On Sunday evening, after reading the Dr Seuss classic “If I ran the zoo” to my three year old daughter, I sat on the couch, fortified myself with a strong drink, and began to read the Treasury modelling on the carbon price (I know, I know, it’s an exciting life).
After reading the projections for the likely impact of the carbon price between now and 2050, I began to wonder if Dr Seuss actually might work at Treasury. While there aren’t any ten-footed lions, Elephant-Cats or Tufted Mazurkas, there are certainly plenty of heroic assumptions, interspersed with ludicrous notions.
According to Treasury, Carbon Capture and Storage (CCS) will somehow become commercially viable around 2030, triggering a large-scale investment in coal with CCS and gas with CCS. It is a bit like predicting in 1990 how many betamax video machines will be sold in 2011 (except that betamax videos actually worked). They might as well have assumed that someone will invent a free energy machine. Seriously, it is becoming increasingly clear that even the coal industry have given up on CCS. The dream of ‘clean coal’ is slowly but surely collapsing under the weight of its own hubris as people actually start to think through what is required to make it work.
Treasury recognise that the long term direction for both coal and gas prices is up (notwithstanding an anticipated short term reduction in coal prices as supply catches up with demand) but they seem to have substantially under-estimated the costs of CCS and under-estimated the extent to which the cost of renewable energy is falling.
The modelling also assumes that no new conventional coal power station will be built in Australia, and it is clear that Julia Gillard and Martin Ferguson are planning on using this as an excuse to avoid their election promise to implement an emissions performance standard.
I asked the PM about this at a breakfast on Monday and pointed out to her that the Deloitte modelling of Electricity Generation Investment (commissioned by DRET) concluded that a carbon price of at least $70/tonne would be required to rule out new coal in WA, where three proposed new coal plants have environmental approvals. She said that she was more optimistic than me about the impact of a carbon price on directing the future of energy investment.
It is true that she is more optimistic than me about the impact of a $23 carbon price – much more. As far as I can tell, the only thing that is stopping three new coal power stations being built in WA is a strange combination of State Government policy incoherence and an increasingly convoluted commercial stoush between Lanco Infratech (the Indian buyer of Ric Stowe’s Griffin coal mine) and their customers over coal supply contracts. A low carbon price of only $23/tonne simply isn’t going to rule out coal in WA, even though their poor quality coal makes WA coal plants among the dirtiest in the country.
Similarly in Victoria, the proposed new HRL coal power station continues to stagger on – albeit without finance from the major Australian banks. The big question is whether or not Ferguson will give HRL $100Million of taxpayer money as promised (by the Howard Government). Mind you, it would be quite embarrassing to be publically subsidising a polluting coal plant immediately after the introduction of the carbon price package – so no doubt the Government will be looking closely at how they can get out of the contract. It shouldn’t be too hard given HRL’s record of missing deadlines.
As for the coalition, their climate and energy policy is a wretched pile of nonsense and despite claims of being interested in ‘direct action’ it is becoming abundantly clear that they are only really interested in ‘direct opposition’ to whatever the Government is saying. The only vaguely good thing that can be said about their approach is that it is so incoherent and destabilising that it is likely to undermine investor confidence in both coal and gas for some time to come, regardless of any actual regulation (This obviously isn’t a sensible policy approach but anything that delays fossil fuel investments is arguably a good thing as the price of renewables continues to fall). Abbot continues to play a high stakes game of wrecking the consensus for climate action for his own short-term political interests – without heed to the costs. It will no doubt define his legacy and it is difficult to imagine it being well regarded by those who follow.
Ruling out new coal power stations should fit perfectly with Abbot’s “Direct Action” approach, and it should fit perfectly with Gillards pre-election promise to “rule out new dirty coal power stations”. The fact that it seems so difficult for both of them seems more a reflection of the political/ideological aversion to putting the words ‘no’ and ‘coal’ together in the same sentence, rather than any rational policy objections.
We still need an emissions performance standard to rule out new polluting power stations.
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Gillard said “coal has a fantastic future” and yesterday added that coalminers’ sons would be able to ‘follow in their fathers’ footsteps”
Leave aside the fatuous implication that Qld open cut mines are somehow Welsh pits surrounded with brass bands and phony Druidic orators banging on about the glories of the valleys and the dignity of filthy, dangerous mining, Gillard’s contortions tell us that the entire “climate” policy is a fiasco.
Sooner or later the Hepburns and Parkinsons will have to face the reality of abject political failure. Make it sooner please.
