Today, the Coalition proposed a Direct Action Plan, which the coalition describes as ’simpler, cheaper, and more effective way’ (Tony Abbott) of addressing a climate change target than the Government’s Carbon Pollution Reduction Scheme (CPRS).
Taking the proposal in good faith and at face value, thus disregarding the potential motivations of the leaders of the Liberal (‘climate change is crap’ – Tony Abbott) and National parties, some preliminary assessment of the proposal follows.
The centrepiece of the $3.2 billion plan is a $1bn fund focussed on rebates to solar PV, Solar Hot Water, and forestry and soil carbon offset projects.
Some practical problems with the policy are as follows:
1. Suggesting that Solar Hot Water and PV should receive additional rebates would further distort and undermine the 20% Australian Renewable Energy Target (RET) should no reform of the RET be forthcoming;
2. Solar PV is the most expensive form of reducing greenhouse gas emissions available in Australia;
3. Soil carbon projects may not generate abatement that will be accepted by the UNFCCC, unless Australia also takes on board emissions liability from bushfire;
Some conceptual problems with the approach are as follows:
1. The polluter does not pay, taxpayers do out of general revenue.
2. The policy is based on direct government intervention, rather than market-based – therefore there is little opportunity for technology or service innovation and value-add;
3. Direct government intervention does not allow for lowest-cost abatement to be sought. Therefore, the spending is inefficient;
4. The spending is thus-far unfunded
We look forward to understanding in greater depth the opposition policy.
In a previous post, we speculated on possible relationships between fuel subsidies in China, world oil prices, and relative efficiencies in generating innovation gains in energy technology between the US and China. Our theorising was based on intuition and logic.
Recent analysis supports our view that China’s oil consumption sets world prices, as reported by Kate Mackenzie at the FT’s Energy Source.
However, it appears that a pivotal part of our thinking needs revising: it seems that removing diesel and gasoline subsidies in China is unlikely to result in a substantial change in Chinese fuel demand – due to very small price elasticity of demand.
Xu Tan and Frank Wolak at the Department of Economics at Stanford University, in the paper “Does China underprice its oil consumption?”, summarise their findings:
We find economically significant evidence of under-pricing of gasoline and diesel fuel by China relative to the US over our sample period for all of the approaches to computing the comparable price of these products for the two countries. [.....] We estimate that underpricing of oil in the form of gasoline and diesel fuel in China resulted in a total subsidy to Chinese consumers of between 5 and 15 billion dollars in 2007. We also analyze the likely change in the consumption of gasoline and diesel in 2007 that would result from the elimination of this underpricing and find that it had little impact on gasoline and diesel fuel consumption for short-run own-price elasticities in the range of recent estimates of these magnitudes from cross country studies.
Over our sample period the extent of under-pricing of diesel fuel averaged between 10.7% and 18% of the Chinese price of diesel fuel (depending on the counterfactual price used) and the underpricing of gasoline was roughly between 8% and 19% of the Chinese price of gasoline (depending on the counterfactual price use).
“underpricing of gasoline and diesel fuel is unlikely to have had much of an impact on China’s oil consumption from 2005 to 2008″
The inference that we might draw from this is, that both we and the G20 were misguided: reducing fossil fuel subsidies in China is unlikely to substantially influence Chinese demand, thus, in turn, will not influence the global oil price.
This empirical analysis supports the view of Jeff Vail in an article in the Oil Drum in 2008. Vail goes on to state that removal of a sub-optimal fuel subsidy may actually enhance oil demand rather than suppress it should the avoided subsidy be applied more efficiently elsewhere in the economy.
However in an economy such as China, where market economics are already so substantially skewed through State intervention, it is unlikely that an optimal re-allocation would be imaginable.
The relationship between subsidies, price elasticity of demand, and resource re-allocation remains a critical one in attempts to determine suitable climate policy design. Removal of fossil fuel subsidies retains an important position in the recommendations of the International Energy Agency to reach global climate change targets.
At Davos this week the joint Yale/Columbia University Environmental Performance Index (EPI) for 2010 was released - the third year of the global analysis comparing national performance against key environmental indicators.
In assessing 163 countries, Australia managed to struggle in at 50th place, down from 46th in 2008.
This achievement is hardly a feat that we can expect Tourism Australia will be shouting from the rooftops, nor does such a relatively poor showing seem obvious for anyone who has experienced much of Australia.
How is it that, with our self-sense of responsible land management, available and deployed resources, and string of natural wonders, Australia does not outperform the likes of Romania and Algeria as an environmental steward?
Inevitably with any attempt to design indicators and criteria and apply weightings to these criteria, in which qualitative value judgements are brought to bear, some level of relative distortion may occur.
The EPI ranks performance against 25 indicators which are then aggregated into ten categories including: environmental health, air quality, water resource management, biodiversity and habitat, forestry, fisheries, agriculture, and ………climate change.
