Australia’s carbon price has gone – but a UK review released this week shows that to lay the foundations for a low-carbon economy, pricing carbon is far from the whole story.
Over recent months, as Australia’s carbon tax repeal has edged ever nearer, expert voices from around the world have united in their support for carbon pricing. Both the International Monetary Fund and the World Bank back it; Nobel Laureate Joseph Stiglitz has called putting a cost on pollution a “no brainer”; and earlier this month 59 eminent economists signed an open letter urging the Australian parliament to keep the carbon price, to no avail. It might appear that, among experts at least, carbon pricing is a policy idea that is almost completely beyond reproach.
But a new report from the UK’s Committee on Climate Change this week provides strong evidence that simply putting a price on carbon – important though that may be - isn’t enough.
Lessons from Europe
In Europe, home to the world’s largest and nearly decade-old carbon pricing policy, the carbon price has collapsed. Despite this, progress has been made to lay the foundations of a low-carbon economy, with striking success in some areas.
Europe’s carbon price was introduced in 2005 and designed to be the central pillar of policy to guide low-carbon investment. The price, which in Europe’s case is established through a market for carbon permits, collapsed from a level of up to around €30 in early years of the scheme to around €4 in 2013. Commenting from the perspective of business, Shell’s chief climate change advisor David Hone said a year ago that the price is now “effectively zero” and that “investment is either not happening at all or is being driven by other factors and policies”.
Lessons have been learnt. It’s now understood that greater checks and balances are needed to ensure a trading system continues to produce a meaningful incentive to reduce emissions over time, and are factored in to the design of emissions trading schemes that have followed Europe’s lead.
But further changes are needed if Europe’s carbon price is to work more effectively, because as it stands it will not provide much of an incentive for emissions reduction.
A new UK government paper released this week recommends a number of solutions, including tackling the oversupply of emissions allowances in the market:
which, if not tackled, threatens to depress the signal for low-carbon investment for at least a decade and may increase the overall costs of meeting our future targets.
The UK has stressed its commitment to keeping the EU emissions trading scheme as the cornerstone of EU energy and climate change policy. But the good news is that while that work is underway, there are plenty of other ways to cut emissions in the meantime.
Progress in the UK
The new UK Committee on Climate Change review charts progress to date in the UK – and it found that a package of other policies, which are complementary to the carbon price, have made the greatest difference to UK emissions to date.
For example, in the power sector, a major step up in investment in wind generation has occurred, including establishing the UK as the world’s largest offshore wind industry. The underlying emissions intensity of the UK’s electricity grid – meaning the intensity that could be achieved if the grid were operated to minimise emissions - has dropped by around 40% since 2007.
The boom in wind generation is due to a mix of subsidies for low-carbon generators, supportive arrangements for associated infrastructure such as transmission lines, and changes to the planning system that expedited approvals. To build on this progress, a major reform of the electricity market has been designed to almost completely decarbonise power generation by 2030.
In the transport sector, EU legislation governing emissions has spurred manufacturers to deliver new cars in the UK with 20% lower emissions over a five-year period to 2012, meeting the legislated objective 2 years early.
In the longer-term a greater shift towards electric vehicles will be required. While numbers of electric vehicles sold remains low, models are now coming onto the market. Financial support towards the purchase cost is available, and infrastructure to charge electric vehicles also being developed.
In buildings, too, policy instruments go well beyond carbon pricing. Regulations were tightened in 2010 and again in 2013 to prepare for all new homes to be zero carbon by 2016. Also, the renewable heat incentive is the world first feed in tariff for low-carbon heating systems, which if taken up could put the UK on track to installing around 4 million heat pumps in homes by 2030.
More than one tool in the kit
While a strong, stable and rising carbon price is an important part of the policy toolkit, progress made in the UK is a reminder that many of the challenges of decarbonisation lie beyond the scope of the price mechanism.
In its advice for policy makers, the International Energy Agency makes this point:
A carbon price is generally considered necessary … However, it alone is not usually sufficient. The costs to society as a whole of decarbonisation over the short and long term can be reduced by implementing a package of policies including energy efficiency, technology development and deployment, and support to overcome underlying infrastructure or financing barriers.
The task ahead for Australia
In Australia, some of these other measures are already in place. For example, legislation to drive energy efficiency for lights and appliances was implemented in 2008 and is having a real impact on reducing emissions. As energy efficiency expert Alan Pears recently wrote on The Conversation:
the value of energy saved in Australia last year alone was around A$3.2 billion. Of this, some A$2.7 billion was saved by households … The Equipment Energy Efficiency program [also] reduced Australia’s greenhouse gas emissions by 13.5 million tonnes
However, across many major policy areas, such as transport and buildings, major policy gaps remain.
For example, passenger and other light commercial vehicles (known as light vehicles) contribute 10% of Australia’s greenhouse gas emissions.
Australia’s independent Climate Change Authority recently recommended raising light vehicle emissions standards between 2018 and 2025, because it would improve the fuel economy of cars, cut emissions and slash drivers’ fuel bills.
While the Climate Change Authority found that improving Australian vehicle standards could be expected to increase the an average new car’s cost in 2025 by about A$1500, drivers stood to win more than a five-fold payback, with fuel savings of about A$8500 over the life of the vehicle.
The proposed standard would also be expected to save 59 million tonnes of greenhouse gas emissions up to 2030, equivalent to the current annual emissions of all light vehicles around Australia.
Whether Australia decides to take a long or short break from carbon pricing is yet to be seen. But for all those wondering after this week’s axing of the carbon price – there is still plenty that Australia can do in other policy areas to lay the foundations for a prosperous and low-carbon economy.