Compare policies: Labor takes $900 per house to reduce CO2, Coalition $100

There are not many serious comparisons of the ALP vs Coalition policies on “climate change”. Don Young, a statistician and IT consultant in Canberra, with experience at the Australian Bureau of Statistics (ABS) and in Washington, is now (happily) retired and has had time to take a close look at both. Strangely, The ABC Drum declined to publish this analysis. (Perhaps the details of reducing CO2 is not a high priority?)

The centerpiece of the Labor strategy is the carbon tax/ETS, which will end up raising $7.7b in financial year 2012/13. That’s $900 per household, and judging by the record of the last few years works out at an average cost of at least $640 per tonne of Co2 not emitted.

The Coalition propose to spend $800 million per year, or $100 per household, with a cap on the cost per tonne that is likely to be much lower, so a lot more effective per dollar. If it can be done.

The Labor Party want us to buy carbon credits overseas, which is “essentially foreign aid”. The Coalition are considering measures like increasing soil carbon, which might not be either verifiable or permanent. I would argue that most of the carbon abatement strategies accepted under the Kyoto Protocol suffer the same uncertainty. Soil carbon can be released into the air, and forests burn down.

Our national debate talks of reducing carbon emissions by at least 5% by 2020. Young points out that to achieve an ambitious 1.5 per cent reduction in co2 emissions per year (so 10% by 2020, 55% by 2050), another 4 per cent of co2 emissions needs to be abated each year (allowing for average GDP and energy growth of 2.5% per year). This amounts to an extra 25 million tonnes of abatements to be found each year. And if that will be hard to do next year, it will be even harder the year after that (and so on).

The stark fiscal inefficiency of the Clean Energy Finance Corporation was news to me. Young notes that the CEFC was set up to invest $10 billion over five years. But after one year it has invested just $138 million, and at a cost to the taxpayer of $18 million per year in management fees to keep the CEFC running. The only good thing is that they are not successful at spending more money.

He writes from the perspective of a person concerned about CO2 levels, looking for the most economically efficient methods to reduce emissions. It’s safe to say he hasn’t read a lot of what’s on this site, but in the spirit of promoting logical analysis (starting from the basis that CO2 should be reduced) I found his thoughts, especially on costs, interesting.

– Jo

Australia – CO2 Emission Reduction Strategies

Guest Post By Don Young

The Labor Strategy

Treasury estimates that the government will raise $7.7 billion from the carbon tax for 2012-13.*

What happens to this revenue? Compensation for households is about $4 billion. Compensation for business (trade exposed industries, high co2 intensity power stations, coal industry, steel industry, etc . ) comes in many forms and is difficult to find and quantify, but seems to be around $3.5 billion (jobs and competiveness $2.4b, coal program $1.0b, steel program $.15b). And a significant amount is needed simply to run the various government bodies set up to administer the carbon tax.

Labor’s strategy is to reduce co2 emissions by making energy more expensive. But energy demand is relatively inelastic, so even a large price rise will only modestly reduce energy usage. So its further strategy is to use the carbon tax to make high co2 emission intensive energy relatively more expensive, encouraging a shift to low co2 emission intensive energy. But because high emission energy is much cheaper to produce than low emission energy for technological reasons, the carbon price needs to be quite large before low co2 emission intensity energy can compete on cost.

Labor claims that its strategy has worked, citing economic growth and decreasing emissions in the last year. No doubt the $23 per ton carbon tax had some impact, but how efficiently and at what cost? Electricity prices have increased about 75 per cent in the last five years (Figure 19). This is mainly due to factors other than the carbon tax, which only accounts for 9% of current electricity prices. Other factors include network costs (including much networking to remote wind turbines), generation costs, RET targets, and feed-in tariffs. The carbon tax has therefore contributed only 21% of the increase in costs over the past five years — and so can only be responsible for 21% of any decrease in co2 emissions due higher electricity prices. Other energy sectors, such as transport, are not yet covered by the carbon tax, so it is not responsible for any decreased emissions in these sectors. And the shift to renewables has been also driven by RET schemes, structural changes to manufacturing, and the loss of aluminium smelters.

The glossy government publication How Australia’s carbon price is working – One Year On summarizes the progress and performance of the government’s carbon tax strategy. Unfortunately this report might kindly be described as “boastful and superficial”, because it fails to provide the basic essential information. There is no detailed summary of money raised, money spent, or co2 emission reductions. There is no detailed analysis of the cost-effectiveness of programs, of other causes of changes to co2 emissions, of how much the carbon tax actually contributed, and no annual projections to 2020. One case study, about the Brisbane City Council, quantifies the savings in electricity costs, but does not quantify how much money was invested or how many tons of co2 emissions were saved, and thus omits the all-important efficiency of the savings ($/tonne of co2). Why was this information withheld?