The categories where Australia lags the global mean, regional mean, and peer country (level of development) mean significantly are:
- Air Pollution (Impact on ecosystem);
- ‘Water (impact on ecosystem)’ and;
- ‘Climate Change’
The first category consists of indicators pertaining to SO2, NOX, Ecosystem ozone, and Non-Methane Volatile Organic Compounds.
The Australian Government is somewhat relaxed and clearly at odds with the EPI analysis in regard to SOX emissions, in that it states that SOX emissions are ‘not generally a problem’. SOX are predominantly generated by fossil fuel combustion in electricity generation and motor vehicle combustion engines.
The NOX indicator is problematic for Australia as the major source of nitrogen oxide emissions in Australia is agricultural soils, according to the National Greenhouse Gas Inventory, and the ability to control these is poorly understood. The EPI does not specify that this source is excluded.
It seems likely that Australia’s high urbanisation, and the mechanism by which the EPI attempts to discount the population scarcity relative to land mass, may have led to a below standard rating on this count.
The second category in which Australia underperforms largely reflects the physical characteristics of Australia being an extremely dry place, and any available water being oversubscribed, according to the Water Stress Index. Economic activity including industry, agriculture, and urban society will tend to further stress this already vulnerable resource. This issue is all to familiar to us.
The last category in which Australia is deficient (climate change) comprises of three indicators: industrial emissions intensity (emissions per unit of GDP), emissions per capita, and emissions intensity of electricity supply.
On these indicators Australia is placed 80th (the United Arab Emirates has a less greenhouse-intensive economy), 156th, and 158th place respectively out of 163 in the world.
These three emissions indicators are widely used in cross-country analysis, for example the Climate Analysis Indicators Tool (CAIT) of the World Resources Institute (which is a very interesting toy to play with for those wanting to delve deeper into international analysis).
Yes: Australia’s greenhouse gas emissions are extremely high any which way one chooses to look at them.
What in UNFCCC jargon is called ‘national circumstances’ underpins this: plentiful supplies of cheap coal for electricity generation and an industrial base that has historically taken advantage of this, and substantial fossil fuel combustion required to transport goods and people around a large land mass.
Whatever our national circumstances however, our trading partners around the world look at these indicators and want to see genuine efforts at improvement in Australia.
One can argue whether the weightings attributed to the indicators and categories within the EPI are appropriate or not.
However, Australians should not be content with sparring for last place on these critical environmental performance indicators.
As the population and economy grows, so will demand for electricity and correlative greenhouse gas emissions, unless structural change is engendered through pricing emissions and promoting low-emissions electricity generation projects.
Such structural change may take a few years to substantially impact the relative performance indicators, but it would be good to see Australia moving up the table. It is in our interests: if Australia is able to reduce greenhouse gas emissions intensity then it is more likely that others will also be willing to participate. Should that occur, Australia may be in better shape in years to come.
Also, no-one likes to come last.
The Council Of Australian Governments (COAG) is reviewing the functionality of the Renewable Energy Target, as its current structure is clearly not permissive for the development of capital-intensive renewable energy projects.
The issue of RET reform is the subject of a consultation exercise at the Department of Climate Change. There are currently two aspects open for consultation: how to treat Renewable Energy Certificates (RECs) from Solar PV, and the treatment of new waste coal mine gas. Submissions are due on January 28, 2010.
Almost all operators in the energy market recognise the significant deficiency in the RET market as it now stands.
For example, Pacific Hydro states within their submission to the COAG consultation:
“In the current conditions it is unlikely that any new large-scale renewable energy projects will be built in the next three to four years, aside from those associated with desalination plants.”
This view is widely echoed.
While AGL CEO Michael Fraser agrees, but goes further by calling the RET a ‘fraud’ - due to current support for systems that either do not generate all the electricity for which they are awarded, or do not generate electricity at all – with signficantly detrimental impacts.
It is a widely held view within the industry that there are now no Power Purchase Agreements being reached for large-scale renewable energy projects – due to the REC price collapse and market structure.
There are a number of production-industry-related projects already built or in development on the expectation of a ‘normal’ expanded RET market free of significant subsidy distortions (e.g. sugar mill cogeneration projects – as raised in a previous blog on this site in November) that are substantially exposed to REC spot price collapse and now losing those companies money – and leaving stranded assets.
Active and vociferous support to rectify this policy failure may accelerate a positive outcome, and represent a tangible and comprehensible climate change-related policy benefit.
This failure of the RET is due primarily to two factors:
- the ‘ramp-up’ structure of the RET whereby early years consist of lower targets; and
- the oversupply of RECs due to the inclusion, and favourable treatment through double-subsidy, of small devices such as Solar Hot Water heaters and Electric Heat Pumps, and solar PhotoVoltaics (PV).
