A mirage of an energy and climate change policy
by Tony Wood
On Thursday, Sussan Ley and Dan Tehan announced that the Liberal Party had agreed on an energy and climate change policy – a simple statement and maybe a political life raft. But it fails when assessed as policy, and against the Liberals’ own objectives.
The political basis for the proposal rests on two facts: power prices have increased, and emissions have not been falling. To understand what is going on and what can and should be done requires a dive behind these facts.
First, power price increases over the past five years have been more due to issues outside the power of governments than to Labor’s policies.
Those issues include ageing and increasingly unreliable coal-fired power plants, really bad weather, and high coal and gas prices partly driven by the war in Ukraine.
The position is made worse when the sugar-hit electricity bill rebates from federal and state governments are not renewed, thereby fuelling inflation.
The Ley/Tehan hypothesis seems to be that removing policies to reduce emissions and support renewables will lead to an abundance of lower-cost electricity.
They make no argument as to what new supply, presumably coal or gas, would be delivered, beyond the suggestion that they would remove the restriction on fossil fuels in the government’s Capacity Investment Scheme, currently intended to underwrite renewables and storage.
The existing, ageing coal plants will continue to be retired or become very expensive to maintain, with associated supply gaps to be filled by gas, the most expensive of the generation sources. There is really nothing in the Liberals’ announcements that will reduce power prices.
Australia’s coal-fired power plants have served the nation well for many decades. Indeed, their low cost was a major reason a nuclear power plant was not built in Victoria some 60 years ago. Whatever technology replaces coal over the next decade, the costs will be higher.
The reality is that it is about time for politicians to stop making promises to reduce power prices when they cannot control physical infrastructure or the weather and there is little they can really do directly.
The good news is that as we shift our homes from gas and our cars from petrol, the average home energy bill will fall and substantially so.
Second, after falling from just over 600mt of CO2e in 2005 to 445mt in 2021, Australia’s emissions have flat lined since. We have done the easy things, with rooftop solar and connecting solar and wind farms to the existing transmission grid.
We have stalled on building transmission for the next growth in renewables, due to high costs, regulatory barriers, and social licence failures.
The only relevant policies, the Safeguard Mechanism on heavy industry emissions and the New Vehicle Emissions Standard on car emissions have yet to make an impact.
The Liberals propose to remove all these policies and mechanisms. They have suggested some form of targeted technology support and a voluntary offset market to reduce emissions year-on-year to meet a series of rolling five-year targets, presumably calibrated against progress in emissions reduction being made by OECD countries.
Potential emissions reduction technologies abound, but they are neither quick nor cheap. Dan Tehan singled out carbon capture and storage (CCS) as a technology that could have an immediate impact on emissions.
The gas producer, Santos, has shown that CCS can be used to capture and sequester CO2 relatively easily and cheaply if done with a concentrated CO2 stream and put back where the gas came from. These are limited opportunities. Geological and economic challenges will limit any role that CCS can play in emissions reduction.
Human-induced climate change is a classic economic externality in that its costs are not reflected in the market price of emitting technologies such as power from coal plants.
The role for governments is to correct this market inefficiency through carbon prices, subsidies, or regulation. As it has been explained so far, the Liberals’ proposal is to reject this role and depend on voluntary markets, for example for offsets.
They have not shown how or why this approach would work to reduce emissions in any substantial way.
For several years and across the board, the business community, investors in energy and other emissions-intensive industries, and the financial sector that supports these companies have been calling for clear, credible, predictable policies on climate change.
The government hasn’t got there yet, but the Liberals’ announcement is far adrift.
The Liberal Party has created a mirage of an energy and climate change policy primarily based on the weaknesses in the government’s position on prices and emissions reduction.
But the policy mirage is lacking in substance, fraught with internal inconsistencies, and not yet credible against either of the Liberals’ stated objectives.
The biggest challenge for Ley and Tehan is to turn this week’s political announcement into a substantive policy that could credibly reduce Australia’s emissions in a way consistent with our position in the global community, while maintaining affordable and reliable energy for households and businesses.
They have a long way to go.