The Clean Energy Finance Corporation was set up to invest $10 billion over five years. But after one year it has invested just $138 million, and even this was done in the last few days of 2012-13. The money is “invested” as loans (at commercial rates) to renewable energy projects; essentially, the CEFC is a bank, and could operate without funding from the carbon tax. Its operational funding is $18 million per year (that’s just the cost to run the CEFC itself). Their published quarterly reports to 30 June 2013 are underwhelming: less than one page, like a spreadsheet with four rows.

Labor proposes to purchase carbon credit permits overseas, so it can meet its co2 reduction target. This is essentially foreign aid: the money is raised by taxing Australians, it is given away overseas, and it does not directly benefit Australia though it may be worthwhile. The government will take credit for reducing global co2 emissions, but I would have thought Australia’s job was to reduce its own co2 emissions. Other countries will take credit for reducing their own co2 emissions, even if it was with funds from Australia.

“Labor’s carbon tax costs about $900 per year for an average household”

Labor’s carbon tax costs about $900 per year for an average household. ($7.7 billion dollars raised, 8.6 million households in 2012-13, the cost is ultimately borne by households. Like anything to do with carbon there is a dispute; the ABC says $550 – how did they lose $350 in the shuffle?) Labor argues that half the cost is returned in compensation to households, but there is no relief for ‘tax bracket creep’, which can be significant. Labor has recently moved to reduce the carbon tax from $24 per tonne to the floating carbon price (currently $6 per tonne) from 1 July 2014, which would appear to be an admission that $900 per household per year is too high.

CO2 emissions from electricity decreased by 7% (or 13 million tonnes) in 2012-13 compared to the previous year [page 4]. This is the ‘net’ decrease in co2 emissions, and when annual GDP growth of 2.5% is factored in, the ‘gross’ decrease in co2 emissions is 9.5% (or 18 million tons). Electricity prices have risen by at least 15% in most parts of Australia over the past year and roughly two thirds of the price increase has been due to the carbon tax [Figure 1], so the carbon tax has contributed to a ‘net’ decrease of 4.7% (or 8.7 million tons) and a ‘gross’ decrease of 6.3% (or 12 million tons). Therefore, the average cost is $885 in net terms ($7.7b / 8.7Mt) and $640 in gross terms ($7.7b / 12Mt) per tonne of Co2 not emitted.

This is an extraordinarily high price, and may account for the lack of support on this issue. Given the inelastic nature of electricity demand, these costs might not come down much in the future, and may actually increase.

The conclusion is that a $23 per tonne carbon tax has managed to reduce co2 emissions by about half what is required to meet the 2020 co2 reduction target. If we change to a floating price, and if Treasury’s estimates that the carbon price will rise from $6 per tonne to $38 per ton by 2020 are correct, then we can expect to fall considerably short of our co2 reduction target. If the floating carbon price does not rise as high as $38 per ton by 2020 (because the E.U. ETS Carbon system is ‘broken’), then we can expect to fall even further short of our co2 reduction target.

Additionally, the carbon costs disadvantage the global competitiveness of Australian businesses, and require billions of dollars in compensation – creating a money ‘merry-go-round’ that does nothing to reduce co2 emissions (but is great for bureaucrats).

The Coalition Strategy

The Coalition propose to spend $800 million per year over four years on the most efficient co2 abatement strategies.

The cost is about $100 per year for the average household. The Coalition will fund submissions with the best value for money, and the total funding is capped. The efficiency of a plan that costs x dollars to abate y tonnes of co2 is x/y dollars per tonne of carbon not emitted. For example, if they aimed to abate 25 Mt then the ‘threshold’ amount per tonne is $32 per tonne ($800m/25Mt), and only projects below that threshold would be funded. The main advantage of this strategy is that it can potentially deliver co2 reductions at a fraction of the cost of the Labor strategy, without hurting Australia’s global competiveness. However, I have some reservations.

How co2 abatement efficacy is measured for energy generation measures needs to be better specified in the Coalition’s Direct Action Plan. For example, does renewable energy development qualify? Maybe yes, because it potentially reduces the use of coal fired power station; maybe no, because the renewables do not actually decrease co2 emissions per se.

“…about $100 per year for the average household.”

A secure funding source is necessary so people can be confident that funding will be sustained in the longer term. There is a real risk that the co2 emissions reduction budget will be reduced by other budget priorities, as circumstances change over time. There is also concern that the Coalition’s co2 emission reduction funding will prove inadequate to meet co2 reduction targets. The test will be whether the Coalition will increase spending if current funding is inadequate. A single website with clear statistics and KPI’s is required, bringing together all co2 reduction initiatives so we get a clear overall picture of progress and the plethora of spending.