Rebates and other subsidies provided both by Federal and State Governments for SHW, heat pumps, and PV (e.g. NSW 60c/kwh gross feed-in tariff) substantially impact the REC market through dramatically reducing installed cost and enhancing profitability, thereby significantly increasing supply to the REC market.
Thus changes in rebate levels set the marginal cost of ‘generation’ projects in the REC market, not the next most economic renewable energy project. The mix of direct State- and Federal- rebates, when combined with the RET REC support, leads to gross inefficiencies and distorted outcomes.
In particular, recent evidence suggests that a very large new supply of RECs of solar PV systems represents a particular concern for market imbalance going forward.
Detail on Specific Aspects
Solar Hot Water heaters and heat pumps
Solar water heater installations include installations of solar and heat pump hot water systems. These aspects are the subject of a specific consultation item.
Heat pumps are not specifically defined in the legislation but are eligible by way of their inclusion in the Australian Standard 2712 for solar water heaters. Solar water heaters and heat pumps are eligible to create RECs under the RET as they use renewable energy sources and displace the consumption of fossil fuel based electricity. Solar water heaters have been eligible to create RECs under the previous Mandatory Renewable Energy Target (MRET) since 2001. No size limits apply to solar and heat pump water heater installations under the RET. Heat pump water heaters extract heat from the atmosphere, and transfer it to a water storage cylinder. This process uses significantly less electricity than an electric water heater. There has been significant uptake of heat pumps due to their relatively low cost compared to other high-efficiency and renewable hot water systems. There are a number of support measures that have encouraged uptake including the Commonwealth Solar Hot Water Rebate, state and territory rebates, and minimum energy efficiency requirements for new homes. The review is considering whether heat pumps continue to require inclusion under the RET to support market uptake.
Concerns have also been raised regarding the potential for heat pumps to create perverse outcomes on greenhouse gas emissions in some circumstances. For example, this may occur in climate zones where heat pumps operate at sub-optimal efficiency levels and the emissions intensity of the electricity grid is relatively high.
Neither Solar Hot Water nor heat pumps actually generate electricity
Solar PV
One specific consultation item deals with the oversupply from solar PV which is now coming on-stream and influencing (negatively) the REC price. This is a result of a confluence of factors:
1. legacy $8000 rebate-subsidised PV systems now coming on-line
2. REC multiplier for PV systems included within the RET – providing ‘phantom’ RECs for electricity that is NOT produced – and creating very substantial new supply
3. (2) above now compounded by further cross-subsidies – in particular State measures such as the NSW Gross Feed-In-Tarrif (FIT) which provides further subsidy payment of $0.60/kwh for systems
While solar PV systems are clearly a vote-inspiring measure due to their obvious tangibility and visibility, and appeal to the public, their inclusion as currently formulated substantially distorts market efficiency benefits (they are actually one of the most expensive forms of renewable energy generation at this time, and thereby also a completely inefficient/expensive means also of abating greenhouse gas emissions). Thereby, the subsidies also negate the possibility for other forms of renewable energy to be developed.
The review proposes three options to address the RET deficiency related to solar PV (abbreviated):
1. Annual Solar Credit uptake review and RET target adjustment - an annual review of Solar Credit uptake in the previous year and the target for the year immediately following increased by a commensurate amount. This approach would have the advantage of ensuring the targets are quickly recalibrated to reflect the precise level of additional RECs created by the multiplier in the scheme. On the other hand, frequent adjustment of annual targets could add to uncertainty around the size of the market for renewable energy, particularly if uptake of small-scale generation varies considerably in coming years.
2. Review in 2015 with adjustment of subsequent years’ targets The total number of Solar Credits RECs created under the RET will be known in the latter half of 2015. It would then be possible to increase targets in order to offset that total, but with the allocation being distributed over a period to ensure that no individual year would be disproportionately affected by a major adjustment to its target.
3. Adjust targets in the early years of the scheme and true-up subsequently for actual Solar Credits uptake Increase targets immediately for the period 2010 to 2015 to reflect currently projected Solar Credits uptake. The increase each year would be based on the annual average increase from the RECs created by the multiplier projected over the entire 6 year period. Once the actual level of Solar Credits uptake was known, in 2015, targets for the period 2016 to 2020 would then be adjusted to ‘true-up’ the changes to the targets profile. This would ensure that the overall adjustments to the RECs targets for the period 2010 to 2020 reflected the actual number of additional RECs created through the Solar Credits multiplier mechanism. This approach would maintain certainty around the targets profile in the early years of the RET scheme.
Specific Policy Proposals
Our view is that the renewable energy market requires immediate intervention to support REC prices, due to the distortions engendered by additional subsidies being provided to Solar Hot Water and Solar PhotoVoltaics.
