Can we move to a low carbon economy without a carbon price?

There are basically six ways to foster installation of clean energy. All involve government regulation. All will increase the cost of energy and/or have to be paid for by taxpayers. All of the first four measures are necessary in the initial transition to clean energy.

1. A price on carbon. The carbon price is levied by Government selling permits to emit carbon, either at a fixed price, escalating at a predetermined rate each year (carbon tax) or variable price (carbon trading scheme). There are advantages to both systems but a fixed price would provide more certainty for investors. Either way a carbon price is a tax reform whereby tax is shifted from income to fossil fuel energy consumption. Its greatest advantage is that it provides an incentive for polluters to adopt low carbon alternatives. This article explains why it is the most cost effective of all carbon reduction measures.

2. Paying premiums for clean energy. For example, premium feed-in tariffs, such as those in place for residential solar PV and the RET scheme, which pays $38 per renewable energy certificate. (One REC = one megawatt hour of zero carbon renewable electricity). These schemes are already in place, but there is a strong argument for feed-in tariffs to be standardized nationally and extended to include more renewable technologies.

3. Reforming regulation and function of electricity and gas grids to encourage dispersed input of renewables. These reforms are urgently needed, in particular to enable surplus energy from ‘Tri – Generation’ (combined heat and power) in large buildings and industrial sites to be sold to the grid.

4. Banning or restricting the most polluting technologies. Any new coal power stations are already required to be ‘CCS ready’ i.e. able to be converted to carbon capture and storage. I would argue that this needs to be strengthened to require functional CCS at start-up.

5. Pay polluters to reduce their carbon emissions (as proposed by Liberal Party policy). The first problem with this is that little that can be done with the existing coal fired power stations. Existing plants cannot be retrofitted with CCS. To achieve significant reduction, entirely new plants will be required – either gasification combined with waste heat utilization or new installations with CCS; the latter may never be economic. Taxpayers (not polluters) would have to pay the cost for an indefinite period and this would not be palatable to the electorate.

6. The only other way would be for Government to buy up power generation and replace polluting plants with renewable technology. This would be prohibitively costly to the taxpayer and is obviously not an option in Australia.

The Liberal Party proposes another way of reducing carbon while enabling emissions to continue - paying landowners to ‘sequester’ (store) carbon in their soils. They propose to achieve 60% of their carbon reduction target in this way. It is not workable because of the scale of action required and the cost of verifying soil carbon. Most agricultural land would have to be planted to woody perennial crops and protected by carbon covenants to ensure they remain for perpetuity. This would destroy our grain production and grazing industries.

To date coal, gas and oil have been the most cost effective energy sources but this will not be so when the real cost of carbon pollution is included by legislating a carbon price, i.e. charging for CO₂ emissions. Fossil fuel energy costs will rise to those of many renewable alternatives. Private sector innovation and competition will ensure that the most cost effective low carbon alternatives are adopted. The carbon price must be high enough to make clean technologies competitive.

Pricing carbon is cheaper to the taxpayer than paying renewable energy premiums and subsidies because it is the only option that raises revenue while at the same time giving a price incentive to reduce emissions. It can be broad based, i.e. applied to all sources of greenhouse gases, and can also enable those who reduce emissions below their ‘cap’ (allowance) to be paid for those reductions. It is therefore an essential part of any strategy to decarbonize economies.

The table below shows that the cost of eliminating one tonne of CO₂ pollution by a carbon price of $25 per ton plus the current REC price of about $38 per MWh will be about $60 - $70. The current tariff premiums and other subsidies for domestic rooftop solar systems are much more expensive, costing the taxpayer over $300 per tonne of CO₂ abated.

Some wind and waste biomass energy projects are already viable with RECs alone, but are limited in their capacity to supply enough energy at all times. To supply most of our energy needs, more expensive technologies such as solar molten salt storage, cellulosic (wood based) biomass and algal biomass technologies must be deployed. For these to compete with coal would require a carbon price of at least $25/ tonne plus the current REC price. The example below shows how renewable electricity costing more than twice as much to generate can thereby become competitive with coal.

* One MWh of coal fired electricity emits about 1 tonne of CO₂

The important points to note are:

• A carbon price $25 per tonne would increase the cost of generating coal fired electricity from about 4.5c to 7c per kWh, where it would be similar to some renewable energy technologies with REC’s.

• When RECs are completely phased out as planned, the same effect would be achieved with a carbon price of about $63 per tonne.

• Even with the carbon price, electricity generation costs comprise less than 1/3 of the retail tariff; the rest is distribution costs and sales margins.

To decarbonise economies, a cost must be paid and many complementary fiscal and regulatory measures are required. A broad based carbon price ensures that polluters will either invest in clean technology options or pay a price for continuing to pollute. ‘No carbon price’ alternatives would mean that all taxpayers (whether they are polluters or not) will pay the cost.