Can The Coalition Axe The Tax But Meet The Target?


The Clean Energy Act and its complementary legislation are in essence the beginning of a long process of decoupling the Australian economy from its dependence on fossil fuels. The transition envisioned by that legislation is too slow, with pollution targets set unconscionably low. What the Clean Energy Act does provide, however, is the all important tool that will allow Australia to shift its economy away from a reliance on polluting industries: a price on carbon.

The Coalition will repeal the act and plans to replace it with an as yet unspecified set of policies known as "Direct Action". Against the advice of the World Bank, the OECD, the IMF and most independent economists who work in the area, they do not plan to price pollution.

In order to drive a shift of technologies towards renewable energy, successive Australian governments — first John Howard's, and then the ALP — have enacted "Mandatory Renewable Energy Target" (RET) schemes. It is currently thought that if Australia achieves its current target of 41,000 GwH of energy generated by renewables by 2020, that would represent 26 per cent of Australia’s total electricity generation.

Strangely, the Abbott government has been explicit about the removal of various programs which support renewables investment. For instance, on Monday there was speculation that the government, in an attempt to bring the budget into balance, would scrap $53 million in clean technology grants (this may be less likely after the government suddenly raised the national debt limit by $200 billion on Tuesday).

Likewise, immediately upon election the Treasurer sent a letter to the $10 billion Clean Energy Finance Corporation (CEFC) requesting it to stop making investments on the assumption that it would be wound up via legislation as soon as possible.

It is interesting to note that despite the generalised shredding of ALP-associated climate change schemes, Environment Minister Greg Hunt has explicitly denied that he plans to remove the RET (although there are rumours that he may move back the date by which the target should be met).

When it comes to providing appropriate assistance to keep the renewables industry in Australia competitive, $50-odd million in grants pales into insignificance next to the $10 billion CEFC, and a mandated target for the country to generate one-fifth of its power via renewables in seven years.

It is easy to see why Hunt would keep the RET: Australians don’t just like renewable energy, they love it. A recent Climate Institute report (pdf) showed that even Australians who don’t believe in climate change like the idea of a future Australia that is fuelled by wind, solar and hydro. That report showed 87 per cent of Australians are favourably disposed to a solar-fuelled future, while only 12 per cent like coal. Thus, the Coalition plans to "axe the tax", yet remain a champion of renewable energy.

Trouble is, it’s difficult to do both. The RET and the price on pollution are designed to fit together. Simply hanging a target over the head of industry is not sufficient. Making polluters pay creates a vital extra incentive for energy companies to come to the party.

The carbon price has already changed the playing field substantially, with recent modelling suggesting that the long-run cost of wind energy in the east coast electricity market has become lower than fossil fuel fired generation. That means that electricity producers are going to build wind. It just makes sense.

Remove the price on pollution, and all of a sudden things look very different. Indeed, analysts suggest that Australia will fail to meet its renewable energy targets in the absence of a pollution price.

Briefly, an explanation. The RET is not just an aspirational target. Rollout of renewable energy is driven by a penalty system, with electricity generators obliged either to produce renewable energy or pay someone to do it for them, via a system of tradable credits called Large-scale Generation Certificates (or LGCs). Or they can pay a financial penalty.

The existence of the carbon price means it is the interests of electricity generators to either produce renewable energy or buy credits — and resulting has been a boom in construction of new renewable energy facilities. Unfortunately, once the carbon price is removed, analysis shows (pdf) that the price of LGCs will spike to the point where they reach parity with the fine companies pay if they fail to comply with the RET.

Without a price signal to disincentivise pollution, the RET is toothless. Australia will fail to reach its 41 GwH target. Hunt has also signalled that he intends to "review" the targets — perhaps lowering them — which introduces yet another layer of uncertainty into the sector.

The response of the renewable energy sector has been what one would expect: they’ve stopped building. It hardly needs to be said, this is not the time to be messing with a scheme that works, especially in the absence of any proven alternative. The Australian renewable industry is on a good trajectory.

In recent years, Australia has seen a sharp spike in construction of renewable energy. Wind now produces 20 per cent of South Australia’s power needs, with average growth in capacity of 35 per cent over the five years to 2011. A number of large scale solar projects have been proposed in recent times, while the nation’s rooftops are disappearing under solar panels — the three years to 2011 saw a 35-fold increase in solar panel installations. Stopping this rapid growth could have serious long-term implications for the effectiveness of our renewable sector.

It will be interesting to see how Hunt goes about hitting the RET. He might choose to lift the price of LGCs. He may move the RET goalposts, perhaps by lowering our target, or by moving the date by which renewable energy targets must be achieved. These moves are likely to be poorly received by the public.

Hunt has signalled at various times that he may intervene more directly in fossil fuel generation, perhaps by paying coal fired generators to close. Most of these efforts, incidentally, will have the effect of raising power prices.

Australia currently has a set of incentives that are working, driving investment in renewable energy and reducing pollution. Hunt intends to remove many of those incentives, but still intends to achieve the same targets. It remains to be seen how he will do that. Every day that uncertainty remains is another day during which investors will delay, and during which our polluters will have untrammelled freedom to keep on keeping on.

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