State rebates and other additional State support measures for SWH (and heat pumps) and PV will be extremely difficult, and time-consuming, to address. The RET market requires more immediate – and simple – policy intervention.
As such we suggest:
1) To address SWH and heat-pumps:
a. Remove heat pumps from the RET
b. Further reduce direct Federal support (rebates) for Solar Water Heaters
2) To address solar PV over-supply:
a. Support urgent reform of treatment of PV credits
b. The retraction of PV from RET or other structural change would endanger investment in PV
c. Therefore, support expansion of RET to compensate for additional supply as per option (3) above as:
i. Retro-active or annual adjustment will leave uncertainty in spot markets and continued stalling of investment
ii. Adjustment will enable continued rapid deployment of PV systems
iii. The market offers a more efficient mechanism than direct rebates for PV
We encourage our readers to consider the solar PV consultation paper, and contribute views. Any resulting implemented policy change will substantially decide the shape and extent of renewable energy investment in Australia for years to come.
Who would attempt to invest in renewable energy in Australia? Only the hardiest, bravest and, some would say, most foolhardy.
The Australian Government kick-started investment activity successfully with the original Mandatory Renewable Energy Target (MRET) through the Renewable Energy (Electricity) Act (2000) legislation in April 2001, which placed a legal obligation on wholesale electricity purchasers to proportionately contribute 9500 GWh of renewable energy per year by 2010. This target was relatively rapidly reached, with industry recognising the need to expand the target in order to maintain investment levels.
The Mandatory Renewable Energy Target Review Panel issued it’s report Renewable Opportunities, A Review of the Operation of the Renewable Energy (Electricity) Act 2000, to the Minister for the Environment and Heritage on 30 September 2003. The report was tabled in Parliament on 16 January 2004. It recognised the industrial and environmental contributions of renewable energy enabled by MRET, and recommended a gradual expansion of the target as:
Under current settings, MRET will not achieve its industry development policy objectives. The anticipated stalling of investment from 2007 will prevent the orderly development of a renewable energy manufacturing industry, which requires steady growth in demand, not a boom and bust. Such an outcome would also lock Australia out of technological developments that could otherwise reduce the cost of renewable energy generation over the next decade.
The Australian Labour Party (ALP) recognised the need to further promote renewable energy, and included MRET expansion as a key component of their electoral climate policy promise.
The ALP has not delivered.
There is an opportunity for the Liberals to generate an easy win and demonstrate practical content to their climate policy.
This opportunity is to push renewable energy market reform (which is in a disastrous situation, again). With the collapse of the REC price over the last six months, investment is again rapidly stalling. The market needs unequivocal governmental intervention – which is rapidly achievable.
Even AGL has made its displeasure unusually clear about the failure of the Government’s renewable energy programme. The threat to pull investment is not empty.
Bluntly, the renewable energy target is a disaster.
With the clear electoral promise provided by Rudd to expand the target seemingly in the bag after the ALP electoral win, companies geared up investment. It then took two whole years to introduce the legislation, which could have been achieved the week after the election through a one-line amendment to the original Act. The last-minute inclusion of Electric Heat Pumps (EHP) along with solar hot water heaters (SWH) – which do not contribute renewable electricity – was bound to substantially reduce projected and expected future REC prices, based on evidence of the operation of the original MRET. Indeed, the collapse in Renewable Energy Certificate (REC) prices has occurred as forseen.
Now, most renewable energy projects are no longer viable and companies are already starting to re-evaluate their commitment to the Australian market.
We can expect a clean-out of companies, and further consolidation within the sector as the incumbent energy companies with deep pockets scoop up companies and assets with less ability or appetite to contend with uncertainty and delay.
There are enough opportunities overseas that many will surely not have the patience to again suffer at the hands of Australian policy equivocation. For example, China’s target is for renewable energy sources to make up 15 per cent of its power generation by 2020.
The Australian energy market requires everything possible to avoid further consolidation and concentration – and many in industry and academia support this view.
Liberal shadow climate change Minister Greg Hunt has already made some supportive statements recently for renewable energy as a means to reduce greenhouse gas emissions. This is not unreasonable: the MRET review in 2003 identified the cost of abatement to be $32/tCO2e. That cost is reasonable from a marginal abatement cost perspective (though very likely still not as good as an ETS).
Mr Hunt and his Liberal colleagues should now vociferously press and work with the Government to intervene forcibly and rapidly to fix the situation. That would be a clear win to the Liberals in the eyes of the electorate, presenting a political party with clear ideas as to how to generate climate and industry outcomes. REC supply needs to be addressed from both SHW and EHP. SWH already benefit from a direct $1600 government subsidy per unit. It’s a double-subsidy whammy, while the REC price implodes.
