Playing carbon politics

Alan Pears

The carbon package offers a constructive path forward, despite the current scare campaign, writes Alan Pears.

When is a lie a lie in politics? Julia Gillard is under enormous pressure about a semantic issue: whether a three-year fixed price carbon permit scheme applying to about 500 entities is a tax or the first stage of an emissions trading scheme, negotiated by a minority government. Meanwhile, Tony Abbott can claim that individuals and small businesses will be harassed by ‘carbon police’, that industries will shut down and that many will experience massive costs, all with no basis in fact. Indeed, we all know that the Hazelwood or Yallourn power stations will shut down eventually under either a Tony Abbott or Julia Gillard-led government.

Media can run with lead articles about the scale of impacts on industries being far higher than that estimated by Treasury, based on ‘gut feelings’ of people from within the affected industries, or selective quotes from carefully qualified consultancy studies, the detail of which no one bothers to read. At the same time, powerful vested interests can manipulate our media with impunity.

This is a serious challenge to the governance of our society.

Government Clean Energy Future package
The government’s carbon package shows the value of a range of people with constructive intent negotiating a path forward. The outcome is much better than was developed behind closed doors by the Rudd government with its bureaucrats and consultants.

The package combines a price signal on emission of carbon dioxide and an important structural change to income tax. The large increase in the tax threshold is an equitable alternative that encourages greater workforce participation without slashing worker rights.

The package links ‘direct action’ measures to the carbon price and very (indeed, overly) generous compensation. Importantly, it does not lock us into a weak 2020 abatement target. It creates floor and ceiling prices to reduce risk for investors in abatement and limits use of international permits. It also includes a range of review mechanisms to allow adjustment where assumptions underlying the package prove incorrect, and in response to stronger global action.

Lastly, it gives us time to work out how to ensure that voluntary abatement action can be properly treated under the trading scheme. In the package, the government commits to treat household voluntary action as additional by factoring it into the levels of future targets (section 3.3.1). Unfortunately this won’t be enough to satisfy carbon accountants and the ACCC. And voluntary action by local and state governments and business must also be additional if they are to be empowered to lead on abatement.

The emphasis on renewable energy is welcome, with billions of dollars allocated to drive innovation and cost reduction. But energy efficiency is still seriously underdone: the foreword, from the Prime Minister, treasurer and climate change minister, does not mention energy efficiency (our most cost-effective abatement option) once.

Later in the package it’s mentioned that the Clean Energy Finance Corporation will also support energy efficiency. Other measures add up to $1.5 million of very worthwhile actions. But this is very modest compared with resources allocated elsewhere.

And, while the government has committed to expedite a national energy efficiency scheme, there are no guarantees it will implement it or set a meaningful target (see below).

The real energy war
The energy supply sector has used the carbon price to justify massive compensation. But the carbon price is really a relatively small factor in the perfect storm facing the conventional energy sector. On one hand, if it is to deliver reliable energy, it has to invest massively, leading to large increases in energy prices. On the other hand, it faces a wave of non-traditional competitors that can be rolled out rapidly and which attack the most profitable areas of revenue. And energy consumers are increasingly seeking to insure themselves against future energy price increases by adopting competing alternatives.

Consider two examples. In 2010, 384MW of additional photovoltaic capacity was installed, tripling Australia’s total capacity. By late May this year, another 275MW had been added. So by the end of 2011, 1000MW of PV power may be installed over two years, and this operates well on hot days. This undermines the most profitable operating times for power stations (including coal plant, which receives the ‘marginal’ price bid by the highest cost operating power station). So not only does PV undermine the case for network investment, but it also removes a disproportionately large chunk of profit. And it is being rolled out very fast.

On the demand side, there are many millions of inefficient low-voltage halogen lamps installed. We are just reaching the tipping point where LED and compact fluorescent lamps can provide enough light of good enough quality at an affordable price. Once supermarkets start selling these products, the impacts on demand will be significant. Replacing 10 million halogens reduces potential demand by up to 500 megawatts, plus the reduction in cooling needed to offset the heat they generate.

There are many more factors at work, such as tightening building codes, phase-out of electric hot water, radical efficiency improvements in TVs and so on.

The electricity industry has traditionally used its enormous political and financial power to block competitors. For example, the energy market rules were designed and used to block cogeneration and energy efficiency. But energy price increases and the climate issue mean that politicians are under increasing pressure to support alternatives. So past strategies will no longer work. The challenge is to become part of a sustainable energy future.

This means energy retailers need to own and operate cogeneration systems hosted by industries and sell energy services to customers, as Origin is already beginning to do. Retailers and network operators need to treat customers as partners, not passive victims to be exploited. Governments and regulators need to focus on the public interest, not maintaining the viability of the existing energy industry. And we all need to confront the reality that past poor business decisions and arrogance will come back to bite some industry participants. They will go down fighting hard, and aggressively seeking ‘compensation’ for their poor judgements, based on the well-worn argument that ‘they’re too big to be allowed to fail’.

It’s also interesting to note that, in the Australian Energy Market Commission’s recent review of expected energy price increases, 60% of Victoria’s expected 27% price increase (that is, 16% price increase) over the next three years is due to increasing retailer charges. Apparently the extraordinarily high rate of customer churn (changing from one retailer to another) is adding major administrative and marketing costs for retailers. Indeed, Victorian households will be paying more for the privilege of being harassed by aggressive salespeople offering no real benefits than we will pay for the carbon price!
Government and regulators claim this high churn shows we have a successful market. I suggest it shows we have a serious market failure, as reflected in the high rates of consumer complaints and the (now visible) extra cost. Other states can look forward to similar waste of money as their retail markets become more ‘competitive’.

The increased VEET target
Another interesting development is the recent doubling of the target for the Victorian Energy Efficiency Target to 5.4 million tonnes of abatement. This compares with Victoria’s annual greenhouse emissions of around 125 million tonnes. It sounds impressive, until you look at the fine print. The target is for ‘deemed’ abatement spread over the lives of the measures rewarded by the scheme. So it’s more like 0.5 million tonnes each year. More PR magic. Keep in mind, the Commonwealth government is looking at a similar national scheme, so we will need to carefully analyse any target they set.

Alan Pears has worked in the energy efficiency field for over twenty years as an engineer and educator. He is Adjunct Professor at RMIT University and is co-director of environmental consultancy Sustainable Solutions.

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