The Trials and Tribulations of Australian Climate Policy

May 14, 2019
Editor(s): Joshua Moore
Writer(s): Lachlan Woods, Taha Bhatti, Thomas Sinclair

For the past decade, the only thing certain about Australian climate policy has been uncertainty. A decade long prime ministerial shuffle coupled with rising energy costs and economic softening have, somewhat understandably, left climate policy floundering, with clear targets to achieve but not enough concrete mechanisms in place to achieve them. With the federal election knocking on the door and the environment suggested as the most pressing issue amongst Australian voters, now if ever is the time to give prospective investors climate policy with a stable, long-term form; or else risk another decade characterised by stifled climate progress.

A Retrospective: Carbon Taxing and Trading Schemes

To understand some of the current political environment surrounding energy and climate policy, we must first examine the far-reaching repercussions of the Clean Energy Act, which commenced in 2012 and was swiftly repealed just over two years later.  Nestled between the act’s pages was the infamous carbon pricing scheme: a market-based mechanism which targeted emission reduction through what was, effectively, a flat tax. The scheme contributed to a 1.4% decrease in emissions, however it failed to garner public support. Large polluters were able to pass on the tax burden (partially or wholly) to households and small business, leading to a 10% rise in electricity prices – and although polls revealed the majority of Australian’s agreed with the principles of an emissions tax, more wished the carbon price to be repealed (42%) than not (36%).

The tax was set to transition into a cap-and-trade scheme, where companies are given carbon permits which they can trade at floating price, by 2015. Where a tax fixes the price of carbon, cap-and-trade fixes its supply, which would allow for more consistent emission control. Compared to a tax, however, the negative short-term economic impacts would have been two-fold: 1), ambitious emissions targets would have resulted in carbon price increases, which would inevitably feed through to consumers, and 2), uncertainty created by volatile permit pricing and policy complexity would have resulted in reduced investor confidence, thereby reducing investment in emission reducing technologies. Other nations from New Zealand to the United States have successfully implemented emission trading schemes, however in an Australian context, the added uncertainty may have only exaggerated the problems instilled by the initial tax.

Although the adverse economic effects of the carbon price were significant, it was the political legacy of the scheme that left a sour taste in the nation’s mouth. From that point on, Australian parties have steered clear of climate policy resembling a tax: which may be a sensible choice regardless, due to peaking energy costs. Nonetheless, the failure of the carbon pricing scheme represents the loss of multiple key tools in Australia’s climate-fighting arsenal for the foreseeable future.

Where we’re at

Nowadays, Australian climate policy has taken on a relatively passive form through a variety of targets and ratified commitments such as the Kyoto Protocol, the Renewable Energy Target (RET) and emissions reduction targets ranging from 2020 to 2100. Although these commitments can be invaluable from a market-signalling standpoint, such value can only be realised where investors deem them as credible. Unfortunately, with the lack of a consistent emissions reduction policy agenda with bipartisan support, this has not been the case. Current emission trends suggest that whilst Australia is on track to meet its 2020 target of a 5% decrease on the 2000 level of emissions, it’s nowhere near meeting its 2030 commitment of a 26-28% decrease from 2005 levels – and no policies have been identified which could allow the target to be viably met.

The Kyoto Protocol (the source of our 2020 target), although legally binding, has shown mixed results. Whilst Australia met its emissions obligations in the first commitment period of the protocol (2008-12), the government plans to use carryover credits earned via over-achievement in the first period to count toward second commitment period (2013-20) targets – a signal that the target, in real terms, is either unreachable or not prioritised.

2018 saw large-scale investment in renewables double from the year before to over $20 billion, suggesting that renewables will continue to trend upward as projects are completed and connected to the grid. Renewables also generated more electricity than brown coal for the first time in 2018, due in part to the closure of one third of Australia’s coal-fired power stations during 2012-2017.

Such investment has been incentivised, in part, by the RET, which 1) requires high-energy users to obtain a fixed ratio of their energy from renewable sources, and 2) subsidises large renewable energy providers. Whilst the RET’s target is set to 2020, renewable usage obligations under the RET will continue until 2030 – providing the certainty required by large-scale investors to invest.

Increasing renewable energy investment has resulted in flatlining emissions from Australia’s electricity generation – however, emissions from other areas such as transport and manufacturing are still trending upward. It can be argued that this has come as a result of policy inattention, which in turn may be due to the relatively small contribution of these areas to overall emissions (when compared to electricity generation, which makes up just under 50% of national emissions). Looking forward, these may be key areas for government intervention to take place within.

