Watching one of Australia’s leading fossil-fuel rent-seekers, APPEA’s Belinda Robinson, speaking at the National Press Club today, I was reminded of another of the key reasons why a weak emissions trading scheme is worse than useless.
Robinson put forward the view that we should be investing many tens of billions of dollars in replacing, or at least supplementing, Australia’s coal power infrastructure with gas power. She argues that, since gas power’s greenhouse emissions are in the order of 30% less than the most efficient coal power, this would do a power of good for Australia’s emissions profile.
That’s an argument that may have been made effectively a decade or 15 years ago. Indeed, it is an argument many environmentalists supported for years – natural gas as a transitional fuel into the renewable energy age. However, it is now an idea whose time is well past.
If my ears didn’t deceive me, Robinson put the price of a single large LNG processing plant at $25 billion. Obviously, the transportation of the fuel is an additional large cost, as is the power station infrastructure, even if it is simply retrofitting coal power stations for use with gas. For that amount of money, we could build some 20 GW of solar thermal power! With various renewable technologies and a smart grid roll-out, we could be halfway(a quarter of the way)* to decarbonising Australia’s entire energy demand with zero emissions renewable energy for the price of one large LNG processing plant which would still have unacceptably high emissions.
You have ask what is the point of a transition fuel when the energy sources that we are supposed to be transitioning to are already available and are, on these figures, cheaper than the supposed transition itself. And you have to ask what kind of short-sighted, nonsensical decision-making would invest massively in polluting infrastructure now when the clear scientific and ecological imperative is to go to zero emissions fast.
Well, since you ask 
, it’s the kind of short-sighted and nonsenical decision-making which lies behind the Rudd Government’s emissions trading plan – the so-called “Carbon Pollution Reduction Scheme”.
One of the biggest problems with setting a weak emissions reduction target, one of the elements that makes it worse than useless, is that it will lead to short-sighted investments in ‘low emissions’ infrastructure which, a few years down the track, will have to be discarded as sunk costs when we finally realise we have to move to zero emissions. This is why it has been convincingly argued that a steeper emissions reduction trajectory is actually cheaper than a slow one, as we learn faster and don’t make these short-sighted investments.
Add the huge pile of free permits and other protections for existing industries, and you get a situation where the investment signal that is supposed to be sent by an ETS – investment in truly clean industries and infrastructure at the expense of polluting ones – is dampened and deadened to the extent that hugely troubling investment decisions are made. We may see many billions invested badly thanks to the CPRS.
It is a great irony that the best line the Government can muster up about its own emissions trading plan is that it is ‘better than nothing’. But it is an even greater irony that it’s actually untrue – it is worse than useless.
*(sorry, I got carried away, it has been pointed out to me that, due to the differing capacity factors, we’d only be able to do a quarter of Australia’s energy demand with solar thermal for $25b. The point, however, remains!)
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LNG processing plants are expensive, and use quite a bit of energy to liquefy the natural gas. This is an argument of using Australia’s gas domestically rather than shipping it overseas.
The capital costs of gas-fired power plants are much lower than gas liquefication. It would be useful to check the capital costs of gas fired power, my understanding is that the more efficient combined cycle gas turbines have very low capital costs, and the less efficient open cycle gas turbines are even cheaper. The excess heat could also be used to heat households during winter via distributed heating. It is likely to be the case that we could reduce emissions more quickly by deploying renewables and deploying gas until we have transformed our electricity generation than if we just deployed renewables.
The main reason that the CPRS is worse than useless is that it treats the polluting of energy intensive industries as a right. These companies get compensated for the emission offsets they have to buy in the initial stage, and then get that compensation indexed if offsets go up or if the emissions target increases. This is the absolute opposite of what we need.
The second major problem is the well publicised one of additionality. Voluntary offsets must count on top of the cap, rather than reduce the amount of effort required from industry.
Sure, it is too little too late and the line that it is better than nothing will calm some people down but it seems to me the absolute sins that must be stopped before this becomes law are compensation for polluters and the rendering of voluntary offsets useless.
Tim Hollo writes: “One of the biggest problems with setting a weak emissions reduction target, one of the elements that makes it worse than useless, is that it will lead to short-sighted investments in ‘low emissions’ infrastructure”
Is it the weak target that causes this problem, or is this inherent in any trading scheme?
Emissions trading minimises the cost of each short-term emissions cut, and the theory is that this minimises the total long-term cost. But when deep, systemic change is needed, this theory is false: trading props up existing approaches and delays structural change, making the overall cost much greater.
It’s a bit like taking the cheapest quote to repair a leaky roof. If in fact your roof needs replacing, it’s cheapest to do that upfront, not to throw away money patching lots of small leaks.
So emissions trading might work when a relatively modest change is needed (e.g. 5-15% reduction), but is worse than useless when deep or systemic change is needed (zero emissions in a decade).
Would it even be possible to craft a CPRS with a 100% target, or even a 40% target?