I can see no obvious reason why we ought not to phase out tax deductibility of “dirty” energy for those not in the permit-based cap and trade system. Let’s say that effective July 1 2012 we defined “dirty energy” as the average lifecycle CO2e-intensity of anthracite coal burned for energy in the years 2009-11. Clean energy in July 2012 would be any thermal coal burned at not more than 95% of the intensity of the dirty standard. On July 1 of 2013, the reference years would be incremented by 1 (thus 2010-12) and so forth.
The same would apply to transport. The benchmark CO2 intensity of all road transport using diesel or air transport using aviation fuel would define “dirty” and so anyone not able to improve by more than 5% on that would get no deduction. In transport, the benchmark could be CO2e/weight-distance (thus Co2 emitted to moving 1ton of cargo one km)
From July 1 of 2012, a business using energy defined as above as “clean” would be able to deduct 100% of the clean energy (i.e. the differential between their intensity and the dirty energy) and 87.5% of the dirty energy cost. Thus, if the industry benchmark in anthracite coal were 0.9tCO2e/MWhe and someone was buying from a provider whose mix resulted in 0.8tCo2e/MWhe 11% would be fully deductible (1/9) and 89% would be 87.5% deductible. On July 1 2013, the dirty portion would be 75% deductible, in 2014, 62.5% deductible and so forth until in 2020 there would be no deductions at all. Effectively, this would mean that by 2020 businesses were paying for dirty energy out of after-tax income — i.e at the tax rate for business of about 26-30%. Clean energy would continue to be fully deductible and so the pressure would be on energy suppliers to lower their emissions. Of course, if they did, the goalposts would shift against “dirty”, keeping everyone honest and focused.
The advantages here are considerable because effectively, all businesses regardless of size would then be paying a price on emissions. Funds raised could be returned to the public in services, lower taxes, or rebates as apt. Strictly speaking this would not be so much a tax as the removal of a fossil hydrocarbon subsidy and it would mean that one arm of policy was not subverting the other. (Tax deductions on the one hand and permits on the other).
It would also be administratively easy, since only businesses claiming deductions and not subject to permits would have to account for their emissions. Minimal paperwork. The CO2 intensity would be simple to calculate even for those in transport. Those who didn’t change their practice and didn’t think they were doing anything special could choose to wear the cost. Others might decide to try beating the industry standard, using more fuel efficient vehicles or energy suppliers or simply change their business process to use less energy. Businesses could decide to opt into a more general cap and trade system to evade being made subject to the system above. That way it’s voluntary and there’s a minimum of whining.
In practice, this prices Co2 at about $30t in stationary electricity and about $150t for diesel. I suspect a lot of long haul freight would come off roads even if most transport switched themselves over to cap and trade.
The high commodity price of coal is a barrier – WA wants the coal (artificially) cheaper like NSW. China and India seem to solve the commodity price problem by letting their generators go into severe debt. Planned Indonesian indexation of its export coal, seemingly will have a big effect: http://www.business-standard.com/india/news/power-companies-seek-ministry-helpimported-coal/442671
Also reminds me of the most recent CCS back-down in the US – American Electric Power won’t proceed with the Mountaineer plant because they can’t pass the costs onto the end-users. I’m curious what happens to the Treasury Modelling if you can’t rely on the “fig leaf” of CCS?
In some ways the mining tax remains more important to the carbon debate than the carbon tax.
Fixed link: http://www.business-standard.com/india/news/power-companies-seek-ministry-helpimported-coal/442671/
coal industry… ahhhh… its like the coal industry saying ‘no but wait, we could still….. we could…’ they’re like kids changing goal posts to stay after bedtime.
Much to my surprise there was some interesting stuff on the technical versus commercial viability of CCS from a source I usually trust. On the other hand, I’d tax the fµ3k out of the coal users and let them sort it out themselves, rather than sit in thrall to their bleating.
Good idea, the emissions performance standard, because it’s a rule not a market. Does anyone except Ross Garnaut think that free market schemes will reduce emissions meaningfully, or even that they are really and truly intended to? Free markets work OK for laptops and toothbrushes, but in the case of emissions they’re just a cloak for business as usual = indefinite population growth and biodiversity loss in a world of unlimited resources.
<blockquote.Will the carbon price rule out new coal?No, of course not, don’t be silly. $23/T isn’t going to stop business exploiting a resource which is netting them nearly $150/T (around $110 of which is pure profit, iirc).
If pollies of all colours can’t bring themselves to “just say no” to new coal mines and power stations, at least we can stop building new and expanding existing export ports.