On a slightly different tack regarding Liberal Party climate policy, I’ve also read (in amongst sensible propositions) some complete nonsense within Mr Hunt’s proposals for post-Copenhagen around incentive mechanisms for a post-Copenhagen framework:
Second, adopt an incentives-based mechanism as a common pilot platform for international action. The US is already proposing incentives for protecting and enhancing the great rainforests of the world.
This US approach of purchasing abatement rather than taxing economic activity is both market-based and incentive driven. It could offer the world a test mechanism which does not threaten trade competitiveness but offers practical action.
Mr Hunt does not seem to acknowledge that a regulated, free market in abatement permits is the economically efficient structure for investment. Abatement purchases still need to be financed either by the private sector or by the public sector, each of which implies a ‘big tax’ (as Abbott labels an ETS, which he freely parrots) which he rejects.
A plan to purchase abatement in emerging markets by OECD countries MUST imply some form of cost impost on economic activity in order to finance those acquisitions. It’s straight-forward! It’s a question of who you want to pay for it – the taxpayer base as a whole through re-allocated of general tax receipts, or those that generate the pollution through an ETS.
It seems that the Liberals would rather fund abatement through a stealth tax.
Despite having plenty of time to reflect on it over the new year, I am still unable to reconcile how the allegedly pro-market Liberal Party maintains a position that is implicitly supportive of higher general taxation to finance inefficient investment in abatement – internationally through bilateral agreements, and domestically through higher-cost technology investment and direct regulation.
With the opposition position so muddled, it is not surprising that there can be no national consensus over climate policy – thus leaving industry in the grip of investment uncertainty for some time to come, I fear.
At least both parties seem to agree on the need for an effective Renewable Energy Target. Time to do something about it – quickly – before investment is irredeemably stalled.
Australian strategy on land-use emissions at Copenhagen to achieve deeper cuts is no revelation
If you have been reading the Australian media and newspapers today and yesterday, you might believe that the Australian Governments’ strategy at Copenhagen to include land-use emissions to assist in meeting deeper national emissions cuts is an amazing new revelation.
For example, see Messrs Borschmann and Pearse in the Sydney Morning Herald, who apparently needed to be in Copenhagen to spot this story.
It should come as no surprise, however.
The strategy has been there for all to see for some time. My readers will know this by reading my previous blog on the subject for example, which outlines the issues in some detail, and is based on publicly-available negotiating text.
The tricky thing is separating out the risk from the opportunity in pursuing the range of carbon sequestration options – which is what the Australian strategy sets out to do.
Despite the science of sequestration being fraught with difficulty, the promise of accounting for sequestration emissions holds great danger. All it would take is a major bushfire or two at the end of a Commitment Period to blow the national carbon budget out of the water.
Such an event would require at the last minute a possibly significant foray into the international carbon market to buy permits in order to balance the books. That could be a costly exercise, given carbon market volatility.
It seems it would be a smart risk management exercise to ensure that emissions reductions are also coming from elsewhere in the economy in order to avoid such nasty surprises – i.e. through the implementation of an emissions trading scheme as a part of a package of measures……
In Explosive Leaked Memo, Liberals brainstorm non-market-based measures to address post-2012 GHGs
In a critical closed-door meeting, and with a view firmly on an impending election in which ALP holds a key policy differentiation, leaked minutes reveal a Liberal leadership seeking ideas from large industrial emitters on a post-2012 climate policy that does not involve market-based measures to reduce greenhouse gas emissions.
Instead of a market-mechanism, senior representatives propose a joint industry/government fund as the key policy, which would serve a number of key aims simultaneously:
- to accelerate investment into technology to reduce GHGs,
- not detrimentally impact industry – particularly with a view to ensuring jobs are not driven offshore,
- produce certain outcomes,
- produce greenhouse outcomes at low-cost,
- be funded substantially by large energy-users.
At the meeting, the Liberals leader’s ideas ‘were by no means concrete’ and he was ‘in search of alternatives’.
He recognises that ‘there is a limit to what Australia could do alone’, and that Australian expenditure into this work should be leveraged.
Tony Abbot, Nick Minchin and Barnaby Joyce discussing their new low-cost strategy in late 2009?
Nope.
Merely a summary of the May 2004 leaked Low Emissions Technology Advisory Group minutes taken by Rio Tinto at the meeting with John Howard and Ian MacFarlane.
It goes to show that, five and a half years later, the Liberal leadership still have no credible policy on the reduction of greenhouse gas emissions, and are still drifting aimlessly on this issue.
They do not realise the ability of emissions pricing both to raise the revenue needed but also create the incentives for technology innovation (e.g. see David Popp’s work at Syracuse) and investment in the lowest-cost source of greenhouse gas emissions.
At least Malcolm Turnbull seems to have grasped the utility of market mechanisms, and the absurdity of a free-market Party implicitly advocating ‘command and control’ (regulatory) approaches through their rejection of market-based approaches.
