Australia will fail to hit its climate change target of net zero by 2050 unless it imposes a constraint on emissions from the electricity sector.
In this podcast, our energy and climate change policy experts Alison Reeve and Tony Wood talk about the thing Australia’s political leaders still refuse to talk about: carbon pricing.
Alison and Tony also discuss the modelling for their new Grattan report, which which shows that governments can act to cut electricity emissions without hurting Australians in the hip pocket.
Transcript
Kat Clay: The federal government has set a long-awaited climate change target for 2035, committing to a reduction in emissions of between 62% and 70% below 2005 levels.
While some think it’s an ambitious target, others a failure, Australia now has a target. But the question remains, how are we going to get there?
To hit the target, requires transformation across the entire economy, but especially in the electricity sector, which is responsible for 34% of Australia’s carbon emissions. Left to itself the electricity sector will not decarbonize sufficiently to support Australia’s economy-wide emissions reduction targets.
So, it’s time to talk about the thing we don’t talk about in Australian politics, carbon pricing. I’m Kat Clay and you are listening to the Grattan podcast. Today we have two energy experts, Allison Reeve and Tony Wood to talk about their new report and why it’s time to introduce carbon pricing.
Allison, carbon pricing, as I’ve said, is the thing we don’t talk about in the Australian policy landscape. Can you give our listeners a brief history of carbon pricing in Australia?
Alison Reeve: Australia actually had the first carbon pricing scheme anywhere in the world, which was the New South Wales Greenhouse Gas Abatement Scheme, which was introduced in 2002.
And that was a scheme that priced carbon in the electricity sector quite successfully between 2002 and 2012. And that conversation then went national in around 2007, 2008. At that time, the Howard government was not really acting to implement Australia’s obligations under the Kyoto Protocol.
We were in the middle of a very long and prolonged drought. And there was a lot of public pressure for action on climate change. And a bunch of the state governments got together and said, well, if the federal government is not gonna act, we think we might be able to implement a scheme between us that puts a price on carbon as a way of driving stronger emissions reductions.
When Kevin Rudd was elected Prime Minister, he said, well, I’ll take that and make that a national scheme. And that was our first go at a National Emissions trading scheme. I moved to Canberra to work on that scheme in 2008. There was a very long design process that happened.
And that became actually quite fraught because the thing about pricing carbon is that what you’re trying to do is make it more expensive to consume products that used a lot of fossil fuels in their production. And at that time. There weren’t, you know, we had sort of alternatives I think in the electricity sector uh, although those, those were still comparatively a lot more expensive.
But there weren’t really ones in the rest of the, in of the economy. And so, what that meant was that process of pricing meant we were all gonna be just paying more for stuff. And that became really politically toxic. It’s a very hard argument to sell politically you should pay more for stuff, right?
That’s sort of what created the big, debate and then almost uh, what people call the climate wars. Pricing carbon and then deciding not to price carbon was one of the things that ended Kevin Rudd’s prime ministership, the way that she priced carbon and the fact that it looked like a tax was what ended Julia Gillard’s prime ministership. There were debates in the opposition at the time that also ended up in leaders losing their jobs. And really what that meant was that carbon pricing became, like you said, the thing that we don’t talk about.
The thing is that carbon pricing itself has not changed. It is still actually an essential part of the toolkit for reducing our emissions, make the old way of doing things that’s fossil fuel intense, more expensive. But the thing we’ve sort of really focused on the other side of that problem, which has been largely can we make the new and cleaner way of doing it cheaper?
And so that’s where all the policy has gone. But like you said in your introduction, we now have some very challenging targets to meet in the 2030s, and it’s really hard to see how we do that unless we do start to make the more carbon intense way of doing stuff more
Kat Clay: Yeah, Allison. I mean, nobody likes a policy that makes people pay more for things. Um, I love that summation of this, but of course we are going to talk about it, and I think it’s important to talk about these bold policy moves that are gonna help get us to net zero. Tony, your new report, it proposes that Australia needs carbon pricing to achieve its net zero goals. So why now and what is different from those previous situations?
