Isra-Mart srl: Carbon pricing lost in translation

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Australian emitters fighting against a carbon price have a new rallying cry. Gone is the call to wait for the US and China to act on climate change, because they already have; let’s wait for Equatorial Guinea and Trinidad and Tobago instead!

That was the gist of the Australian Petroleum Production and Exploration Association’s pre-emptive strike against the conclusions of the Productivity Commission’s report on carbon pricing, which, as expected, found that the world’s two biggest economies, two biggest greenhouse gas emitters, and two of our largest trading partners are, indeed, taking action.

The long-awaited PC report on carbon pricing delivered pretty much what was expected. As Professor Ross Garnaut explained, these are economically literate folk who can locate an emissions reduction policy when asked to find one. And they found plenty – more than 1,000 of them, working to varying degrees of efficiency and cost, across the nine countries they were asked to survey.

The principle conclusion of the report was that Australia was lying in the middle of the cohort the PC was asked to compare. It’s a slightly misleading picture, because if all of the other leading economies were included, particularly those in the EU emissions trading scheme, then it would be unlikely Australia would be in the middle. But the PC could only answer the question it was asked.

But the report certainly delivered a broadside to those who would contend that the world is not acting – which, frustratingly, has been a central part of the public policy debate here – and it was unequivocal on its conclusions that an emissions trading scheme was the most efficient way of achieving abatement.

Indeed, the PC concluded that Australia could have achieved the 12.5 million tonnes of emissions reductions it has accumulated to date in the electricity sector, at a cost of $9/tCO2e, had a carbon price been imposed on that sector alone. This compares to the average implicit subsidy of its current policy mix of $44/tCO2e, which just happened to be in the same ball park as the US ($44/t) and China ($35/t).

“Alternatively,” the PC wrote, “it was estimated that a carbon pricing mechanism applying to the electricity generation sector, and imposing the same costs as the policies in place in 2010, could have reduced emissions by more than double the abatement achieved.”

That’s an important consideration given the scope of emissions reduction that Australia is obliged to achieve under its bipartisan target of a 5 per cent cut by 2020, one that could easily be ramped up if the world does the same.

But this too, does not tell the whole story, because it only accounts for a short-term transition to gas, not the long-term transformation to zero emission technologies that the International Energy Agency says will be required of the future – be it renewables, carbon capture or nuclear.

It also sounds like a damming assessment of the range of state and federal-based policies, particularly in solar PV, which the PC put at between $400/tCO2e and more than $1000/tCO2e. But that’s one of the weaknesses of the PC report. It is merely a snapshot in time that is focused on just one criteria – and does not take into account other benefits such as industry growth, avoided costs, and energy security.