What’s really needed are good old-fashioned (and probably government-run) engineering projects, and lots of them, real quick: hundreds of solar thermal power plants, thousands of wind turbines, an HVDC electricity grid, very fast trains, and not-so-fast cycleways.
Maybe this will be palatable to the powerbrokers in a year or two, once the economy has ground to a total halt.
Some advantages with a transitional pathway.
1. Zero emission techs are still developing and costs are decreasing however they are currently prohibitively expensive. e.g. Try telling pensioners or businesses that their electricity bill will be tripling.
2. All projects have a life-time. Wind turbines have to be replaced after 25 or so years. Who knows what the life-time is for large solar thermal installations.
3. Least cost has to be based on valuing capital according to the year it is spent in. Yes this does depend on the discount rate you assume. e.g. it is actually cheaper to spend $500 now and $500 in 20 years than $750 dollars now. This effect is not due to inflation, instead it is due to opportunity cost of not having the extra $250 to invest today.
However in some ways I think a centrally planned approach would be better. But government has a history of appalling project management and no budgetary control (see Vic regional Sprinter trains, infact anything to do with public transport).
Whatever happens if emissions are to be reduced someone has to pay. Either via higher prices (under CPRS), higher taxes and government debt (under central intervention) and bailing out the workers of all the industries that get shut (either option). Low income earners don’t have the money to pay (and benefits/welfare will be adjusted to compensate), industry has enough lobbyist to avoid paying, so I guess that leaves the middle class.
Jonathan I have a fair bit of sympathy for that argument, but in this particular case I’d say that it is the weak target and slow downward trajectory which creates this problem. If there were a steep trajectory leading to very low emissions within the lifetime of a major project (30-40 years at least), it would make it uneconomic to build in the first place, I would have thought.
That said, I do often wonder personally whether an ETS is an appropriate mechanism for the kind of extremely fast decarbonisation that we need. I have had this discussion with various economists who always tell me that it doesn’t matter how fast you need to act or how much, that an ETS will still work. But I still have my doubts. Which is why I advocate an ETS plus plus plus a whole pile of industry measures to bring on those new technologies ASAP, thereby bringing down the cost of abatement and the potentially highly inequitable impact of the pricing mechanism.
Which brings me to your point, EnergyPedant. Yes, indeed, any measure to reduce emissions will lead to increased prices – expect of course for energy efficiency retrofits. Which is why the Greens have consistently argued that a big chunk of ETS revenue should be recycled straight into a massive retrofit project, starting with the homes of the least well off and moving across Australia as fast as we can train people to do it! This should go a long way to offsetting the increased cost of power from the shift to renewables.
By the way, I don’t necessarily advocate central planning. There are other ways – for instance, governments can pre-permit large tracts of land as renewable energy hotspots – areas with good solar, wind, geothermal, wave, bioenergy resources, for example – and then pay to take the energy grid out to them, leaving it to investors, with the help of feed-in tariffs, to choose which energy sources to put in there.
Along with centralised investment in smart grid technology, we should be able to get this to work fast and effectively at least as well as if anyone – government or private sector, stepped in a planned it. Which they’re simply not going to do, anyway. We ain’t a planned economy and ain’t gunna be one soon.
Tim, one issue I’ve seen from non-public modelling is that the prospect of carbon capture for coal plants discourages gas baseload from building in the 2015-2025 window. High domestic gas prices (due to LNG export opportunities) mean that the only advantage gas has is lower carbon impact, however if coal can have carbon capture applied its vastly cheaper fuel source means they will undercut the gas plants that are only 10-15 years old. Investment decisions on the basis of net present value (NPV) calculations are very shaky for gas baseload in many scenarios (particularly because gas prices can be highly correlated with carbon prices).
Energy efficiency is a massive opportunity and many projects are worth it regardless of the carbon impact (not just low hanging, fruit that is already on the ground). In the US California’s energy consumption per capita(?) has remained flat since the 1970s, while the rest of the country has grown by about 30%.
If the government is going to intervene in the energy market place to reduce emissions, then those reductions should come of the cap in excess of the 5-15% targets. My taxes shouldn’t be used to keep the carbon price low. It is fine for the government to invest in energy efficiency as long as the cap takes that into account.
“my taxes shouldn’t be used to keep the carbon price low.”
I’m not sure I agree with that, actually (and I know that some of my colleagues and former colleagues will disagree with me here).
Certainly, if the cap stays at 5-15%, anything serious should be additional. [Not that I'm sure how that could be done, but anyway... To me the real issue is that the cap needs to be dramatically increased.]
The thing is, if we have a really stringent target, the carbon price is going to go sky high and cause a lot of equity issues that can’t entirely be dealt with directly even through a big energy efficiency investment. Governments step in to deal with inequities all the time, particularly to smoothe out those caused by their own policies. To me, if we were aiming high, this would be a prime case for the Government to invest directly in reducing the cost of abatement to reduce the carbon price.