Tony Wood: Kat, thank you. Look, our report is fundamentally focused on the electricity sector, as you said, which is a third of our emissions. A lot of progress has been made for some of the reasons Allison talked about, and so electricity has done a lot of the heavy lifting so far. But the policies that were used, in particular one to support renewable energy, and help it grow are pretty well done now.
They’re not gonna proceed after 2030 and even a policy the Commonwealth government introduced only recently, is only a short-term thing to increase renewables between now and 2030. So, the emissions will still be there in 2030. But there’ll be nothing to drive them down. And even though renewables, as the government likes to talk about, are the cheapest form of generation, there will be nothing to cause that cheapest form to gradually grow and the black form to gradually close without some sort of constraint on emissions.
And so that’s what we’re looking to argue in this, in this report now, since a lot of this stuff was done. As Allison described in the history, a lot of other things have been changing in our economy. So, for example people are now starting to realize that they’re better off if they moved away from gas.
For many people, gas used to be cheap and solar used to be expensive. Well, not only is solar, now it’s cheaper, but gas is much more expensive. So, a lot of consumers are starting to go down that route. The support that the government, state, government, and federal governments are giving to electric vehicles.
Means that progressively we’re seeing the cost of using electric vehicles as a form of transport is also coming down, so that’s changing. 40% of households in Australia now have solar, and many of them have been adopting battery storage. The way we interact with our electricity system is changing dramatically, and so as a result of that, we can contemplate things that we’ve really not contemplated before.
And feel comfortable that we’re not going to be really hit in the hip pocket, recognizing that what this is about is dealing with climate change. And the other big thing that’s changed in the last 10 years or so is that the tangible, real impacts of a changing climate are becoming more and more clear to real Australians in many parts of this country. And the cost of that is gradually mounting.
Kat Clay: So why do we need carbon pricing? Isn’t converting to renewables enough?
Alison Reeve: You are right that, you know, converting the electricity system to, to renewables is the way that we decarbonize it. But if you look at any credible piece of modelling of the electricity system and how it will decarbonize it always ends up with a little bit of gas in it at the end.
And the question that you’ve also gotta ask is, how do you get the coal generation, which is the cause of the emissions, to leave the system in a way that’s orderly? This is kind of where carbon pricing is helpful. If you’ve got carbon pricing, then that actually gives the coal a signal to leave rather than just hanging around as it does at the moment.
At the moment, the way that governments are getting the coal out of the system is just pushing the renewables in until there’s no more room for the coal and it pops out. It has to go. Because its economics are affected largely. Whereas if you are giving it a signal ahead of time that kind of is saying hey, you are not gonna be welcome here after a while, then that is actually gives you a much more orderly process of that coal leaving.
Kat Clay: So, Allison, we’re at the climate nightclub and somebody’s, uh, switched the lights on at 2:00 AM to tell coal to go home.
Alison Reeve: It. Yeah, it is kind of like that. Yeah. I’m not sure I wanna go to the climate nightclub. The climate day club is enough work as it is. And then the other part of it is gas. And so, the amount of gas that you end up with in your system has an impact both on your overall emissions but then also on the cost of the system as well.
And so, you really wanna make sure you’ve got the optimal amount of gas, not just for keeping the lights on, but also with respect to achieving your emissions targets.
It is easier to make decisions around how you structure your energy market and how you get all of the rules and things in it, right, to give you that optimal amount of gas. If you’ve priced in the emissions from the carbon, if you don’t price the emissions in, then what you’re relying on is for example, state governments to say, oh, I don’t want gas to be used in my state, or I only want this amount of gas used in my state.
And that leaves you with an economically suboptimal system, which overall means that you end up with higher prices for consumers.
Kat Clay: Just one thing for clarity there, Alison. I mean, am I getting confused between a carbon tax and carbon pricing? Are they two separate things technically?
Alison Reeve: A tax is a way of doing pricing. As part of the background research for this report, we identified around eight different ways that you could put some sort of price signal, as people say, into the electricity market around carbon. And a carbon tax is one of them. So, a carbon tax is where every tonne that you emit, you have to pay a certain number of dollars for, and that amount of dollars just goes up over time.