Only co2 abatement measures recognised in the Kyoto Protocol, and are both verifiable and permanent, should be considered. Increasing the carbon content of soil, a central measure being proposed by the Coalition, is not included in the Kyoto Protocol — though the Coalition could argue that it is indirectly included via its “Australia clause” and is already taken into account in preparing Australia’s carbon accounts under the Kyoto Protocol. While this measure does not reduce co2 emissions, it directly reduces the co2 in the atmosphere. There is contention about whether abatement measures like soil carbon are either verifiable or permanent, which could undermine public confidence.

Apart from this “Emission Reduction Fund” (which would use 75 per cent of the co2 emission reduction budget), there are other initiatives such as the ‘One Million Solar Roofs’ (12 per cent of the budget). The cost of solar photovoltaics is over $220 per tonne not emitted (Figure 15), which is why it cannot be part of the much more efficient Emission Reduction Fund.

What can we do?

Whatever Australia does will make little impact on global co2 levels. However, if you believe that human emissions of co2 might dangerously heat the planet then we should reduce our emissions, and it might help other countries to follow suit. On that basis, what can we or government do?

“…this amounts to an extra 25 million tonnes of abatements to be found each year”

Historically, Australia energy usage has increased in line with GDP, about 2.5 per cent per year (Figure 5). To achieve a 1.5 per cent reduction in co2 emissions per year (so 10% by 2020, 55% by 2050), another 4 per cent of co2 emissions need to be abated each year (allowing for average GDP and energy growth of 2.5% per year). Ongoing decreases in energy intensity and co2 emission intensity will impact slightly, but this amounts to an extra 25 million tonnes of abatements to be found each year (we currently emit 550 Mt). It will become progressively more expensive to abate each tonne of co2, over time, with the best value-for-money measures being adopted first.

Australia cannot use zero energy, and everyone is in favour of more efficient use of energy. Arguably there is a much more that the government can do to encourage efficient energy use. But how much can we afford to spend, how quickly can we do this, and what is the lowest cost way to do this?

People want a reliable, sustainable, secure and cheap energy supply. Many people want to lower co2 emissions, but only in ways that are affordable, effective, efficient, do not cost one dollar more than necessary, minimize inconvenience, do not cause our economy to be globally disadvantaged, and are guaranteed to work. When you carefully analyse the Labor strategy, it is clear that Labor just “does not get this”.

One funding model would be to impose a 1% levy on all energy exports (to raise $0.8b per year, but not from Aussie households), and a 0.25% levy on individual taxpayer’s income ($1.6b per year) , or about $200 per year for the average household. With this model there is no new tax on business, so there is no need to compensate high co2 emission intensity industries so they can generate even more co2 emissions, and Australia’s domestic energy is not made more expensive thereby disadvantaging our economy. People have been led to believe they need to pay much more than necessary!

Both Labor and the Coalition advocate that co2 emissions will decrease by ‘x’ per cent after ‘y’ years. But the targets are so far into the future as to be next to meaningless, and the reporting along the way is grossly inadequate. Many people suspect that 2020 will roll around and we will suddenly be told that we have failed to meet out co2 emission reduction targets. But there is no reason that an independent body or the ABS cannot scrutinize the performance and publish annually – showing revenue raised, revenue spent, co2 emission levels, energy intensity levels, co2 emission intensity level, and the cost efficiency of each measure. I do not have confidence in the Climate Change Office to undertake this responsibility, because they have a natural conflict of interest.

The ETS model is a ‘financial engineering’ solution. While it may work to an extent, it is inefficient, makes Australia less competitive globally, and makes large profits for the financial institutions which trade the carbon credits.

There are a number of structural problem that need to be fixed. While these problems do not decrease co2 emissions in themselves, they do make energy unnecessarily more expensive, thereby reducing our capacity to fund co2 emission reduction measures:

(1) Electricity prices have increased by 75% over the past five years (Figure 19). Even allowing for the carbon tax, this increase far exceeds CPI, which has led to considerable community anger. The government has acknowledged that practices such as so-called ‘gold-plating’ have been responsible for some of this increase. There is a need to better scrutinize and justify (or rectify) any price increases. [Jo wonders if "gold-plating" is not as important as some would make out. Our peak energy use on the hottest day of the year is not that much above peak use every day in summer. Don't we need a bit of safety margin in our infrastructure anyway? ]

(2) State governments take dividends from their electricity assets, but the dividends are unsustainably large and have led to a long term deterioration of the electricity network, resulting in brownouts. If state governments are unable to maintain the necessary engineering and financial discipline, perhaps a more independent body should make those decisions.

(3) Governments and business have a plethora of schemes to reduce co2 emissions, mainly uncoordinated and insufficiently focused. Reporting of these schemes should be done on a single website, so the full level of funding, actual schemes, and their performance is understood.