Turbull also states:
The Liberal Party is currently led by people whose conviction on climate change is that it is “crap” and you don’t need to do anything about it. Any policy that is announced will simply be a con, an environmental figleaf to cover a determination to do nothing.
This insight rings true, as it clearly isn’t far removed from ‘pre-enlightenment’ Liberal policy on climate change.
It is too hard to see the Liberals being able to realise their folly in the two months before a vote, and back the reintroduced emissions trading scheme - the Carbon Pollution Reduction Scheme.
The Liberals are stuck in the land that time forgot, in a time warp, with a view on policy measures that are now clearly understood to be ineffectual and insufficient. It seems like it’s back to the bad old days of 2004: all smoke and mirrors, but no action – other than to pass ‘the pub test’, to use the then-Liberal leader’s words.
The world has moved on, but has Australia?
Will we be tired of being sold the same horse twice, when asked at the polls?
Or can the electorate call out the Liberals for the sham policy they are attempting to pursue, on this issue of deep environmental and economic significance?
On a day on which Malcolm Turnbull, the leader of the opposition, is wondering what his numbers will be in the Senate to support the Carbon Pollution Reduction Scheme (CPRS – the Australian Emissions Trading Scheme), I find myself considering a whole set of completely different numbers, but numbers which are likely much more important to determining the extent to which climate change is addressed.
On my desktop, I have two web pages open. One is a good article in the New York Times about the U.S. Government deficit and interest payment position. The other is the second version of McKinsey’s greenhouse gas abatement cost curve.
Both contain some fascinating numbers. Both are worth thinking about and provide an interesting point of reference for ambitions to address climate change during the critical twelve months to come, during which one might expect both political and implementation agreements for a global climate accord to be agreed.
Both items ask the question: how are we going to pay?
Both issues imply both an inter-generational and intra-generatianal equity aspect: our generation has been living beyond our means either financially or environmentally, and that mechanisms must be developed to manage the payment of that debt and debt-servicing among ourselves, and between us and a future generation.
The NYT article reminds us of the current status of the US deficit: $12 trillion. It is such a staggeringly large number that it hardly seems conceivable. It is an abstract concept to most.
US Treasury results point to a $1.4 trillion deficit in FY09 alone – an estimated 10% of US GDP.
The IEA Energy Technology Perspectives suggests an investment of $1 trillion per annum out to 2050 is required in the development and deployment of 17 key energy technologies to meet a 450 ppm greenhouse gas emissions target. McKinsey estimates incremental investment costs of $445 bn in 2015 to $1.14 trillion in 2030.
That number is about 1.1% of global GDP.
In a recent report on technology transfer financing under the UNFCCC, ECN quotes a Project Catalyst report which estimates the total international North-South funding flow requirement under an international climate agreement to be to the tune of $76-111 bn.
This estimate tallies with the EU’s estimate of Euro 100 billion - of which the EU expects Euro 22-50 billion should be publicly-funded, with the balance privately financed through the carbon markets. The EU further expects the ‘fair’ share of the EU to the public funding to be between Euro 2-15 billion per annum. The EU agreed finally on a sum of Euro 3-5 billion per year for the next three years for international public climate finance.
The GDP of the EU 25 is $16.5 trillion. The EU commitment is therefore equivalent to approximately two-one hundredths of one percent of GDP.
The GDP of the US is 14.2 trillion. Might we expect, following the EU lead, the US to commit between Euro 2.5-4.5 billion per annum approximately?
It is hard to see how, at this rate, commitments will reach any more than $15 billion per annum from Annex 1 countries in aggregate for international public climate finance.
Now consider the climate change invesment funding requirement in the context of US debt interest payment, as the NYT reports:
Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.
But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.
Treasury interest payments alone - not repayment of capital - in FY09 was $383.4 billion.
FY09 outlay for the US Department of Energy was $24 billion.
On the one hand, the US figures make the climate agreement seem manageable: we can now relate in some capacity what the ‘billions’ and ‘trillions’ mean – the debt and expenditure figures provide a familiarity and detatched comfort sufficient for us to be able to consider the climate change investment requirements as potentially something feasible – as perhaps something that is not totally outlandish.
On the other hand, the US debt figures remind us of the difficulties that will be faced in securing an appropriate investment in low-emissions infrastructure, and in North-South transfers. Governments in the West are suffering reduced income receipts due to unemployment, and are carrying substantial deficits. Their ability to continue to fund additional infrastructure publicly going forward will for some time be constrained. In a scenario in which the Bureau of Labour Statistics point to official unemployment of over 10%, and the NYT reporting braader unemployment rates in the US are more akin to 17.5%, prospects for substantial expansion of international funding commitments from the US is bleak. Without that strong lead from the US, others are unlikley to act.
These deficits may preclude the investment required for future generations – whether it be in terms of sustainable health or retirement programmes for the US, or low-emissions technology application in developing countries.
