Australian Productivity Commission report reveals high cost of bad energy policies

(…) policies encouraging small-scale renewable generation and biofuels have generated little abatement for substantially higher cost. (…) The relative cost effectiveness of price-based approaches is illustrated for Australia by stylised modeling that suggests that the abatement from existing policies for electricity could have been achieved at a fraction of the cost.

We recommend the just-released report Carbon Emission Policies in Key Economies [PDF, full text]. I think this is a very important study, which will have impacts on the design of every countries efforts to price the externalities of GHG emissions. If I had to choose one conclusion to emphasize, it is that seven of the eight countries studies (excepting NZ) could dramatically unburden their economies by replacing all of their inefficient subsidies/mandates with a simple carbon tax (or equivalent ETS).

The Productivity Commission [PC] has done a credible job of exposing the truly awful waste of public wealth associated with the renewables subsidies and mandates. Commission resources were limited, so the avoidance costs quoted for wind and solar are understated, as there is no accounting for the true cost of compensating for the intermittency of wind and solar.

Example: the following Figure 1 shows the range of estimated abatement costs (in AUD per ton CO2). These costs are not directly equivalent to a carbon tax of the same amount – but they are indicative of how ineffective the artificial renewables supports have been. The South Korea results are a surprise – I don’t think of the Koreans as running “feel good” policies. The high Korean costs are associated in particular with solar subsidies – more study required.

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The Commission found for all eight countries studied that it was dramatically more economical to replace all of the subsidies and mandates with a direct carbon tax (or an equivalent ETS). Example: for electricity generation only, Australia is estimated to be spending between A$ 44 and 99 per ton CO2 abated. The PC estimates that the same abatement would be achieved by killing all of those ineffective programs and substituting a direct carbon tax of A$9/t CO2. See page 151 and related figures:

Stylised modeling using an ‘off-the-shelf’ version of the MMRF model of the Australian economy suggests that a carbon tax or ETS permit price would have achieved the same abatement at much lower cost. For example, according to the modeling, if applied only to the electricity sector, an explicit carbon price of about A$9/t CO2 (corresponding to P2 in figure 6.4) is required.

It will be interesting to see how the Australian politicians spin the study results. The Greens are not going to readily give up all their favorite subsidies. The Coalition is going to have a hard time arguing against the pure efficiency of trading a modest carbon tax for the morass of subsidies. Similarly, can the Coalition continue to argue that Australia will be an outlier case among nations by imposing on itself a A$9/t CO2 carbon tax?

My take is that it remains true that Australia’s impact on deferring climate change will be completely insignificant. To make an impact on the future of our climate we need to be working on helping China, India and the other developing nations to stop burning coal in favour of clean technologies that are “cheaper than hydrocarbons”. Harrywr2 has taught us that “cheaper than coal” sound great but is only accurate for the “very small club of countries that have significant amounts of inexpensively extractable coal then coal is the ‘cheapest option’”. The only base load scale option I know of (available for deployment over the next decade or two) is nuclear fission. Let us get on with deployment. A level playing field with no more subsidies will make our task much easier.