Despite its imminent demise, the carbon price has cut emissions

Emissions from Australia’s power network fell sharply as a result of the carbon price. Peripitus/Wikimedia Commons, CC BY-SA

Carbon emissions in Australia’s national electricity market would have been 11 to 17 million tonnes higher if Australia had not introduced a carbon price.

New research using the latest data indicates that the policy was working despite its imminent Senate repeal.

Over the first two years of operation of the carbon price (July 2012 to July 2014), carbon emissions are down by 29 million tonnes or 8.2% across the National Electricity Market compared to the two years prior.

The conclusion from our research is that the carbon price has been performing well in its main job: delivering emissions cuts in the power sector, which is the largest source of emissions and the sector with the biggest opportunity for cuts.

Besides helping to reduce power demand by households and industry, the carbon price has also had a strong effect on the relative costs of running different types of power plants, making highly polluting plants more expensive, and cleaner ones cheaper. Some black and brown coal generators have reduced their hours of operation; others have been mothballed.

We estimate that the emissions intensity (the amount of carbon dioxide released per kilowatt hour of electricity produced) of Australia’s power grid fell by 2-3% as a direct result of the carbon price, while demand fell by 1-2% and overall emissions by 3-5%. This is a conservative estimate.

Electricity demand and emissions have both fallen since the carbon price came into effect. O'Gorman & Jotzo, 2014

Beware of misleading numbers

When the political stakes are high, as in the case of the cost of carbon pricing to the economy, misleading statements can be common. Opponents of the carbon price have wrongly equated the total value of emissions permits with the cost to the economy. In truth, selling permits generates revenue which the government can use to cut income taxes, for example. Also, almost half the permits are given away to industry for free anyway.

The actual economic cost is much smaller than the value of permits, or the tax take. Pretending otherwise is like calling the Goods and Services Tax an A$80 billion dollar cost to the economy, which of course it is not.

Stable policies needed

Political uncertainty dogged the carbon pricing policy over its entire existence. As a result its effect was not as great as it would have been under a stable policy framework.

It is likely that investment decisions were not much affected by the actual carbon price, because of the widespread expectation among industry that the carbon price might be repealed.

For investors in assets with lifetimes of several decades, what matters most is the expectation of policy settings over the medium to longer term.

That said, the fact that a carbon price exists will encourage businesses and householders to look for options to save energy and shift to lower-emissions equipment, fuels and processes.

The estimated effect of the carbon price on emissions. O'Gorman & Jotzo, 2014

The prominence of the carbon price in Australia’s political rhetoric over the past few years may have done as much to make people aware of power-saving opportunities. For companies, carbon pricing ensures that emissions become an item in financial accounting, giving the issue greater salience in company decisions.

If we are serious about moving Australia’s economy to a low-carbon footing, we need a stable policy framework that creates economic incentives to cut emissions. Major international economics agencies, such as the OECD and the International Monetary Fund, are recommending that governments introduce carbon taxes or emissions trading schemes.

Don’t dump the architecture

But what are the chances of getting carbon pricing back in Australia? Australia’s climate change policy has been bitterly divisive since the Rudd-Turnbull deal on emissions trading fell apart in late 2009. It has cost several political leaders their jobs.

Years and careers have been spent in negotiations with business and government, poring over the minute details of the carbon pricing architecture. More political capital was invested in developing this policy than any other in recent Australian history.

The tragedy in the repeal of the carbon pricing mechanism is that this architecture may now be lost. It seems unlikely that future leaders of either party will summon the force of will needed to introduce a carbon price again anytime soon.

By getting rid of it we are sending the worst possible message to other countries. It is a worldwide first for a national emissions trading scheme or carbon tax to be abolished; no other country is planning such a move. Most big emitters, such as China, are going the other way.

A better option, under the parliamentary circumstances, would be to follow Clive Palmer’s suggestion of keeping the emissions trading system but at a price of zero. The plan is yet to be considered by the Senate, although the proposal to wait for India to get on board before raising the price may doom the plan.

Here to stay

Climate change won’t go away as a policy issue in Australia. The world’s major countries – including China and the United States – are pushing ahead with policies that will clean up their energy systems and modernize their economies, and cut carbon emissions in the process. All countries are expected to put their pledges for a post-2020 international climate agreement on the table in early 2015.

Australia will not be able to hide in the international arena. And voters, having abandoned the issue in 2013, may once again demand credible climate action.

But we are likely to find ourselves in the realm of second-best climate policies. We may see more regulatory intervention, perhaps even in the power sector as the US administration is planning. These can be effective, but tend to cost more than an economy-wide price signal. Subsidy-based policies like Direct Action might rise but they are inefficient and limited in their reach.

Just like the Obama administration, future Australian governments may find that the politics of climate policy is too poisonous for a rational economic approach.

The one ray of hope lies in Australia’s tradition of putting itself in the vanguard of economic reform, from trade liberalisation to deregulation. Perhaps a future government will find the courage to reinstate a wide-ranging price incentive to cut emissions.

But one thing’s for sure: they had better not call it a “carbon tax”.