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Friday 18 Aug 2017 | 20:51 | SYDNEY
Friday 18 Aug 2017 | 20:51 | SYDNEY

Carbon tax repeal: Learning from Europe



21 July 2014 14:24

In September 2010, the Australian Labor Party's Greg Combet sat down with The Australian's Samantha Maiden to explain why the coal industry 'absolutely' had a future. Given Australia is a leading coal exporter, this should have been unexceptional, except that Combet had been put in charge of the development of a carbon price for Australia. Trained in engineering, economics and labour relations, the rising star of the Gillard Government had the unenviable task of navigating between the popular 'soft energy path' policies supported by the electorate (wind, solar, tidal, efficiency) and the realpolitik of energy policy. 

This was five months before the unveiling of the Labor-Green carbon tax. History will record the highly capable Combet as another victim of the Australian carbon pricing debate, along with three prime ministers and a federal opposition leader, all of whom have been defeated or deposed since the start of 2007, in part due to an inability to construct a coherent narrative on carbon pricing. So what has gone wrong?

Winding the clock back to the late 1990s, arguably the single most significant failure of Australian climate policy was the Howard Government's rejection of Environment Minister Robert Hill's proposal for a modest carbon price in the aftermath of the Kyoto Protocol. On the other hand, the problem for the Labor Party is that it has allowed itself to be drawn into fruitless debates on 'targets and timetables', and devised complex policy instruments without clear goals, or a means to satisfactorily explain them.

Economics 101 tells us that pricing carbon, ceteris paribus, will lower emissions relative to other factors. The strength of direct pricing is its ability to capture the low-cost efficiency and conservation opportunities and encourage marginal fuel switching. Indeed, the experience of the northern Europeans since the 1990s has been that carbon taxes do in fact reduce emissions from what they would otherwise be, and mostly without a loss of industrial competitiveness.

But there are two distinct differences in the Australian experience.

Firstly, the Europeans implemented carbon taxes within a broader tax reform agenda, essentially forging a no-regrets response irrespective of global pricing. Secondly, the broad political support ensured a credible commitment to ongoing carbon pricing, in contrast to the highly contested debate in Australia, which has resulted in a labyrinth of carve-outs, compensation payments, and reliance on overseas permits for imported abatement.

The script is supposed to run as follows: a low starting price followed by a rising price with greater global buy-in. But the Labor-Green script has run backwards: a high starting price, then falling to the European price, and now a repeal of the price entirely, due to the inability of Labor to consolidate its carbon package. 

The ambitious Australian scheme was caught between a price that was too high for a starting price but too low to drive a switch to low-emission electricity generation. The sort of carbon prices required to displace incumbent baseload coal start from typically $60 per tonne of carbon dioxide equivalent (CO2-e) for gas and in excess of $200 per tonne CO2-e for baseload solar. 

But even if carbon pricing had run to script, economics alone won't allow us to convert marginal abatement into long-run deep abatement. To understand this, we need to look at how electricity is generated.

Regional electricity markets were developed during a period when nearly all electricity was generated with thermal or hydro-rotary turbines. The problem is that a broadening of the electricity mix is introducing a suite of unintended consequences that are not captured by energy or carbon markets.

For example, the degree to which renewables can be integrated is dependent on the growth of 'flexible generation'. We are already seeing this globally with gas-fired generation complementing wind power, which is crowding out the potential for low-emission baseload and locking in a vague medium-emissions future scenario. This highlights the need for a greater focus on low-emission baseload, a notable omission in Labor's plan.

The divergence of climate and energy policies over the past decade has proven expensive, delivered only marginal abatement, and failed to provide a plausible long-run pathway to low emissions. A credible framework will integrate climate and energy policy to provide investor certainty, clear goals, and a broadening of the Clean Energy Finance Corporation's charter beyond 'soft energy'. Few would argue that the Abbott Government's 'Direct Action Plan' is better than a well designed carbon tax, but perhaps the repeal will at least provide an opportunity to reset the debate and examine the mistakes to date.

Photo by Flickr user Qian.

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