Wednesday, March 09, 2011

Memo to Julia: You don't have a carbon consensus

Julia Gillard was right the first time. It's worse than dangerous to introduce a carbon tax while someone like Tony Abbott is Leader of the Opposition.

Abbott is behaving like a vandal. While saying he is concerned about energy prices he is wrecking any chance of them stabilising. By saying he will rescind any new carbon price approved by parliament (if, as is likely, he wins the next election) he is forcing would-be investors in the power industry to extend their capital strike.

A report to the Multi-Party Climate Change Committee by Rod Sims of Port Jackson Partners finds electricity prices are climbing for three reasons, the most important being distribution charges, which are unrelated to carbon emissions. Those charges are climbing because of the need renew deteriorating assets and to strengthen them to cope with much bigger peaks in demand. By way of illustration he says Brisbane now air conditions 72 per cent of its homes, up from 23 per cent just 12 years ago.

The second most important reason prices are climbing is increased retail margins with the passing of the honey moon that followed the introduction of competition. Even so inflation-adjusted electricity prices are no higher than they were 25 years ago. What we are noticing is a catch-up.

The third and least-important reason prices are climbing is increased generation costs... They are being driven by rising international coal and gas prices (about which we can do little), by a freeze on building new coal fired power stations given the likelihood that one day they will be hit with a carbon tax and by an effective freeze on building new baseload combined-cycle gas-fired stations given that they would be uneconomic without a carbon tax.

Meantime the piecemeal emissions reductions schemes we are for the moment stuck with are ramping up costs in a way they wouldn't if replaced by a carbon tax. Subsidies for household solar panels cost an extraordinary $300 or more per tonne of emissions saved, much of which gets added to power bills through the need to pay high feed-in tariffs. Renewable energy requirements, which mainly necessitate the erection of windmills, cost $38 per tonne.

The carbon price the government proposed last time began at $20 to $25 per tonne. If we had that instead of the plethora of schemes we have now we would cut emissions in the cheapest possible way, which would be the construction of many more combined-cycle gas-fired stations, each emitting typically just 40 per cent of what a power generator emits now.

"If Australia wants to meet its target it can choose between at least two approaches," says Sims. "It can continue using the current high cost and non market mechanisms, or introduce a carbon price."

"Electricity prices will in future be lower if we take the latter path of meeting a greenhouse gas reduction target through a carbon price."

He could have added they will remain higher for as long as investment in baseload combined-cycle gas-fired stations is delayed because of a threat to remove the carbon price they would need to become economic.

Not that nothing will happen if the cloud of uncertainty remains. New generators will have to be built. They won't be the cheapest, which are coal-fired, because of the ongoing likelihood of a carbon price sometime in the period they will operate. They will be cheap to build and expensive to run so-called open cycle gas turbine generators which burn gas less efficiently and are only worthwhile running at peak times when spot prices are high.

"Electricity market modelling suggests that uncertainty-driven over investment in open cycle gas turbines would lead to wholesale electricity prices around $8.60 per megawatt hour higher in 2020 than they would be in a scenario with earlier policy certainty and thus more combined-cycle gas-fired investment," the Australian Industry Group says in a report.

The longer Abbott and Gillard are unable to provide certainty, the higher the electricity price according to the Industry Group.

What's odd is that Gillard knows this. She spelled it out when she proposed her much-derided citizens assembly during the election campaign.

"You can't create a circumstance where our economy transforms because you have put a cap on carbon pollution and then three years later we have a new government come in and sweep it all away and then three years later you have a new government come in and put a cap back on," she said at the time. "We can't do that. We need a deep and lasting consensus."

Instead she has done just about the opposite, breaking not only a promise not to introduce a carbon tax this term, but also a promise to build a scheme Australians can agree on.

Danny Price of Frontier Economics (a man who wishes he had never worked for the Coalition because of the way it keeps falsely citing him as a supporter of its own proposal) is trying to build such a scheme but says the government won't talk to him. The proposal he developed for the Coalition and Nick Xenophon would collect much less tax, penalising only emissions over a quota and rewarding firms who emit below a quota.

Reserve Board member Warwick McKibbin is a senior fellow at the Brookings Institution. Expert enough to brief the White House on carbon pricing, he has told the Canberra Times been "completely blocked out" by Labor after criticising its stimulus package.

Labor's own chief scientist Penny Sackett has resigned half-way through her term revealing she had never been asked to brief the prime minister about climate change.

Former Treasury official Geoff Carmody is trying to get someone to listen when he says the scheme Labor is pushing would needlessly penalise exporters and firms that compete with imports.

All of these people are worth listening to. All should be involved in developing a scheme Australians will actually support; one that's vandal-proof.

Instead the government is behaving like a shark whose eyes cloud over as it prepares to attack. It isn't building consensus and it seems to know it.

Published in today's SMH and Age

Rod Sims Energy Market Outlook

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. Earth to supporters of an ETS - we have a problem

. Why we need a carbon tax, by the Coalition's environment spokesman

. Get set for higher power prices, with or without a carbon price