And eventually you say, it’s too expensive for me to do this, and you stop emitting. Carbon pricing can also mean things where instead of fixing the price, you fix the amount of the quantity of carbon that a sector or an economy is allowed to emit, and then you allow people to pay in order to get that, permission to emit. Effectively they get a permit to do it.
A license almost. The amount that people are willing to pay is what sets the price on carbon. And there are other things that you can do too. But the point of it is, is what you’re trying to do is to make it so that someone somewhere when they are emitting in the process, in this case, in the process of making electricity, that there is a cost to them of doing so that reflects in some way the cost that is imposed on all of us by the climate change at those emissions clause.
Kat Clay: And we actually do have programs like that in other sectors, don’t we? And your report has identified that expanding the Safeguard Mechanism is the best way to implement carbon pricing in the electricity sector. We have talked about the safeguard mechanism before on the podcast, but not necessarily as it relates to electricity.
First up can you give us a little explainer on what it is and then why this is the best option from your studies versus kind of other schemes or, or not having a scheme at all?
Tony Wood: Now, back in 2010, Greg Hunt, who was keen to become the energy environment minister in Australia, came up with this idea of saying, well, if we’re gonna be paying under a different program for supporting emissions reduction, we don’t wanna see a situation in which other parts of the economy are just continuing to emit without penalty. And so, he introduced something which he called for that reason, the Safeguard Mechanism. And the idea was to say, look, we’re going to require that big industry pays for or reduces emissions or pays for it. And he called this the Safeguard Mechanism.
Now, his boss at the time, Tony Abbott, didn’t like that very much. So, when they got into government, that instrument sat there as an interesting measurement tool. It was never used to actually reduce emissions, even though that was originally Greg Hunt’s idea. When this Albanese government was elected, they said, well, look, we think that’s a pretty cool idea.
Why don’t we pinch that, and we’ll now turn it into a real emissions reduction policy applying to the very big emitters heavy industry. And as you said, we’ve talked about that before. Electricity in the meantime, was doing the good things we talked about earlier in this podcast. That is its emissions had already been coming down and probably didn’t need something like that.
As that is now complete, finishing up, as we’ve already said, Kat, that means we do need something after 2030. So, we say suggest, well, why don’t we take the Safeguard Mechanism, which was originally considered to cover electricity, but never practically done that way and apply it to electricity.
There are several reasons why that makes sense to us. One is it’s already there. Secondly, it’s relatively easy to make the changes to turn it into a scheme that would provide incentives or a regulation or an obligation for big emitters to reduce their emissions, but also for those who are producing low emission or even zero emission electricity to get credit for that. And that combination of penalties and credits it opens up the opportunity in the sector for trading of those credits, and that’s where your carbon price mechanism arises.
And the final issue for the Safeguard Mechanism, which is a, in some way a political question. And that is given all the climate war and our lack of preparedness to discuss carbon pricing, having something that was invented by the Coalition is already in place. And by the time we get to 2030, we’ll have been there for more than five years. It must have some better chance than other policies that people are not familiar with today, to actually not just get implemented, but could potentially be supported as well. So that’s one of the reasons why, amongst all those options that Allison talked about, our view was from a pragmatic, practical way forward position, using the Safeguard Mechanism in electricity would be a way forward that would have some opportunity for discussion and success.
Alison Reeve: The other thing I might add to that is that because the Safeguard Mechanism is already acting in the heavy industrial sector, if it was also acting in the electricity sector, you would be able to actually trade-off between reducing emissions from electricity versus reducing emissions, say from cement or steel making or coal mining or whatever else.
And that’s actually quite important when you think about. You mentioned the targets at the start of the at the top of the podcast, that’s a really large emissions reduction that needs to take place over the next decade. And if we can do that, it, you know, it makes sense for the people who have the most options and can do it the cheapest to do that first.