National Energy Unguaranteed

The National Energy Guarantee (NEG) was the Liberal party’s front-running climate policy proposal before it was scrapped by Turnbull in an effort to appease leadership challenges. With energy prices skyrocketing, electricity reliability faltering and climate pressures mounting, the NEG was designed with the intention of hitting three birds with one stone. Under the NEG, energy providers would have 1) an obligation to obtain energy from a variety of renewable and non-renewable sources, and 2) an obligation to satisfy peak load requirements when energy is in high demand.

Through these obligations the NEG aimed to combat present and anticipated emissions and electricity unreliability, with hopes of reducing electricity prices by reducing reliance on short-term spot prices. Although the emissions reduction targets of the scheme have been cited as ‘woefully inadequate’ by critics in terms of both scale and time span, the policy may have provided an additional platform for renewable investment through firm-level obligations – which, ultimately, is better than nothing.

Barriers to Progress

In a general sense, climate policy can be difficult to implement due to climate change’s difficult economic characteristics. Firstly, when a nation such as Australia decides to cooperate by reducing emissions, this comes with immediate economic costs including structural unemployment, infrastructure costs and price and reliability uncertainty. The benefits, however, are much less pronounced in a short time span.

Secondly, climate action can be characterised as a collective action game, where Australia will always be better off without emissions reduction due to our relatively small role in worldwide emissions. Whilst Australia had the 9th highest CO2 emissions per capita in 2016, the nation only emits less than 2% of the world’s carbon emissions – suggesting that any action taken in isolation may be negligible. It can be argued, however, that the action of many small economies is required to achieve a socially optimal equilibrium. Additionally, Australia’s role as a significant economic partner to China and the US gives it a non-negligible amount of influence, which can and should be used to inspire growth and innovation in these larger economies. A model such as this also fails to account for the future investment opportunities gained through development of renewable energy technologies.

Figure 5: A simplified game table which suggests that Australia will be better off choosing to ignore emissions mitigation.

Next Steps

“The electricity sector makes investments that have long pay back periods and life spans … and requires a long-term trajectory to allow the sector to plan for the future.” – ATSE

Non-partisan research institutions such as the Grattan Institute have called on the NEG to be revived, along with expansion of existing policies such as the Safeguard Mechanism and further action in areas such as transport and manufacturing. With Australia’s inability to commit to carbon pricing schemes due to economic and political factors, schemes such as the NEG are Australia’s next best bet to allow for rapid, large-scale market reform. Investors also urge whoever wins the election to take a definitive stance on funding for infrastructure projects such as Snowy 2.0, as in the interim there will be significant opportunity costs associated with funding uncertainty if infrastructure is required.

Australia is well and truly behind the curve on climate policy. With coal plants across the nation beginning to come to the end of their technical lives, the actions of the upcoming election’s winner will be pivotal in swaying new investment to meet Australia’s energy requirements toward renewables. When faced with a pressure as large as climate change, the onus is on the government to choose how much change to embrace – and then embrace it with full commitment.

Additional Sources

  1. Australian climate change policy to 2015: a chronology – Parliament of Australia. (2016). Retrieved from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1516/Climate2015
  2. Carbon tax v cap-and-trade: which is better?. (2019). Retrieved from https://www.theguardian.com/environment/2013/jan/31/carbon-tax-cap-and-trade
  3. Clean Energy Council. (2019). Clean Energy Report 2019. Retrieved from https://assets.cleanenergycouncil.org.au/documents/resources/reports/clean-energy-australia/clean-energy-australia-report-2019.pdf
  4. Department of the Environment and Energy. (2018). Australia’s emissions projections 2018. Retrieved from https://www.environment.gov.au/system/files/resources/128ae060-ac07-4874-857e-dced2ca22347/files/australias-emissions-projections-2018.pdf
  5. Garnaut, R. (2018). The Complex International and Domestic Economics of Climate Change. Lecture. Retrieved from https://www.youtube.com/watch?v=jAUtWhFImlc
  6. Grattan Institute. (2019). Commonwealth Orange Book 2019 (pp. 80-89). Retrieved from https://grattan.edu.au/wp-content/uploads/2019/04/916-Commonwealth-Orange-Book-2019.pdf
  7. Teeter, P., & Sandberg, J. (2016). Constraining or Enabling Green Capability Development? How Policy Uncertainty Affects Organizational Responses to Flexible Environmental Regulations. British Journal Of Management28(4), 649-665. doi: 10.1111/1467-8551.12188
  8. The Carbon Tax in Australia – Centre for Public Impact (CPI). (2017). Retrieved from https://www.centreforpublicimpact.org/case-study/carbon-tax-australia/

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Joshua Moore
Editor

Joshua is a third-year student studying Economics and Finance. He has strong interest in macroeconomics and aims to work in public policy or economics consulting after graduating.

Lachlan Woods
Writer
Taha Bhatti
Writer
Thomas Sinclair
Writer