Treasury Climate Modeling Full of Holes

One of the most significant decisions an Australian federal government has ever made will be made on the basis of the treasury modeling released this week on the impact of the carbon pollution reduction scheme.

Yet many of the assumptions in this modeling are questionable, and I wanted to let you know that beneath the modeling lies shaky ground. I’m no economist (well, I did study political economy with the legendary Frank Stilwell) but even I can tell that these assumptions don’t make sense.

The treasury modeling assumes that oil, coal, and gas prices will fall dramatically in the near future, with oil prices assumed to fall by around 40 per cent over the next 7 years. This directly contrasts against CSIRO modeling, which projects prices between $2 and $8 per litre of petrol by 2018 (1).  When comparing the price of renewable energy to fossil fuel energy like oil and coal, of course fossil fuels look cheaper if they’re modeled to fall by such extravagant amounts in less than a decade. In fact, if these forecasts are correct then it appears that the introduction of an emissions trading scheme will have no effect at all on energy prices from coal, or on petrol prices.

Another set of problematic assumptions in the modeling regards energy efficiency. Treasury assumes that energy efficiency will improve 0.5% per year. This is assumed to come from technological change, rather than behavioural change. In fact, existing technologies that aren’t widely utilised – because of lack of policies to mandate energy efficiency – can deliver 20-30 per cent energy efficiency improvements.

Take for example, all the office buildings, which leave their lights on at night. It’s not as if light switches haven’t been invented yet. It’s just that people aren’t using them. Similarly, Treasury assumes that fuel efficiency will grow by 0.7% annually – yet if I switched from a large Commodore or Falcon to Toyota Corolla tomorrow, my fuel efficiency would immediately improve 30%.

The current Fringe Benefit Tax concessions not only encourage us to purchase large cars, but even to use these cars more. Removing these subsidies, as well as introducing new mandatory vehicle fuel efficiency standards, would completely negate Treasury’s assumptions around fuel efficiency only improving 0.7% each year.

Perhaps the most incredulous assumption in the treasury modeling is that carbon capture and storage of coal and gas (“CCS”) would be commercially operating from 2020 – in just 12 years. Given that CCS is yet to have been successfully constructed at even the demonstration scale, I stagger to understand why Treasury thinks this, and also why they have assumed that ‘the fixed cost of building the pipes required for CCS is not assumed to be paid for generators in the modeling. Why would Treasury assume that the costs of constructing the pipes necessary for CCS be paid for by anyone other than the generators, unless there is already a secret government commitment, in addition to the existing $500 million ‘clean coal’ fund, to subsidise these costs?

In total contrast to the assumptions, Treasury has placed limits on the rate of take up and total take up of renewable energy capacity reflecting resource availability and engineering and technical constraints. It seems that similar ‘engineering and technical’ constraints for CCS – namely, that the technology has not even been proven to work – were not included in the modeling assumptions.

A set of problematic assumptions underlies the modeling upon which Kevin Rudd will base his decision on a 2020 target for reducing greenhouse pollution. At the very least, Treasury should provide sensitivity analysis for the areas where these assumptions can be vigorously contested, to allow non-expert users of the modeling to quickly interpret the implications of individual assumptions in complex models.

(1) Fuel for Thought, Future Fuels Forum, CSIRO (2008) http://www.csiro.au/files/files/plm4.pdf