Emissions Trading

Not all carbon pricing schemes are the same

Contrary to all the scare-mongering about carbon taxes or an Emission Trading Schemes (ETS) from political & industrial vested interests, in the electricity sector at least (responsible for about a third of Australia's greenhouse emissions in 2017), there's a simple, pragmatic way to encourage emission reductions without incurring large electricity price increases and economic disruption — you simply apply price signals at the margin, for those emissions you actually want to stop, and avoid applying a tax to the majority of emissions that you're willing to tolerate (“permit”) continuing for the time being.  And these marginal price signals (i.e. incentives for customers or clean power producers) can be provided as subsidies (rather than price increases), funded by very small price rises on remaining emissions (plus any revenue raised from penalties for non-compliance with permit levels).

This approach is equivalent to "recycling" carbon tax receipts as energy subsidies, but without the Government ever receiving tax revenues.  Instead, the economic incentives can be efficiently applied through competitive energy retailers, so those that help their customers reduce emissions at least cost will offer the lowest priced electricity (especially if they use solar + batteries, which were cheaper than 2016 tariffs in Australia anyway, and in many other countries).

Another advantage of this approach is that up-front subsidies for investments in green technologies reduce the artificial risk on investment returns posed by potential future political/policy changes (which are more significant for a carbon tax, or emissions-trading schemes with similar price impacts, where investor returns depend on policies not changing market prices for many years into the future).

See the detailed discussion & analysis in the following papers:

• My first policy paper from 1997, Carbon Taxes, Tradeable Emission Permits and “Feebates”, which explained the advantage of permits over a carbon tax, challenged the hype about tradable permits, and suggested a "feebate" ETS — where a carbon price is applied as fees for energy retailers with above-average emissions, which then fund rebates for those below average (thus giving fees + rebates = feebates, with no net "tax" revenue).  This would address the problem of permits not creating an incentive to reduce emissions below the permitted level.

• This follow-up paper distributed at Federal Parliament on 23/8/97 calculated the price impact advantage of a permit scheme that effectively recycles carbon taxes, compared to ABARE's biased economic modelling that was used to mislead Kyoto Protocol negotiations (my critique rattled ABARE & drew pressure on my University from them, but impressed a close adviser to PM John Howard).

• My subsequent refined paper in 1998 further explains the "real advantage of permits" – theoretical & practical – in terms of reducing unnecessary economic disruption.  This paper was also added to my 1998 submission to a Federal Inquiry, which discussed methods of permit allocation in depth (which should ideally encourage energy efficiency measures – like more efficient air conditioning – as well as renewable energy generation, and for energy-hungry businesses could be based on their "value-add" or GST liability).

• My 2007 paper, "A New Combined Cap & Credit Emissions Trading Scheme", advocated a non-linear permit price/subsidy/credit that's higher for zero emission technologies, or similarly, a hybrid ETS that combined a general ETS with a modest carbon price (applied to all energy sources), along with additional targets & premium incentives for very low to zero emissions generation technologies (like renewable energy), which may not offer the cheapest immediate emissions reductions, but which need to grow and achieve economies-of-scale in order to  cost-effectively achieve long-term emission targets.

  • However this level of complication seems no longer necessary because the costs of renewables – especially solar PV & batteries – have now fallen so low (see the following charts or here), and continue to fall, that in 2019, wind & solar energy were the cheapest forms of power in two-thirds of the world (and the cheapest new power option in Australia in 2023, including storage), and even below the marginal operating costs of existing coal-fired and nuclear power stations (with new renewable energy capacity including battery storage expected to be cheaper than operating 60% of the world’s existing coal-fired capacity in 2022 – thanks to battery costs falling 90% in less than 15 years – and even large-scale storage like pumped-hydro being less of a problem than many people seem to think, with many potential sites being next to existing reservoirs, and synergies available from hybrid systems operating in parallel with relatively high-power/low storage batteries).

Guiding the market to better, integrated customer service

Finally note that although the primary objective of an emissions-trading scheme is of course to reduce emissions, a well-designed scheme applied to energy retailers could also transform the industry from one selling a commodity product and competing primarily on price (a mug's game that results in very low profit margins), to a higher value-add customer-service model — which the industry competition reforms of the last few decades were supposed to deliver, but haven't done so very well because despite all the political hype, most customers can't be bothered changing retailer to save only a few dollars!  The ramifications therefore go well beyond just emissions reductions as they could address the sort of unethical practices I've experienced from AGL, who charged me $1,200 for gas caused by a leak, then fobbed me off for a year to 3rd parties (like Jemena, who they contracted to fix the leak but then claimed they couldn't contact to resolve my problem!).

Ideally regulation should hold the retailer accountable for all aspects of the service, but I suspect it doesn't because politicians are captured by the votes of the many small-business plumbers who want customers to be allowed to contract with them for repairs, and not just the big retailers. But if AGL had any ethics and commercial sense, it would step up to customers and say, "Hey, we guarantee to be accountable for all aspects of service delivery, as long as you only use us or our licensed partners for all gas systems connected to our service." — then they could transform their business into a genuinely customer-focussed, comprehensive, value-adding energy service!