Energy and the Earth

Energy and the Earth

Will the real Greg Hunt please stand up?

The Minister for the Environment, Greg Hunt, has claimed that carbon pricing should go because it has proven ineffective. But the data show quite unequivocally that carbon pricing has helped reduce electricity sector emissions by 18 million tonnes (or 11%) in just 2 years.

NEM emissions for all jurisdictions (in red) and for all jurisdictions less Tasmania (in grey), as reported in AEMO’s Carbon Dioxide Equivalent Intensity Index dataset. Note that Tasmania entered the NEM in 2005, but because of the negligible emissions associated with Tasmanian generation there is very little impact on total emissions. Data from AEMO, Image by Mike Sandiford.

To give him credit, Greg has been foremost amongst senior members of the Coalition in acknowledging his acceptance of human influence on climate change and the need to curb carbon emissions to limit global warming. He has been strong in advocating a market mechanism for abating carbon emissions. But try as he may to convince us that his Direct Action plan is his preferred mechanism, one suspects that, in his heart of hearts, he doesn’t really believe it.

The suspicion remains that if it weren’t for the implacable rhetoric of his somewhat more sceptical party colleagues he would much prefer to advocate an emissions trading scheme. In fact, had the previous government proposed Direct Action, one can well imagine Greg condemning it as the type of heavy handed government intervention that in opposition he and his party had been so scathing about.

But that is conjecture, and who cares for conjecture when the future is at stake?

Much more important is reason. Surely, that is the least we can expect from those we choose to govern us, especially now they happily proclaim the grownups are back in charge.

As noted above, one of the Minister’s key arguments in prosecuting the case against direct pricing of carbon, such as an emission trading scheme, is that Australia’s own experience shows pricing will not reduce emissions. That would indeed be compelling reason, if only it were true.

The Minister has used Treasury modelling to support his argument. In a background paper presented last year at a joint Melbourne Energy Institute-Grattan Institute seminar, the Minister claimed “the central flaw [in the carbon tax] is that it doesn’t do its job. Australia’s domestic emissions are set to go up not down.”

The Treasury modelling makes predictions about what might happen to future emissions based on various assumptions including electricity demand. With electricity demand predictions in shambles, one would think the Minister might like to test the modelling against some empirical data. It’s hard to imagine the Minister could lose respect from cabinet colleagues if he were to ditch the model because it didn’t stack up against the data. After all many of them have tried that logic to question the very basis of human impacts on climate.

As it happens, two full years on from the inception of the carbon pricing experiment, we no longer need to rely on modelling. We now have plenty of data to test against.

So in the spirit of federal Cabinet’s predilection for data over models, I’ll try an help Greg out, not for the first or second time, by asking the question “what is the data telling us about the effectiveness of carbon pricing on emissions in Australia?”

To do so I use data reported by the Australian Energy Market Operator (AEMO) related to emissions intensity of electrical power generation served on the National Electricity Market (NEM) [1]. AEMO’s Carbon Dioxide Equivalent Intensity Index data covers the period commencing 1st January 2001 and here I have aggregated the data by financial years for the years ending June 2002 through to June 2014, encompassing the 2 year period since carbon pricing was implemented.

Using the electricity sector is appropriate for this exercise, since it is the sector that is targeted almost exclusively by the existing carbon pricing arrangements. Importantly, those arrangements do not directly tackle the two other significant emission intensive sectors of the economy, namely transport and land use. If you are in any doubt about this, just listen to how the Minister happily substitutes “electricity tax” and “carbon tax” when referring to existing carbon pricing arrangements.

It is also worthy of note that the Treasury projections used by the Minister assess future emissions from all three sectors, not just electricity. As such they go well beyond the scope of existing carbon pricing arrangements. It’s just a touch naughty to pin anticipated emissions increases in agriculture and transport on the failure of a carbon price attached to electricity!

The bottom line is that electricity sector emissions are in steep decline. NEM emissions peaked in financial year 2008-09 at 188 million tonnes CO2-e, having risen consistently by about 2% annually until that time. In the last financial year (2013-14) NEM emissions were some 30 million tonnes lower than the peak. In percentage terms that is a total reduction of 17%, at an annual rate of 3.6%.

NEM emissions showing best-fit trends prior to and following the fall out of the GFC. Data from AEMO, Image by Mike Sandiford.

The total decline over the two financial years since carbon pricing is almost 11%, at an annual rate of 5.36%. That compares to the average of 2.5% annual decline in the three years immediately preceding the implementation of carbon pricing. The rate of decline has approximately doubled since carbon pricing commenced.

Annual percentage change in NEM emissions (red) and NEM less Tasmania (grey). Also shown are averages for the financial years ending 2002 to 2005 (red), 2006 to 2009 (green), and 2010 to 2012 (aqua) and 2013 to 2014 (purple).