(4) Some electricity customers receive bills that do not split supply (infrastructure) and usage (generation) costs. Others do split these costs, but not accurately. Infrastructure costs account for roughly 50% of the power costs, and electricity bills should reflect this. Households with solar panels only pay for the supply costs, but these are understated, so households without solar panels are subsidizing them. Typically, poorer people who cannot afford household solar are paying part of the electricity costs of wealthier people. This should not continue.

(5) Feed-in tariffs above the wholesale cost of electricity reduce economic efficiency. Furthermore, poorer households are subsidizing the wealthier households who receive these over-generous feed-in tariffs. This should not continue.

(6) Reducing peak electricity demand reduces the cost of electricity by reducing electricity generating capacity. Melbourne has installed ‘smart meters’, but they have not yet been activated. Households receive a ‘smart meter’ together with a small booklet. This is grossly inadequate, and much more needs to be done to help people actually increase the uptake of off-peak electricity voluntarily.

Some existing schemes need to be overhauled or scrapped:

(7) The CEFC lends money at commercial rates, mostly to renewable energy projects. These projects should be considered for funding based on the cost for each tonne of co2 emission abatement, rather than returning a profit to the CEFC (even if this meant charging less than commercial interest rates).

(8) The R.E.T. has resulted in a shift from high emission intensity energy to renewable energy. This should be replaced by a more general scheme to switch from high intensity energy to low intensity energy, rather than just renewables. As assistance may not fully compensate for cost increases, it is important to ensure price increases are sensible, affordable, and do not get ‘out of control’.

There are many measures available to reduce co2 emissions for a low cost.

The Coalition Direct Action Plan is short on details in this area. This should be a primary focus of using funds to reduce co2 emissions. Some suggestions for government:

(9) Figure 15 shows the long run marginal cost for selected technologies. Onshore wind is $120 per MWh, compared to $85 per MWh for gas. Assuming gas emits 0.5 tons of co2 emissions per MWh, it would cost $70 to reduce each ton of emissions using onshore wind (ignoring the problem of keeping turbines spinning for when the wind drops). Solar PV costs about $200 to reduce each ton of co2 emissions, so it is more efficient to subsidize other measures.

(10) Converting from coal power stations to gas reduces co2 emissions by half for each MWh of energy, as well as providing a non-interrupted base load capacity. It is economically sensible to provide a partial subsidy capped at the co2 emission threshold (dollars per tonne). [Jo notes that coal is cheaper than gas, and also that upgrading existing coal plants to more efficient modern plants would reduce CO2 emissions from coal by 15%.]

(11) LPG car co2 emissions are about a third less than petrol car co2 emissions. Therefore, LPG powered cars provide the same co2 emission savings as one electric powered car using renewable electricity (even assuming engineering solutions to supply renewable power to a usable electric car!), but for a fraction of the cost. Therefore more use of LPG should somehow be encouraged.

(12) Figure 28 shows that rail is some 10 to 15 times more energy efficient than road for freight transport.

(13) Fortunately other countries are investing heavily in vehicle fuel efficiency, and Australia can share in the results of this investment. Lower registration costs for low emissions vehicles might induce people to purchase fuel efficient vehicles.

(14) It is difficult to find out what is happening with R&D. Typically, you get a big government announcement, and then silence – you have no idea what progress was made, or if the money was even spent. What is happening to the Coal Industry Association investment of $1 billion in co2 emission reduction? With ORICA technology to store co2 in “rock”? What is happening with the CSIRO’s BlueGen technology? What of the government’s Carbon Tax R&D initiatives, as set out in the Clean Energy Future? What has happened with the holy grail of clean coal? [Jo says carbon capture is not remotely realistic, it uses too much energy, and she'll post on this soon]. What is happening with the electric power car R&D subsidies – was there ever any analysis this money could be more efficiently spent converting from petrol to LPG? Were these merely PR opportunities for politicians and funding opportunities for researchers?

(15) Comprehensive audits of businesses might reduce energy inefficiency, though presumably businesses are paying for their energy use so it is their problem. Perhaps it would make economic sense to provide some funding assistance to businesses from the public purse? [Jo thinks companies will benefit from lower electricity bills, so they should pay for audits, but if they don't think the savings are worthwhile pursuing, why should the taxpayer fund them?]

* From the Treasury Table C3. Alternatively, calculate it as $23 per tonne for the 550 million tonnes of co2 emitted ($12.6b), times 60% because only the top 500 odd companies are taxed and they do about 60% of emissions. The latest Clean Energy Regulator LEPID data suggests their share may prove to be nearer 50% (the final figures aren’t available yet), which would provide only $6.3b of revenue.

Don Young is commenting below. Look for the mark.

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