And when you actually start to have policies that cut across more than one sector, you start to get that effect happening, which means that the overall cost of the economy of achieving those targets is lower.
Tony Wood: And that also does something that we should not even maybe talk about very much on this podcast, Kat. But the secret behind this is that what Alison’s describing is expanding what is a narrow carbon price in the Safeguard Mechanism, potentially into a broader, not necessarily economy-wide carbon price, but as most economists would argue, being able to do what Alison described that is, let’s find the cheapest way to do this wherever they exist across the economy, this offers that pathway.
That’s politically gonna be challenging, but what we’re wanting to do with this report is open up that conversation.
Alison Reeve: We’re not saying jump in and do and, you know, implement that tomorrow. I mean, I think that’s one of the key recommendations out of our report is that, because there is the Safeguard sitting there in the industrial sector and the government should actually do a little bit more work to look about what those interactive effects might be before jumping to a decision.
Because there’s a lot that, you know, we couldn’t model for the purposes of this report, which would be very important questions that you would need to think about before you actually made the policy change.
Kat Clay: Yeah, and there’s an advantage too, for the sheer fact that this is an existing thing. It’s not, uh, reinventing the wheel here. It’s implementing that in another sector. So, I think that has a huge advantage over, over coming up with something completely new.
The reason that there’s a lot of political adversity, you get to carbon pricing, is the cost to consumers. And I mean, this is coming at a time where cost of living is high. Nobody wants to bring in a policy that cost voters more money in already stretched financial time.
But you have crunched some numbers here and I’m really interested in what you found, as to whether carbon pricing will increase electricity prices.
Alison Reeve: There are actually three things that we wanted to look at in this report. So, the first one was, what would that carbon price do to wholesale electricity prices? Then what would it do to retail prices, but then also what it would do to total household energy costs.
Most of what households spend on energy is not on electricity, it’s on petrol. And many households also spend money on gas. As the technology to replace petrol and replace gas has gotten cheaper more and more consumers are shifting towards having an all-electric home, so an electric vehicle, solar on the roof, a battery in the garage, and electric appliances in the kitchen.
Now, what that means is that when we are thinking about what does this cost households, we need to look across all the sources of energy that they’re buying. And our hypothesis going into this report was that that benefit from electrification might be enough to counteract the cost of putting a carbon price into electricity. And that is exactly what we found.
Even though unit costs of electricity go up both on wholesale and retail side, the money that people save by not using petrol and not using gas more than covers what that extra cost is. So, you are paying more per unit of electricity, and you are actually buying more electricity than you used to, but you’re not buying gas and you’re not buying petrol, and so you actually end up economically ahead.
Tony Wood: And the other point about that, I think Kat, is that financially, the individual household is ahead, but we are getting the environmental benefit. You can turn that environmental bit into numbers if you like, but it’s very, it’s a very low-cost way of achieving that outcome.
And it also has that benefit of being a very low impost on consumers as well.
Kat Clay: So, do we have a number on how much households will save?
Tony Wood: There’s two ways of looking at it. One is Alison just mentioned that the total energy bill for the home is gonna go from about $6,000 to about half that over the next 25 years. That’s a big improvement in cost of living right now.
It’s not gonna happen tomorrow. It’s not gonna be, there’s a lot of things to be done, but that is the prize at the end of this, right? About 50% lower household energy bills. The increase in the electricity bill will probably mean that 3000 odd dollars saving might be a hundred dollars less than that.
That a $2,900 saving, so it’s still a very significant saving, even though the cost of your electricity bill might have gone up be three, three and 5%.
Kat Clay: For me though, one of the things that I’m thinking about when it’s, we’re talking about the cost of electricity in the home, um, it’s that outlay factor. I think that’s one big thing that like a lot of people see as a stumbling block to electrification of their homes and their vehicles. For example, like me you know, I’ve been so busy paying off multiple mortgage interest rate increases that I don’t have the extra cash to outlay to electrify my home and put solar panels on the roof and a battery in. Is this gonna be another case of, say, an electricity equity divide that’s created where the people who can afford to get off these things do and have cheaper electricity bills and the people who can’t actually pay the price by paying for things like gas as the prices go up.