However, in the context of the required climate change funding being equivalent to just a tiny shift in debt-servicing interest rates of the US alone, the ability to generate the required investment is surely imaginable.
When economic studies of climate change mitigation weigh up the costs of inaction versus the cost of action, the direct and indirect financial effects of climate impacts are typically utilised. This is true of the reports of both Stern and Garnaut.
It is often noted that Australia is particularly susceptible to climate change. There are often references to drought, and to bushfire (particularly this week with the heatwave and ‘catastrophic’ fire risk in South Australia so early in the season).
However, not all financial impacts have been internalised into economic models – and Australia wants to keep it that way in the real world.
How?
Climate change will increase emissions from Australia’s land-use sector. This would represent a real, financial liability to Australia should these emissions be included formally in Australia’s national inventory, and thus have a tradeable market price. Australia therefore wants emissions from things like drought and bushfire to be kept out of the national inventory.
As part of a global climate deal, Australia wants to be able to benefit from demonstrating enhanced sequestration from land-use activities, but not be liable for ‘non-anthropogenic’ emissions within their inventory.
At present, most of the mitigation options from agriculture are included already in the Kyoto Protocol greenhouse gas accounting articles (in particular Articles 3.1, 3.3 and 3.4 as options, but Australia has elected not to account for Article 3.4 activities (rangelands, mulga, soil carbon (carbon storage) and Savanna (carbon storage), while biochar could be added to this category.
If Australia did report those activities, then there would be an obligation to report on emissions from e.g. forest fire and drought – and be liable for any change.
As the Garnaut Review states:
It is important for efficient global mitigation that the international community move to comprehensive carbon accounting related to agriculture and forestry. This is particularly important for Australia.
Comparative carbon accounting, among much else, would bring to account all carbon sequestered by and emitted from managed lands. This would provide significant revenue opportunities for landowners. It would also bring risks, especially, as would be required in logic, if all emissions arising from fires and the effects of drought are covered.
The Australian Government position for the second Commitment Period of the Kyoto Protocol (i.e. the negotiations at Copenhagen in December), is for Australia to pursue separate treatment of natural- and anthropogenic sources and sinks of emissions from Article 3.4 categories.
This would enable recognition of anthropogenic changes/improvements such as improvements in carbon sequestration through improved rangelands grazing practice, while avoiding the potential substantial inventory risks associated with the inclusion of e.g. bushfire and drought-induced emissions.
Australia does not want to be saddled with a category which would increase its national emissions – and thus make the national target harder. Others have noted this strategy.
What is the quantum of the risk from land-based non-anthropogenic emissions? By way of illustration only, personnel from the Bushfire CRC in February made statements to the effect that just two of the major bushfires in the last decade account for greenhouse gas emissions of between 70-105 MT CO2e.
In November last year The Centre for Australian Weather and Climate Research – a joint CSIRO/BOM institution – released a study entitled ‘Assessing the impact of climate change on extreme fire weather in southeast Australia’ .
I’ll save you having to read the technical document, by providing remarks from the summary below:
The research results reveal an increasing danger under climate change conditions for both of the two contrasting scenarios investigated. The models selected by our analysis show under the low and high emissions scenarios an increase of respectively -41-208% and -22-1072% in the number of cases of potential fire weather by the end of the twenty-first century.
Excluding the one model that showed a far stronger trend than the others, these percentage increases equate to a change from around one event every two years during the 20th century, to around 1 event per year in the middle of the 20th century, and 1-2 events per year by the end of the 21st century, but with a great degree of variation between models.
So – one might conclude that, if the episodes referred to by the bushfire CRC were to be taken as typical events in terms of emissions release, one might expect Australia’s emissions inventory to be very heavily impacted by the inclusion of non-anthropological emissions from LULUCF, and worsening over time.
Australia finds itself in a bit of a fix: to take advantage of the (often low-cost) biophysical sequestration potential in Australia of 1000 MT CO2e per annum, changes must be made to the Kyoto Accounting rules. Otherwise, it’s too much of a risk to include these elements of LULUCF in the inventory, in case emissions exceed sequestration.
Until non-anthropogenic disturbances are included, Australia will not have a direct financial liability associated with the impacts of climate change in terms of the price of the greenhouse gas emissions permits in the national inventory associated with drought and bushfire emissions. (The question, of course, is how to differentiate between natural and un-natural bushfires and drought, in order to establish the marginal financial implications of climate change impacts.)
Marginal additions caused by climate change to LULUCF emissions can structurally be limited through reducing global atmospheric concentrations of greenhouse gas emissions – thus limiting climate change itself.
In order to do that, developed countries, including Australia, must assume deep cuts.
Without biophysical sequestration, a deep emissions target for Australia is unlikely to be forthcoming due to perception of high costs.