That is a quite staggering turn around. Electricity sector missions are now already well below 2002 levels, and on current trajectory will be 5% below 2000 levels by sometime towards the end of this financial year - some five years ahead of schedule.

Clearly something has happened to curb emissions in a step-wise process, beginning around the time of the GFC and then again at the inception of carbon pricing.

The explanation the Minister gives is that emissions are falling solely because demand for electricity is falling implying it has nothing to do with carbon pricing.

And indeed, demand for electricity served on the NEM has been falling at about 1.9% annually pretty much since the time that emissions started to decline as the fall out of the global financial crisis took hold.

NEM total Sent Out Energy less Tasmania, showing the trends prior to and post the fall out of the GFC. Excluding Tasmania from this analysis give a more accurate trend for the pre-GFC years, but does not affect the post-GFC years. Data from AEMO, Image by Mike Sandiford.

If the Minister is right, and the emission trends were just reflecting electricity generation, then we might anticipate that emissions would fall at a rate proportional to the fall in electricity generation. We can test this using AEMO’s Emission Intensity Index which provides a metric independent of the actual amount of energy used.

If carbon pricing is effective then emission intensity index must have fallen. If it is not, emission intensity index must have stayed the same or, god forbid, risen. So the test of the Minster’s assertion that carbon pricing has not been effective is available in AEMO’s emission intensity data.

AEMO’s data show that prior to 2005, NEM-wide emission intensity was about 1.03 tonnes CO2-e per megawatt hour of generation. Emission intensity dropped to 0.97 once Tasmania joined the NEM in 2005, reflecting the very low emission intensity of Tasmanian hydro generation (factoring out Tasmania and the emission intensity and the other contributing states over the same period was 1.01, only marginally lower than pre-2005). In the three years subsequent to the GFC, NEM wide emission intensity averaged 0.92, and dropped again to 0.87 for the years following the carbon pricing mechanism in mid 2012.

NEM emission intensity (tonnes CO2 per megawatt hour) for the NEM as a whole (blue) and for the mainland states exclusive of Tasmania (brown) which only joined 2005. Also shown are averages for the financial years ending 2002 to 2005 (red), 2006 to 2009 (green), and 2010 to 2012 (aqua) and 2013 to 2014 (purple). The significant drop in NEM wide emission intensity in 2005 is an artefact of the incorporation of Tasmania, rather than a systemic reduction in emissions intensity of generation across the NEM. Data from AEMO, Image by Mike Sandiford.

AEMO’s emission intensity data provide a compelling tale of two-stage reduction in the emission intensity of our electricity supply, dropping about 5% in each stage. The first accompanied the decline in demand commencing around the time of the GFC. The second coincided with the start of carbon pricing.

As the Minister no doubt understands the reasons for the fall in emissions intensity are multifactorial, as outlined here. They include measures such as energy efficiency, the RET, and others that have some resemblance to direct action. In particular, the reduction in emission intensity following the fall out of the GFC can be attributed to a multiplier effect on demand reduction, of the kind that could likely be further obtained through a direct action targeted on reducing demand. That is because demand reduction has been accommodated by lower output from the most emission intensive part of the generation system, impacting particularly the generation that has relatively high short run marginal costs such as black coal generation in New South Wales and Queensland.

But the factors also clearly include carbon pricing which has contributed to a further reduction in emissions intensity by around 5%. In combination with the impact of declining electricity demand carbon pricing has helped reduce emissions by some 18 million tonnes.

While one might argue the case as to whether it is cost effective, to deny the role of carbon pricing in emissions reduction is to deny the facts of the case.

At 3.6% the annual average reduction in emissions in the electrical power sector since the GFC, sustained in part by the carbon pricing mechanism, is just a few points under the critical value of 4%. As pointed out here, 4% annually is what is required to achieve the 80% reduction in emissions by 2050 needed to avoid the possibility of serious and irreversible global warming.

As such Australia is already one of the leading international countries in terms of sustained emission reduction in the power generation sector, something any Environment Minister should be proud of. If Greg Hunt was able to replicate the astonishing electricity sector reductions in the transport and land-use sectors, then he would be truly worthy of the epithet “a great Minister for the Environment”.

To do so, the Minister must first choose to recognise that he really doesn’t need to do much to the arrangements in the electricity sector. They are already working quite nicely. But it would require him not only to acknowledge the data but, more troublingly, stand up to his peer group. And that would be something worthy of a “truly great Minister for the Environment”.


[1] The NEM comprises the states of Queensland, New South Wales, Victoria, South Australia and Tasmania, and so covers about 80% of the national electricity consumption. Tasmania only entered the NEM in 2005, and in doing so had a dramatic impact on the emissions intensity of the NEM, because it has by far the lowest emissions intensity of any states participating in the NEM.