Alison Reeve: Yeah, that’s a, that is an absolute risk. And that risk would be there whether we priced carbon or not. And when you think about the size of the saving that Tony is talking about there, that, your bill in an all-electric home would be half what it was if you were not in an all-electric home. You can get a sense of like how wide that would divide would be between houses that were otherwise the same.
So, one of the recommendations that we’ve made in the report is that regardless of whether governments want to further explore carbon pricing or not, they really need to lean into making sure that the benefits of electrification are available to everybody.
For this stuff to become normal there are some pretty formidable barriers for a lot of households that you have to remove.
So, the really obvious one is the landlord tenant divide. The appliances you have in your home if you rent, are the choice of your landlord. And he or she also chooses whether you are allowed to put a car charger in the garage for your electric vehicle. So, finding a way to overcome that barrier, for example, by things like minimum rental standards, tax write-offs for landlords and so on.
It’s really important that governments lean into those so that the households that one third of households that rent are getting access to the benefits of going all electric, that people who live in their own home and don’t have a massive mortgage to pay off are able to access.
The other thing about this is that if you allow that divide to open up, it actually ends up costing the government money because it means that things like Rent Assistance have to be higher. Pensions have to be higher. Any other payment that the government is making that is CPI linked will have to be higher as well. So, the more that government can do to actually open those benefits of electrification up to anyone, the better it actually is in the long run for the federal Budget as well.
Kat Clay: So, we’ve put carbon pricing on the table. Uh, we think it’s really important for reaching, uh, the government’s climate goals by 2035. What then should governments be doing next?
Tony Wood: I think the first thing we’d recommend, and this is related back to the whole story of the unfolding about these various ways of car, of pricing carbon, when the safeguard mechanism was introduced or expanded by the Albanese government and we were part of that process in making submissions, it was recognized that it was such, so, such a big change that a major review would be justified in a couple of years’ time. That’s gonna happen next year. So that’s the best time to start thinking seriously is the current mechanism, which applies to only the biggest 200 emitters in the country working in that area.
But in addition to that, that’s the time to think about, okay, let’s take this a bit more seriously. Let’s have the conversation about are we on track to achieve our emissions reduction in electricity? Is there a way to do it, to impose, introduce a form of carbon pricing and is the safeguard mechanism the way to do it?
Now, all policies associated in this area have to be thought through for unintended consequences, what could go wrong, that sort of stuff. So, a major review of the safeguard mechanism next year would be the best and first place to start to think about introducing this form of carbon pricing into electricity.
Alison Reeve: And it might be that, that the review finds that the safeguard’s not the best way to do it, and that there’s, there are alternatives that work better. And if that’s the case, that’s fantastic. Let’s get on with doing those instead.
There are some advantages here when you’ve got a policy that already exists that’s already working, where the rules are already quite clear that you know that you can just move and expand that into a different sector rather than trying to come up with something new from scratch. And just going back to that point I was talking about with equity before, one of the things that we weren’t able to test in this report was that equity effect.
So, we could look at the average Australian household and then the average household in each state. But we didn’t have the data grant to be able to say, what’s the difference for rich households and poor households, for example. And so that’s another sort of thing that you’d wanna think about.
The other thing that, would be important to think through in the context of the Safeguard and expanding the Safeguard is that if electricity is slightly more expensive, what does that do to the economics of switching away from using gas and coal in the industrial sector and towards using electricity to do that same job? The economics of that will change if electricity is slightly more expensive. So that’s a really important interaction that needs to be captured. It’s one that we weren’t able to test. And so that’s why our recommendation is, for governments to look at this a little bit deeper and do a little bit more work before they make a decision.
Kat Clay: Thank you so much Alison and Tony, if you want to read this report, I will put a link to it in the show notes, but it will also be available for free on our website at grattan.edu.au. If you’d like to talk to us on social media, please find us at Grattan Institute across most social media channels. And as always, please do take care and thanks so much for listening.