Australia's vanishing carbon target

Business Spectator
Tuesday 8/6/2010 Page: 1

There's a middle-aged Irish joke about a lost tourist trying to get directions from a remote-living yokel to which the punchline is "Well, if I was you, sir, I wouldn't be starting from here." If you read the new report on Australian carbon abatement from the Climate Institute Australia and Westpac commissioned report from the American Bloomberg New Energy Finance consultancy, that crack takes on a modern, local resonance.

Bloomberg NEF point out that, as things stand policy wise, Australia is likely to miss its unilateral greenhouse gas emissions target for 2020 by around 170 million tonnes. This is a goal dreamed up by the Rudd government and subsequently embraced by the coalition - but how to get there from here is a question that voters should be posing to both sides come the federal election.

The Bloomberg NEF figuring goes like this: As of 2008 (the latest data) Australia's annual emissions under Kyoto Protocol accounting rules totalled 581 million tonnes. Plot a business-as-usual trend and the emissions total in 2020 will be around 720 million tonnes, requiring government to find 195 million tonnes of annual abatement. Factor in the renewable energy target and you can cut this by 23 million tonnes a year.

"What is evident," says Bloomberg, "is that, in the absence of real or implicit carbon pricing across the power sector, the volume of low-cost, carbon intensive coal-fired generation remains relatively constant in the mix over the decade." The report echoes a key point made by Origin Energy CEO Grant King to last month's upstream petroleum industry conference. He said that in the absence of a policy to make gas more competitive with coal, the amount of new gas plant is "likely to be moderate" and the addition of more renewables to the generation mix is likely to displace gas-based supply. The point is that the running cost of gas-fired generation is greater than that of black or brown coal generation, meaning the lower-emitting plants are the first to be pushed out of the eastern seaboard wholesale power market as renewables are added to the mix.

As Bloomberg NEF point out, the RET was intended to work in tandem with a carbon price and it is the latter that would enable new gas generation to drive the higher-emitting and most inefficient coal plant out of the market while also meeting the demand for additional baseload production. Leave aside the rather far-fetched (and cripplingly expensive) environmental movement ideas for massive investment in renewable generation. The more immediate issue is that both sides of Australian politics have taken on a commitment on the world stage for abatement by 2020 and neither has a plan B to get within coo-ee of what is promised.

What's more, the public has yet to have brought home to it that the carbon price needed to shift abatement towards this target will be well beyond the level of Treasury ETS modelling on which Rudd, Swan and Wong based their promises of household compensation - it will need to be at least 50% higher. At which point the wheels may start to fall off the energy intensive manufacturing cart with what implications for federal tax revenue? Join the dots from here to what the miners are threatening for the impact of the new rent tax and it is not a pretty picture. Toss in the economic impact, especially from mid-decade, of the ever-growing transport fuels trade deficit and it could be still worse.

For one, I don't take much comfort from Treasury's resident wombat botherer claiming in ever more overtly political statements that all will be well. Getting to our preferred destination from where we now are looks like an increasingly rocky road to this traveller.