Picking losers

For some time now, there has been bipartisan support for a 5% reduction in emissions from 2000 levels, and Australia has committed this abatement effort under the Cancun agreement. Although it may sound small, a 5% reduction actually represents a very substantial abatement effort. In absence of mitigation policy, emissions under a “business as usual” scenario would increase by over 20% to 2020; this is because the business as usual scenario sees us continue to power our industry and households predominantly by emission-intensive coal-fired power. So the target requires 160 million tonnes (MT) of abatement, from 690MT down to 530MT, a cut of a quarter of the nation’s emissions.

If the abatement task is taken as a given, attention must then turn to the means of achieving this objective. Generally speaking, the policy options fall into two groups, market-based (or price-based) mechanisms, and regulatory controls. The Shergold Report, commissioned by and delivered to the then Prime Minister in 2007, noted that:

Financing subsidies and specific project-based interventions also impose costs on society from their use of taxation. If these approaches were to be used extensively to achieve large-scale abatement, the economy would suffer losses in economic and administrative efficiency. In contrast, market-based approaches to emissions abatement involve the explicit pricing of emissions, allowing the market to determine the cheapest source of emissions reduction.

I thought it would be useful to revisit this concept and illustrate it with some examples. A variety of suggestions have been made on how such an abatement target can be made. Two suggestions doing the rounds are putting solar panels on every Australian roof, and shutting down the Latrobe Valley brown-coal generators. So we will examine the cost of these and the resulting abatement.

Firstly to solar, if we put 1.5kW of panels on 10million homes, it will cost around $8,000 per home or $80billion in total. On average, each of these panels would produce about 2 megawatt hours of energy each year, and displace roughly 2 tonnes of emissions each year. The cost of this initiative, including financing cost, would be around $8billion per year, resulting in emissions savings at $400 per tonne of abatement. This is extremely high cost of abatement when compared with a carbon price to achieve a 5% target of around $20-30/tCO2e, according to Treasury and Garnaut Review (2008) modelling.

Secondly, to shutting down the brown coal-fired generators. Bearing in mind that this installed capacity is critical to the security of energy supply across the National Electricity Market, this scenario can only be considered in the context of building replacement capacity at the same time. Therefore, the scenario being considered is replacing 6,000MW of coal-fired generation with equivalent baseload, but low emission, power. Nuclear remains the only baseload low emission option currently available, but it is more expensive, with new nuclear plants costing around $3-5 million per MW. In addition, the payments to “stranded” coal-fired power to have them shut down could be around $1.8-2.2million per MW. In total, this exercise would cost around $30-40billion and save about 60 million tonnes per annum, so a resulting cost of $50-90 per tonne. Again, this is much higher cost than predicted under a carbon price and it also only results in just over a third of the required abatement. In addition, electricity prices would need to rise in order to fund the higher cost of nuclear power relative to coal-fired power.

I would contend that neither of these two abatement options are cost-effective uses of taxpayers’ money. This scenario analysis serves to demonstrate the inefficiency of determining a priori the best way of meeting the abatement challenge. When the abatement challenge is left to the innovation of all players in the economy, it is likely to result in meeting the abatement challenge at least cost.

This should not come as a revelation. Quoting again from The Shergold Report:

Market-based approaches have the potential to deliver least-cost abatement by providing incentives for firms to reduce emissions where this is cheapest, while allowing the continuation of emissions where they are most costly to reduce.

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Comments

  1. Aptly named; Picking losers
    No doubt who the economic losers will be.

    http://macrobusiness.com.au/2011/04/power-hungry-china/

    [China-based analyst was showing a slide of the projections of the growth in “low carbon” energy out to 2015. It was startling: 40 gigawatts nuclear power, 63 gw for hydro, 22 gw for gas fired, 48 gw for wind, 50 gw for solar and ….. 260 gw for coal generation.”]

    So you propose to pay ETS ‘indulgence’ on our behalf to the climate gods and at the same time export millions of tons of coal to China, tax free.

    What a wonderful idea.

  2. What about CCGT? Can handle baseload, can be built 3-4 times cheaper than nuclear without the waste issues and produces 50% of the emissions of a coal plant. Remember, we don’t *need* zero emission power generation.

