What price carbon?

Sweden produces all of its electricity from nuclear and hydro sources and during its transition from coal, it managed to grow its economy. Swedish per capita GDP was US$37,300 (2005) compared with Australia US$36,700. The damage predicted by major Australian polluters did not occur in Sweden and there is no reason to assume it will occur in Australia.

The governments of both countries have shown what should be expected from the Australian government - the ability to manage the transition from fossil fuels to renewable, clean and/or nuclear energy sources and grow the economy at the same time. Sweden, Denmark, Germany, France, the UK and several other developed countries are in the process of doing this or have done so.

It is argued that none of them are as highly dependent on exports of fossil fuels as Australia. Australia, it is argued, can not simply close coal mines which yield businesses such attractive returns on capital, which produce so much export wealth, and are the source of so much income for federal and state governments. Wrong. Australia can, and ultimately will, be forced to do so by the emergence of technology offering cleaner, cheaper electricity and the demands of the international community that they be adopted.

Anticipating this and seeking to continue production and use of coal for electricity generation, Australia has unwisely invested heavily in developing carbon capture and sequestration (CCS) technology, expected to be commercially available by 2025. Unwisely? Yes, because it assumes that more cost-efficient technologies for generating clean electricity will not be developed during the next 15 years and because CCS is so expensive to use, at least in its present form.

Until the price of carbon reaches $65-$70/tonne, it will not be possible to use CCS technology now being trialed. Prudent business practice is to opt for the cheapest alternative. At a price below $65/tonne, it would be cheaper for electricity generators and others to pay the penalty for CO2-e emissions, rather than the marginally higher cost of using CCS technology.

In effect, what government is telling us is that over the next 15 years the price of carbon will rise from a possible initial $25/tonne to $65-$70/tonne.

The problem for coal use, at least in Australia, is that at $65/tonne or more, the application of CCS technology makes base load electricity generated from hot rock sources significantly cheaper. In other words, the use of CCS technology prices coal out of the market.

Further, major advances in the areas of electricity storage (battery technology), improved performance in photovoltaic cell efficiency (nano technology) and in solar thermal technology (heat storage) are all expected to occur over the next 10 years. These developments will put further pressure on use of fossil fuels to generate electricity.

In conclusion, the prospects for reduction of CO2-e emissions are considerable, continued use of fossil fuels to generate electricity will diminish, and the physical and financial price of carbon is known or predictable. Governments need to plan the transition to a clean, sustainable economy as France and Sweden have done, or risk the economic damage caused by having to play the costly game of catch-up.