an intervention quickly and permanently alters relative prices and ultimately the structure of the economy.
As the OECD research has indicated, in addition to a carbon price, 'specific Research and Development (R&D) policies are also needed to accelerate the development of new low-carbon technologies'.[2]
In the Government's Clean Energy Plan, support for innovation in low emission technologies and renewable energy is primarily delivered through the establishment of the $3.2 billion Australian Renewable Energy Agency (ARENA) and the independent $10 billion Clean Energy Finance Corporation.
ARENA will provide support for R&D, demonstration and commercialisation of renewable energy technologies through grant funding. The Clean Energy Finance Corporation will invest in businesses seeking funds to get innovative clean energy proposals and technologies off the ground by making loans, providing loan guarantees or direct equity investments.
The second set of reasons for introducing policies to complement a carbon price go to arguments for building among the community and businesses the credibility of Government policies and their intent in lowering emissions.
Policies such as the Renewable Energy Target are in this camp. These policies pull forward investment in low emission power generation and anchor business expectations around the Government's ongoing response to climate change.
Under the Renewable Energy Target, the Government remains committed to achieving 20 per cent of Australia's electricity supply coming from renewable sources by 2020.
Together with the carbon price, the Renewable Energy Target is estimated to lead to $20 billion of investment in renewable energy by 2020.
The modelling by the Commonwealth Treasury indicates that with the introduction of a carbon price, the renewable energy sector (excluding hydro) will be 18 times as large in 2050 as it is today.
3. Energy efficiency
The third element of a clean energy future will create a more carbon- and energy-efficient economy. Increased energy efficiency has multiple benefits: lowering carbon pollution, improving energy security, and helping households and businesses cope with rising energy prices.
As the Prime Minister's Task Group on Energy Efficiency reported last year:
'Energy Efficiency is Australia's untapped energy resource — a means to improve the productivity of the economy as well as an important element in moving towards a prosperous low-carbon future.'
In line with the Task Group's recommendations the Government will look at the costs and benefits of a national energy saving initiative that would replace existing state schemes.
The Government will also be supporting households and businesses to use energy more wisely by providing advice and information on how they can save money by improving their energy efficiency.
Additional research is also being undertaken to better understand the barriers that may exist to the implementation of energy efficiency measures more broadly across the community.
4. Creating opportunities in the land sector to cut pollution
The fourth element of securing a clean energy future will create economic opportunities for farmers and land managers who reduce pollution or store carbon in the landscape.
Agriculture, land clearing and forestry create around 18 per cent of Australia's carbon pollution.
Under the Carbon Farming Initiative, landholders who store carbon, such as in trees or the soil, and those who reduce emissions from farming practices will create credits for each tonne of carbon pollution stored or reduced.
Governance arrangements are in place to support the CFI and ensure the credibility of the credits generated. An independent domestic offsets integrity committee has been established to evaluate methodologies for generating credits.
These credits will be able to be sold on domestic and international carbon markets, providing a significant revenue stream to regional and rural Australia.
The legislation gives farmers and landholders the certainty to invest in new approaches to reduce carbon pollution. It will enable farmers and other landholders to receive carbon credits for reducing emissions from livestock and fertiliser use, or increasing carbon in soils or vegetation.
As part of the Clean Energy Future plan, the Government will also invest $1.7 billion in a new Biodiversity Fund and other land sector measures.
This funding will deliver a cohesive suite of measures to support action on the land to reduce emissions, store carbon, preserve and restore biodiversity and improve on-farm productivity.
The Clean Energy Legislation Package
Next week, the Government will be introducing the Clean Energy Future legislation into parliament.
The legislation sets out the design of the carbon pricing mechanism, and how this will link to other laws and regulatory systems in place in Australia.
The principal objectives of this bill are to:
- take action directed towards meeting Australia's long-term target of reducing net greenhouse gas emissions to 80 per cent below 2000 levels by 2050 and take that action in a flexible and cost effective way.
- support the development of an effective global response to climate change; and
- give effect to Australia's international obligations under the United Nations Framework Convention on Climate Change and the Kyoto Protocol.
Conclusion
No Government acting in the national interest can ignore the advice from major science academies that our climate is changing.
Globally, 2010 was the warmest year on record, with 2001 to 2010 the warmest decade.
Rising temperatures place our environment at risk from climate change impacts such as more frequent and intense droughts, floods and bushfires.
Credible domestic actions are an essential building block for a global response to the risks posed by climate change.
Credible policy will find the least cost abatement in the economy by putting in place economy-wide incentives for changes in behaviour.
It is this thinking that underpins the Government's Clean Energy Future plan and why it is introducing a price on carbon as well as complementary measures in renewable energy, energy efficiency and the land sector.
Thank you.
[1] The views expressed are those of the author and not necessarily those of the Australian Government. I would like to thank Julie Gilfelt, Anthea Harris and Jenny Wilkinson for discussions and input to this speech.
[2] Organisation for Economic Co-operation and Development. (n.d.). Tackling Climate Change and Growing the Economy. Retrieved from http://www.oecd.org/dataoecd/28/18/44287948.pdf