Morrison scores a climate own goal - Grattan Institute

Published in The Australian Financial Review, 8 February 2021
Photo credit: AAP Image/Lukas Coch

In his recent address to the National Press Club, the Prime Minister announced his goal “to reach net zero emissions as soon as possible, and preferably by 2050″. The statement took the government a small step further on its journey towards a credible climate change policy.

Yet, in the same speech, the Prime Minister imposed a significant constraint on his government’s future policy options. “If you don’t get there (to net zero) by technology, there’s only one other way that’s achieved and that is a tax. I will not tax our way to 2050.”

Any form of carbon price or emissions reduction liability on polluters also seems to have been ruled out.

“Technology not taxes” is a catchy slogan. Like many such slogans it sounds like a valid ambition. But this one is based on a false trade-off.

In the quest for lowest cost emissions reductions, technology and carbon prices or taxes are not mutually exclusive.

The central challenge we face over the next few decades is to develop and deploy low-emission technologies at the lowest possible cost.

Current technologies will not deliver net zero emissions across the Australian economy at low cost. New technologies are needed, and existing technologies need more development to become cheaper.

Supporting early-stage technology is an appropriate role for governments where the risks are high, even if the costs are modest.

The Government already has the tools to build a credible, lowest-cost policy framework to develop and deploy low-emission technologies that can meet the PM’s own stated aims.

The Commonwealth Government’s Technology Investment Roadmap identifies key technologies that have great prospects for low-cost emissions reduction.

It sets stretch targets for cost reductions that provide clear milestones and impose financial discipline in exchange for financial support. The Government’s Australian Renewable Energy Agency is the main vehicle for this program, and it has a strong track record.

For technologies that survive this R&D stage the next step is typically early-stage commercial deployment via pilot or demonstration projects.

The technology risks during this second phase may be lower, but the financial hurdles are often considerably higher. The Clean Energy Finance Corporation can play a valuable role here, through debt or equity funding alongside private sector finance.

Beyond this stage, things get harder. New technologies that bring major environmental benefits often face a cost gap as they move towards full commercial viability.

That was the challenge for renewable electricity 10 or so years ago. Our best current knowledge indicates that even with hydrogen at $1/kilogram, for instance, green steel or green ammonia will still be more expensive than the fossil-based alternatives.

The difficulty is that in the early stages, developing technologies can’t achieve the economies that come with scale. And they’re competing with incumbent technologies whose lower prices do not reflect the environmental costs they impose on the community.

Three choices

So, governments have three choices. They can impose a financial obligation on polluters, regulate against the pollution, or pay polluters directly to reduce their emissions.

While all three can be effective in driving the deployment of low-emission technologies, they will not be equally efficient ways of finding the lowest cost solution. It is disappointing that the Prime Minister seems to have ruled out the first two.

The Coalition Government seeks to stand on its record of meeting emissions reduction targets.

It does have a strong track record in supporting technologies to reduce emissions, largely thanks to two notable policy mechanisms, both of which effectively price carbon.

The Howard government’s Renewable Energy Target (RET), introduced in 2000, imposed a liability on electricity retailers to increase renewables’ share of electricity supply.

The sharp drop in the cost of renewables over the period of the RET was supported by an implicit carbon price.

In 2014, drawing from ACIL Allen modelling for the Government’s Warburton Review, the Climate Change Authority concluded that, at an average cost of $35 per tonne, the RET was making a reasonably cost-effective contribution to emissions reductions.

The second policy instrument, the Emissions Reduction Fund (now known as the Climate Solutions Fund), was introduced by the Abbott Government in 2015 to fund low-emission projects through a competitive bidding process.

By September 2020, $2.4 billion had been committed to deliver 200 million tonnes of emissions abatement. Assuming this abatement is delivered, the auction process creates an explicit carbon price of $12 per tonne.

Ruling out taxes or carbon pricing, explicit or otherwise, seems like an awkward own goal.

The Government already has the tools to build a credible, lowest-cost policy framework to develop and deploy low-emission technologies that can meet the PM’s own stated aims.

The real challenge is developing a political narrative that can put them to work.