Wednesday, October 17, 2012

Costs lost in the focus on climate

It is more than 25 years since the possibility that carbon dioxide and other human-induced greenhouse gas emissions achieved currency as possible causes of global warming.

In that period a large volume of legislation has been introduced.  The latest proposals link Australia's carbon price with that of the European Union and provide a one-way street for Australian firms to acquit part of their emission reductions by buying EU credits.  This is likely to transfer about $1 billion a year to the EU, perhaps a suitable form of aid to a political entity increasingly resembling a third world ''failed state''.

The proposed change to Australia's carbon tax/cap-and-trade will mean a lower price on carbon.  But it leaves unanswered how much Australia is currently and prospectively spending on emission reduction measures.

There are four families of such measures in place:  the carbon tax, the Renewable Energy Target, direct budgetary expenditures and standards on a range of products.

The government has never provided public estimates of the combined cost or benefits of all these imposts.

The carbon tax is unique to Australia, though the EU has a less comprehensive cap-and-trade variant.  Public estimates of its costs are $8bn a year in its present format.

The RET has been around since 2001.  It currently requires 20 per cent of electricity by 2020 to be derived from a mix of large-scale sources, dominated by wind, and small-scale installations, which include solar water heaters, heat pumps, and solar panels.  Wind requires a price of more than $110 per megawatt hour to be economically viable and small-scale systems at least twice that.  Coal-generated electricity costs $35-$40 per megawatt hour.

Together, the RET schemes, including the need for back-up systems, mean an impost by 2020 of about $5bn a year.  The third family of costs comprises direct budgetary expenditures, chief among which are those of the Departments of Climate Change, Energy and Resources, and Sustainability and Water.

In the current year's budget at least $2.7bn is clearly identifiable, added to which are the sums that every department, including Treasury, must allocate to addressing climate change.

Finally there are regulatory measures that force suppliers to feature energy-saving features in the products they offer.  Many of these standards started life as measures to conserve energy and were targeted at a previous scare — the forecasts that the world was running out of fossil fuels.

Although such forecasts were discredited, the conservation regulations remained and morphed into measures that are designed to reduce greenhouse gas emissions.  They are imposed on many domestic appliances and on buildings.

These standards are uncosted but one that has been subject to some scrutiny is the 6 Star Standard on new housing.  The Victorian Competition and Efficiency Commission accepted a cost estimate for this of at least $5000 per new house, an estimate that would translate into an annual Australia-wide cost of at least $500 million.

All in all the greenhouse emission measures therefore impose a cost of at least $15bn a year, for benefits that are probably zero.  Yet the debate on the issue has largely centred on the Coalition's opposition to the carbon tax.  The opposition seeks to replace this through ''direct action'' measures that select the most promising sources to target for reductions.

''Direct Action'', which also features in the government policy arsenal, suffers from its very selectivity.  Thus, while it might appear cheaper to target a particular source of emissions, emissions are fungible — closing down one source may see something very similar replacing it.

For example, the government's proposed replacement of the Hazelwood Power brown coal station by a gas station aims to halve the current facility's annual 16 million tonnes of carbon dioxide emissions.  At a cost of $3 billion if the life of the existing facility is 20 years, that translates into a carbon price of around $50 per tonne.  Not only is this well above the carbon tax but the operations of the National Electricity Market higher cost new facility would bring an increase in price for all electricity.

Greenhouse emission policies may well be the key issue dividing the Government and the Opposition.  But the goals of those policies have not been fully specified and the lack of costing on existing and proposed measures means there is no platform on which the desired level of emission reductions can be based.

No comments: