Australia’s New Energy Regime

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Below figures will use Australian dollars unless otherwise noted.

As followers of the international climate and energy scene will know, Australian Prime Minister Julia Gillard last month unveiled a major climate change package attempting to reduce carbon emissions and spurring clean energy development. The full plan and a summary are here. It’s a lot to chew on, with a lot of moving parts, and though it is not yet law, passage seems assured later this year. Briefly, the centerpiece of the package is a $23 ($25 USD) per ton carbon price on the country’s 500 largest polluters. The price will rise by 2.5% each year, estimated to generate over $27 billion by 2015, after which it will be replaced by a carbon trading scheme. More than half of the tax revenues ($15 billion) will be used to assist consumers with higher energy costs. Most of the remaining revenue will go to adjustment and efficiency assistance for energy-intense industries like metals, minerals and chemicals, and additional assistance packages will specifically target the domestic coal and steel industries.

The plan will also invest $13.2 billion over the next decade in clean energy innovation and project financing, and consolidates many of the government’s renewable energy research programs for, one hopes, improved coordination, and allocate an additional $1.2 billion over seven years for cleantech manufacturing (it’s worth noting the plan does not manage to balance revenues and outlays). A new Climate Authority will monitor carbon reduction efforts with an eye to hitting emissions targets of at least five percent below 2000 levels by 2020, and 80 percent below 2000 levels by 2050. There are several other initiatives intended to promote sustainable farming, retire older coal plants by 2020, and achieve other ends (see Leigh Ewbanks’ excellent post for more).

A plan this complex is not easy to summarize, but we can grade it along two criteria: its ability to accelerate the development of innovative new clean technologies, and its ability to displace fossil energy and its associated emissions without hurting domestic competitiveness or otherwise setting the country up for failure. Initial reaction: Australia is taking the right steps on the first point, but challenges related to the second point might make this effort more difficult than it needs to be, and could leave the entire effort at risk. Let’s get a bit deeper and look at a few aspects of interest.

The Right Stuff

Efforts to displace fossil fuels won’t succeed unless viable alternatives are developed, and this is best achieved by ramping up public-private innovation efforts in a coordinated, targeted fashion incorporating both technology-push and demand-pull. Per the International Energy Agency, Australia is already among the world leaders in clean innovation investments, both in absolute terms and on a per-capita basis, and the plan appears to advance the country further along this trajectory.

Three programs in particular are worth mentioning, though further details on program structure are needed to make any final judgment. First, the energy plan establishes the Australian Renewable Energy Agency (ARENA), rolling several preexisting programs in solar research, advanced biofuels including algae, geothermal production, and other research under one roof, and funds it at $3.2 billion over ten years. ARENA will include both a renewable energy venture capital fund for early-stage commercialization efforts, and an emerging technologies program. What’s not clear is if this new agency will be structured in such a way as to optimize decision-making and avoid stove-piping; whether it will be sufficiently willing to pursue the kinds of high-risk/high-reward projects some of its individual programs are already pursuing (though many of these efforts are quite young); and whether the agency will develop a clear strategy with effective roadmaps connecting basic science research with latter-stage development. And by focusing exclusively on renewables, the agency necessarily leaves out Australia’s significant carbon capture and sequestration (CCS) work, which is highly important for Australia’s coal-intensive economy and status as a coal exporter. Nevertheless, ARENA seems a great step in the right direction.

Second, the plan establishes a Clean Energy Finance Corporation (CEFC) to help finance and commercialize new technologies and boost innovative cleantech manufacturing—essentially acting as a green bank—and funds it at $10 billion over the next decade. The CEFC will be able to invest in broader low-carbon technology like cogeneration as well as renewables, but will again not pursue CCS.

Lastly, the plan creates a Clean Technology Program for manufacturing-specific support and funds it $1.2 billion per year. This support will go to both energy efficiency and to promote business R&D. This program is complemented by others intended to drive broad efficiency, boost skills, and establish domestic supply chains. All of these are worth doing on their own, emissions charges or no, to improve industrial energy productivity and thus competitiveness. Indeed, it’s unfortunate that these programs are only moving forward to offset cost increases driven by the carbon pricing/trading schemes – which brings us to our next point.

Tough Market Impacts…

While the above steps are good ones on their face, the program centerpiece—carbon pricing—could be problematic for a simple reason: the potential hit to trade-exposed industries and consumers in the form of increased costs. The coal industry warns of 4,000 lost jobs, business opinion is mixed with some firms concerned over competitiveness, and many consumers are worried as well, as support for climate policies have dropped substantially over the past few years. The government’s assistance package will theoretically offset the estimated hit to consumers, but one wonders how they’ll feel watching energy bills and the price of food increase, as the Victoria Farmers Association has warned. Quantas and Virgin Airlines have announced small increases in domestic airfares and expect losses from higher fuel costs, as do regional carriers. On the other hand, higher energy prices should also help to drive investments in efficiency where possible, as they tend to do. Ultimately we’ll have to wait and see how significant the costs really are, and whether these fears are legitimate.

What’s lamentable about all this is that carbon pricing, if it does have the negative impacts in jobs and competitiveness as some fear, would likely do so without actually achieving much for either emissions or renewables deployment. It will instead foster a shift to natural gas plus efficiency, while doing little for radical innovation to make clean alternatives cheap. One Australian expert has said he believes the carbon price would have to be four times higher to make most renewables attractive. Such a boost in price is not in the cards, nor should it be. In fact, the hit to trade-exposed industries could cost jobs and exports while simply pushing emissions elsewhere. And ultimately, any emissions reductions will likely be fairly small in the grand scheme of things – it’s global warming, not Australia warming. Emissions reductions are the big end goal, but given the international nature of the problem, a fragmented approach by the international community, and the current centrality of fossil fuels to our entire economic system, aggressive innovation is a far better path than excessive reliance on pricing, especially in the near-term. Price has its role, but it must be a tempered one.

The real value is thus in Australia’s cleantech development activities, which could have been funded by a smaller price by half, with a smaller impact on the economy, which in turn would have helped avoid future backlash. Which brings us to our final point…

…And Political Consequences?

The politics of this approach seem fairly problematic – that much is obvious to a novice in Australian politics such as myself. As mentioned above, voter support for climate policies have declined in previous years, with jobs unsurprisingly the top concern. The attempt at a carbon price is credited with sinking former Prime Minister Kevin Rudd, and Gillard promised not to introduce a carbon tax during her campaign. Obviously, promise broken. Recent polls show 60% of voters against the policy; the government’s poll numbers have utterly tanked; and opposition leader Tony Abbott has pledged a repeal if he wins in 2013. If costs to consumers and businesses spike and job losses materialize, his path could get a bit easier.

Carbon prices are not particularly effective drivers of radical innovation, but they can inspire investments in efficiency and, even more importantly, serve as a revenue stream to fund more robust innovation in pursuit of affordable clean technologies. In this sense, Abbott’s promise of a tax repeal should be of real concern. If price spikes and continuing backlash are in the cards, one must hope the Gillard Government is willing to moderate its plans rather than throw the baby out with the bathwater.

Richard Flanagan, writing in the Guardian, called Australia’s move a “brave start” – but the question is, a start to what? We’ll have more as this debate unfolds, including a deeper look at Australia’s innovative ventures as they take shape.

Photo Credit: Wikimedia user Fir0002/Flagstaffotos (license).

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About the author

  • Sean Pool