Power generators would be forced to pay for the closure of a competitor’s dirty brown-coal fired plant under a radical plan that could help Australia slow the continued increase in electricity sector greenhouse emissions without a carbon price or expensive government subsidies.

The idea – from Australian National University academics Frank Jotzo and Salim Mazouz – offers the government hope of meeting the long-term emission reduction targets it will promise in Paris and provides the energy sector with a solution to the problem of oversupply that has forced the mothballing or under-use of less polluting types of generation.

Old high-polluting brown coal-fired plants, particularly in Victoria’s La Trobe Valley, were the biggest winners after the carbon price was abolished with coal generation hitting a three-year high of 75.6% of the east coast market in October, a trend that makes it almost impossible for Australia to meet its promises of long-term cuts in greenhouse emissions even with increased renewable generation from the renewable energy target.

Under the plan the big brown-coal generators, near the end of their operational life, would submit bids for how much money they would need to receive in order to shut straight away. The cost of the winning bid would not be paid by the government but would be spread across all the other generators, in proportion to their own carbon dioxide emissions.

The generators that continued to operate would benefit from an increased electricity price and the prospect of running their other plants closer to capacity, and the government would finally have a way to reduce emissions from Australia’s electricity sector, a task too expensive for its $2.5bn emissions reduction fund.

The increase in the retail electricity price would be small – somewhere between 1% and 2% according to rough calculations based on a one-off payment for closure of between $400m and $1billion, shared between the remaining power generators. And the reduction in greenhouse emissions from closing a big brown-coal-fired plant would be between 2m and 7m tonnes of carbon dioxide a year, even taking into account that some of the generation would move to black-coal-fired stations.

Origin Energy, which owns Australia’s largest power station, Eraring, has proposed a progressive phase-out of brown coal generation in response to a Victorian government review of climate policy. It says it will shut the black-coal-fired Eraring at the end of its technical life.

AGL, which owns Loy Yang, Bayswater and Liddell power stations and is Australia’s single largest greenhouse gas emitter, has also called on the government to regulate that brown-coal-fired power stations close when they reach their scheduled shelf life, about 50 years. It says it will shut its plants at that point.

And the Hong Kong-listed CLP Group, which owns Energy Australia – the company that holds Yallourn power station – has demanded a government policy to solve the “chronic oversupply” in Australia’s wholesale electricity market.

AGL to shut all coal-fired power stations by 2050 in bid to limit global warming Read more

But each suggestion hits the problem that the current policy gives individual companies an incentive to keep their plants going, because whoever closes first gives their competitors the advantage of a reduction in supply and consequent increase in the wholesale price, and does not provide any incentive for them to shut sooner. By regulating the order of closure, or trying to bring it forward, governments would be picking winners and losers.

Jotzo, associate professor at the Crawford school of public policy, says the idea could be refined after detailed modelling.

In an article explaining their plan, Jotzo and Mazouz write that “without a carbon price in place, the running costs of brown-coal-fired plants are extremely low: they sit right next to open-cut coalmines and there is no alternative use for the brown coal, so the fuel cost is minimal”.

“... So there is the risk that the next large power station to shut down is one that produces electricity with much less carbon output than the brown-coal plants, and that the high-emitting brown-coal plants stay put.”

They say it would “not be politically acceptable for the government to pay large amounts of taxpayers’ dollars to the owners of an old high-polluting plant” but singling out one or more plans and forcing them to close “would similarly be politically unacceptable”.

“Under our approach, government regulates that one or more plants need to exit the electricity market, but leaves it to a competitive bidding process to determine which plant will close and at what payment level. Plants bid competitively over the payment they require for closure, the regulator chooses the most cost effective bid. The plants remaining in operation then make financial transfers to the plant that exits, in line with their emissions.

“Such a mechanism can provide emissions savings from plant closure at least cost, avoid budgetary costs by sourcing the payments for closure from the plants remaining in production, and provide some incentives to adjust the power mix to reduce emissions,” they argue.

Both the Gillard government and the original version of the coalition’s “Direct Action” policy produced from opposition envisaged payments-for-closure for brown-coal fired plants, but in both cases the idea was abandoned.