The CEFC balancing act - Grattan Institute

Published in the Climate Spectator online, Monday 23 April 2012

The expert review on the establishment of a Clean Energy Finance Corporation has attracted both howls of protest and cheers of support. This is not surprising. Vested interests are strong on both fronts.

The report has tried to create a space for the proposed Corporation to be effective but, in doing so, it has been clear on principles whilst remaining unclear on details critical as to whether its existence actually makes for good policy.

Central to the case is a clear rationale for the CEFC and a definition of the problem that its existence is intended to solve. In the absence of such clarity, there is the clear danger that a child of political compromise becomes a bad solution to a non-existent problem. So, what might be such rationale?

Firstly, the CEFC is not intended to deliver additional renewable energy if the Renewable Energy Target remains binding. Secondly, the CEFC will not reduce greenhouse gas emissions: the emissions trading system has that role. Nor is there, per se, a shortage of private sector capital to justify its existence. The problem at the core of creating the CEFC is the shortage of projects in clean energy technologies that could be low cost in the long-term, but offer adequate financial returns to investors in the short-term.

This is another way of saying that the ETS will carry the load of reducing emissions. Other policies and programs can only be justified if they make that task more efficient, i.e., lower cost. Removing barriers or addressing market failures to long-term cheaper technologies would be examples that could qualify.

The review could have been much more definitive in making this argument. For example, it recognises that the ETS will efficiently drive switching between existing energy technologies, but may be quite inefficient at driving the deployment of technologies that could deliver lower cost in the long term. However, this criterion does not seem to have been explicitly included in the review’s recommendations.

The recommendations reflect a thorough understanding of the benefits the CEFC could deliver and the costs it could incur. Positive externalities almost certainly will exist with new, low-emission technologies. Without activity by the CEFC, investments will still be made, including those driven by the Renewable Energy Target and the ETS, but they will be different.

The stated vision of the CEFC is to address barriers currently inhibiting investment and so increase financial flows into the clean energy sector. Existing and earlier rebate and capital grant programs have been justified on similar bases in the past, but have failed. The CEFC should not add to the failed policies of the past nor subsidise industries that are simply not commercially viable. This concern and constraint can be read into the report, but does take some interpretation.

Many of the recommendations reflect sound commercial principles and are hardly controversial, indeed good governance and risk management are consistent themes of the report. Furthermore, the proposed approach of being open to all technologies and thereby creating and maintaining real options for clean energy technologies is of critical importance when there is great uncertainty regarding future climate change politics and technology developments.