    Instead of paying operators $2mn/MW to shut down coal plants, make them a deal: they turn off the coal plant, we (the Govt.) build a new CCGT plant of the same MW (@ $1mn/MW) and hand it over to them to run.

    Start w/ the least-efficient plants, some of which are apparently emitting 1.75kgCO2/kWhe versus 0.4kg/kWh for CCGT.

      • Combined cycle gas turbine (CCGT) could be money wasted. Why not go straight to renewables and save time?

        • Treasury’s 2008 analysis puts the cost of construction of CCGT at $1mn/MW, Hydro at $2m/MW, wind at $2.5m/MW, nuclear at $3.5m/MW, solar thermal at $5m/MW and solar PV at $7.5m/MW, so on a pure cost basis CCGT wins hands down.

          Furthermore, most renewables-based baseload power generation appears to be at theory/pilot stage whereas CCGT plants are in production now.

          Given an approx. operating life of approx. 30 years, perhaps we could deploy CCGT now to meet our immediate 2020 targets, buying us another 20-30 years before we roll out zero-emission renewables in order to hit the much tougher emissions targets being talked about for 2050?

        • Alex Heyworth

          The other argument against going to renewables as the only response is the scale of the construction task that would be required. It is probably not even feasible, at this stage, to build the required number of windmills and solar power plants that would be required in the time available. There are a couple of reasonable analyses around, one by Roger Pielke Jr and another on the Brave New Climate website.

  3. The Ancient Investor

    One thing that is missed by commentators on the solar PV option is the interesting rise in energy efficiency of those with solar panels. Several households I know with solar panels have become electricity misers reducing their electricity consumption by 50-90% (post-installation versus pre-installation) so that their panel system can earn a few dollars on the FiT schemes. That has to make the contribution to lowering carbon through solar PV better.

    Also the carbon dioxide issue is far less pressing than figuring out what we are going to be using for liquid fuels and fertilizers in the event of the Peak Oil scenarios being correct. Peak Oil will happen a lot sooner than climate change from carbon dioixide emissions.

    • Also the carbon dioxide issue is far less pressing than figuring out what we are going to be using for liquid fuels and fertilizers in the event of the Peak Oil scenarios being correct

      Fertilizers are made using natural gas, not oil, so that’s not a worry (yet).

  4. A couple of comments/questions.

    a ) As ancient advisor notes moving away from our current base of energy inputs specifically oil has other advantages not just environmental.

    b ) In other countries large industry is incentivised to do R&D in other areas to avoid taxation. This is something I have talked about before in regards to robotics in Honda.

    http://macrobusiness.com.au/2010/05/asimo-and-the-oz-mining-tax/

    A similar program aimed at our big miners could easily see joint venture programs setup to do research in alternative energy programs in-parted funded by mining taxation ( or at least the threat of it )

    c) The solar mentioned in this post is large numbers of small scale installations, what about the reverse. A small(er) number of very large installations, it isn’t as if we don’t have the land.

    d) China’s 5 year plan stats they are aiming for 48 gw for wind, 50 gw for solar. Can someone explain why Australia does not have the capacity to deliver similar ?

    e) I think arguments based on “cost-effective uses of taxpayers’ money” are somewhat interesting given that we currently accept a situation where the “taxpayer” pays $10 billion a year for people to “invest” in houses. This proves that the government has the ability to make loss making enterprises attractive to investors. It is just a matter of adjusting policy to make it so.

  5. Would a “global tax” on all fossil fuels work? Upon purchasing the raw fossil fuel an international tax is paid by the company to the resource company to offset the carbon it will eventually create.

    The resource companies become the tax collectors….

  6. With Solar, we have the issue of the Govt offering their rebates artificially inflating prices. (Just like pink bats)

    I can buy solar panels direct from China @$1.5/kw. So a 1.5kw system panels would cost $2250. Inverter $500. Wires/ frames / freight/ other things $750. Comes to $3500.

    The normal price in Aus is $8000 as U mentioned. (Thats about right) Therefore installation equates to $4500. Yeh sure. Say $1000 for install, and we get $4500,

    Govt wastage of $3500 per unit with the Govt being involved offering the current system.