Here's One Good Climate Idea, Kevin


Kevin Rudd has unveiled a plan to help the different countries of the world reach at least some kind of climate agreement at Copenhagen. But back home, the path to achieving meaningful reductions in emissions is beset with problems. Fortunately, there are some promising policy options — we just need to take a good look at them.

As political leaders in Australia lick their wounds after the Senate contest over an Australian carbon emissions trading scheme (ETS), an opportunity presents itself to re-frame the debate on economic grounds by getting a proper understanding of the real financial barriers to clean technology investment in Australia.

Whatever Malcolm Turnbull was trying to do with the recent release of his alternative ETS, carried out by Frontier Economics, the Opposition has failed to convince the electorate that it can protect Australian jobs while also achieving an improved environmental outcome.

On the Government side, Climate Change Minister Penny Wong’s line of attack has run dry. By targeting division within the Opposition on the science of climate change, she has wedged herself into arguing for an emissions trading scheme on a scientific basis rather than an economic one.

While some may argue that any effective mechanism to reduce emissions is unlikely as long as the Government allows its policy to be shaped by industry and the carbon lobby, that argument is really just more reason to develop the best possible policy as a visible and persuasive alternative to that which was recently rejected by the Senate.

To do this, our political leaders need to go back to first principles and re-think exactly which economic policies make sense in overcoming the investment barriers to a low carbon economy. This begins by acknowledging that the endgame is centred on new technology, and that in situations where that is the case, the role of government is to address market failures in financing the development and deployment of these technologies.

Although the Government has focused its political campaign on introducing a carbon emissions trading scheme, it’s highly debatable whether this is actually the best place to start. Indeed experience abroad suggests that before we can transit to a carbon market other economic policies need to be introduced first in order to smooth the way. Failure to lay the correct economic groundwork leads to a cost in jobs and stunts private investment in home-grown technology.

The European carbon market is a good example. It has been in operation since 2005, and offers insight into how a carbon market can fail to drive new domestic investment in technology innovation and commercialisation. Because energy generators are able to pass the cost through to consumers, they have little economic incentive to invest R&D money in new technology. In the long-run, this will only change if clean energy generation alternatives come to market which can compete on a cost basis with coal. However there are systemic barriers preventing this in the short-run and this is where the Government and Opposition need to work to come up with the best economic policy for Australia.

The main financing barrier confronting clean energy has been in taking technologies from the R&D stage to commercial deployment. The unusually high demonstration costs of clean energy generation technologies means that the up-front cost of commercial-scale demonstration is often 10 to 20 times the cost of technologies in other sectors such as pharmaceuticals and information communications.

The lack of incentive for investors to enter the market is also due to the structure of the electricity industry. Because renewable energy generators are required to sell into a market where there is a direct substitute — coal-fired electricity — technologies will not be able to reach scale and compete on a grid parity basis unless there are short-term subsidies to help bring technologies to market. A price on carbon only helps to levelise the cost of electricity after renewable energy technologies have reached real-world market scale.

This bottle-neck in private investment going into early-stage investment is clear from global investment data in the clean tech sector. Recent data from New Energy Finance reports that in 2008 US$97 billion flowed into asset financing globally for established technologies whereas only $6 billion was attracted to venture capital for new technology worldwide. This is exactly the kind of market failure that governments have a duty to fill.

Indeed, many foreign governments agree, and have been much quicker than Australia to identify and plug these financing gaps in the clean tech sector. In the UK for example, the Government has sought to stimulate the supply of finance into the venture market through tax-incentives and direct investment. In June this year, the UK Innovation Fund was launched to invest £150 million on a pari passu basis into clean tech private equity (among other technology sectors) through private fund managers. This policy is helping to inject liquidity into the market without interfering with the expertise of the private sector to make investment decisions.

However, the area in which government intervention has had the biggest impact in spurring investment in innovation has been through the use of feed-in tariffs. These tariffs operate by paying a government subsidy for each unit of electricity sold into the grid from a renewable energy source, and locking this subsidy in for a fixed period (often 20 years). This reduces cash flow risk and allows investors to enter the market with long-term confidence,

The main success story in this area has been in Germany, where feed-in tariffs introduced in 1999 have underpinned the strong growth of the solar industry well before the carbon market came into operation. This has created jobs and supported small businesses in the country. One company, Q-Cells, which started producing silicon PV cells to sell into the German market in 2000 with 19 employees, has grown its turnover 73 times in 8 years. In 2008, it had turnover of €1.25 billion and had close to 5000 employees.

The success of Germany’s feed-in tariffs for solar energy has been emulated across the hydro and wind sectors within Germany, and by numerous governments across Europe, the US and Asia. Even China, often castigated as the renegade in international climate politics, is rumoured to be introducing a national feed-in tariff for solar electricity by year’s end.

In Australia, by contrast, the Government canned the proposal for a national feed-in tariff for solar in July this year. This is despite the fact that many states have made some inroads into state-based feed-in tariffs. For the most part, the federal Government has sought to earn political capital from funds with such names as the Renewable Energy Fund and the Energy Innovation Fund. But whatever the wrapping of these funds, their underlying investment is in primary research and development rather than in addressing the equity gaps of later-stage commercialisation. Indeed, the one fund which did have a commercialisation focus — the 2006 Low Emissions Technology Demonstration Fund — was small in size and has since been closed.

As the climate debate heats up again around Copenhagen later this year, all political camps professing to take energy policy seriously need to re-focus their attention on those genuine financing barriers which are obstructing the commercialisation of clean energy technology. Addressing these gaps is crucial. Narrowly targeting the carbon market alone may be enough to win some votes but it won’t be enough to lay a secure platform for creating clean energy jobs in Australia for builders, developers, engineers, financiers and others.

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