So we would ordinarily be hoping that Australia’s position wins through so that it can take on a deep cut target through the inclusion of anthropogenic emissions sequestration from LULUCF.
However, there is little evidence of a deep cut being on the table from Australia in any circumstance – and there’s lots of wriggle room in Australia’s position with the definitions used.
So all the inclusion of LULUCF offsetting or sequestration activities would likely achieve is to drive down the price of permits in Australia by substantially increasing supply. This is a potential major opportunity to alter Australia’s risk profile.
As Giles Parkinson points out, having a low carbon price as an over-riding objective should not be the principle concern.
One might imagine that, should Australia take on responsibility the real costs of climate change as evidenced through the dollar value of climate change-related increases to LULUCF emissions, it is much more likely that the imperative to act aggressively to address greenhouse gas emissions across the economy, but also from emissions from increase in drought and bushfire, would be evident.
After all, money talks.
Agriculture: RET and CPRS: Fool me Once – Shame on You. Why farmers might be better off getting on with core business.
Over the weekend, the willingness of the Government to parlay with the Opposition on the treatment of Agriculture has become clear. An emerging compromise would be sensible: competitiveness and food security are at risk with unconstrained potential cost increases.
Actions to enable agriculture to participate in greenhouse gas emissions abatement are also under exploration. These actions might include a range of direct greenhouse-gas emissions abatement activities, which may be regulated or included as offset activities within the CPRS. Obviously, farmers want to have their cake and eat it. But there is reason for caution in pursuing this dream.
Already, carbon forestry looks like an attractive prospect for farmers to generate carbon credits. However, it is likely that many will respond with distrust to locking up land in forestry following the recent history of MIS, and the rebound in demand from agriculture and mining.
There are also options for land managers and rural industries to generate low-emissions and renewable power.
There have been a few more articles in the press in the last few weeks relating to sugar industry renewable energy developments which are illustrative of how different players are responding to Renewable Energy Certificate (REC) prices in the sector.
On October 5 in the Australian, Nicola Berkovic raised the prospect of two bagasse-fired electricity generation assets closing in NSW as a result of a rapid decline in REC prices. These assets are relatively new, but now running at a loss as REC prices are substantially below those prices envisaged prior to the passing of the Renewable Energy Target (RET) expansion.
The over-supply of RECs from Solar Hot Water heaters in the Renewable Energy Target has caused the REC price depression.
It means that, for the next few years, it is hard to see capital-intensive plant continuing to be run at a loss – as reflected by the article in the Australian. It would appear to represent a pretty substantial policy stuff-up if the RET really was meant to support low-emissions electricity generation – with the consequence that much investment will now likely be shelved.
CSR seem to be in the same boat – the REC price is unhedged, and their corporate literature suggests a more optimistic view of REC prices than we are currently experiencing. If this is the case, will CSR continue to subsidise the loss-making cogeneration assets? They are likely to, given that they are integral to core sugar assets, and given the relatively small weighting of cogeneration assets relative to sugar – so relativly low impact of losses from this division – both now and for the de-merged entity.
On the flip side, it is interesting to note the continued confidence in the sugar price re-bound, with expectations of continued strength in sugar values and correlative sugar land values.
Into the mix, North Queensland Bio-Energy Corporation are reported by the Townsville Bulletin to have purchased 107 hectares of land at Ingham, secured contracts for 2 million tonnes of sugar cane from 2012 with local farmers, and reportedly have made substantial progress being made in off-take and funding (reportedly to the tune of $400m) for sugar, ethanol, and electricity generation.
It seems that this investment reflects a medium-term view of the market – with no assets currently operating at a loss, NQBE can continue to plan assets that will not be on-line until 2012, in the expectation that REC (and electricity) prices will have recovered. The investment decision may reflect a positive view of future REC market developments, a potential to cross-subsidise through sugar and ethanol components of the plant, and blind faith. Whether NQBE can secure commercially-viable electricity and REC off-take contracts is yet to be seen.
For prices to improve substantially in the short-term, REC oversupply from Solar Hot Water needs to be addressed. Eliminating one or other of the existing double subsidy of the direct $1600 Government grant or the REC creation potential would be a good start. Continuation of current REC market conditions will mean continuation of stalled or cancelled investment in renewable energy generation.
Whether and how much agriculture can substantially benefit from other low-emissions activity investment is likely to emerge though political negotiation, and consideration of market, budget, and scientific considerations. Of particular interest is clearly the extent to which agriculture might participate in generation of carbon offsets under the CPRS.
However, farmers are unlikely to find an easily-accessible El Dorado through the CPRS in the short-term.
When one looks at experience to date with the RET, solar rebates, and prevarication and lack of clarity around CPRS thus far, it will not be surprising if agricultural industries are suspicious and less amenable to being ‘fooled twice’ when presented with promises of profit-making market-based opportunities under emissions trading. No point getting excited quite yet.
