The Turnbull government looks set to win approval in-principle from states and territories for the architecture of its National Energy Guarantee at Friday’s energy ministers meeting.
But a key detail of the design – the target for the electricity sector to deliver carbon emissions cuts of just 26 per cent from 2005 levels by 2030, in line with the target for the entire economy – remains as a sticking point.
Western Australian energy minister Ben Wyatt has shone a light on the elephant that will be in the room with energy ministers on Friday: if electricity is only doing its pro rata share of Australia’s Paris target, where is the plan for transport, industry and agriculture to do their share?
The answer is simple. There isn’t a plan for those sectors to do their bit.
Achieving abatement in some of these other sectors is extremely challenging and potentially very expensive.
The key reason for the discrepancy in the calculation of abatement targets is that most appear to misunderstand what a commitment to a 26 percent reduction by 2030 means in practice.
While the Paris commitments to emissions reductions are generally specified as a target by 2030, this target will be translated into a carbon budget for Australia for the decade, in the same way our Kyoto commitments were previously translated.
This is generally done through the development of a notional linear emissions trajectory, with our budget for the decade set as the area under this trajectory.
The final target is relatively unambiguous as this is how our commitment has been framed. A 26 percent reduction on 2005 emissions (597 Mt) gives a 2030 emissions target of 442 Mt.
However, the starting point for this emissions trajectory is where the water gets muddied. In simple terms, the higher the starting point, the larger the area under the trajectory (the carbon budget), the less aggregate emissions reduction and the easier it is to achieve.
At a national level, the Department of the Environment and Energy present the 2030 abatement task as being a linear trajectory starting at the end of the Kyoto trajectory in 2020 (marked by the intersection of the dotted lines in Figure 1.1 below). This is what gives rise to the estimated 868 Mt of additional abatement required to meet the obligation.
However, a different approach appears to have been used in sectoral modelling for the Government or Government-sponsored activities, including the Finkel review and the NEG modelling undertaken for the ESB.
In those cases, the starting point of the linear trajectory for the electricity sector commenced in 2020 at projected NEM emissions in 2020. As electricity sector emissions have already reduced significantly since 2005, this approach means very little remaining abatement would need to be achieved in the electricity sector post-2020 period.
This is reflected in the ESB NEG modelling only seeking 44 Mt of abatement over 10 years. This implies that the remaining 842 Mt of abatement will need to be achieved from sectors other than electricity.
Over the last decade, it has become apparent the electricity sector will lead decarbonisation efforts in our and other economies as new low emissions technologies have become available and the cost of deploying them has fallen markedly.
Therefore, a more sensible approach in determining an emissions budget by sector is, at a minimum, to pro-rate the remaining abatement task between 2020-21 and 2029-30 among each sector, based on its proportionate contribution to emissions under the Baseline Scenario.
This is shown in the table below based on emissions from the Department of Environment and Energy’s 2017 projections. Total Australian Baseline emissions are projected to be 5,648 Mt CO2 over the period 2020-21 to 2029-30.
Given a stated abatement task of 868 Mt CO2 to meet a 26% reduction, this implies an Australian budget of 4,780 Mt CO2.
The electricity sector accounts for 31% of the projected emissions over this period, so it seems sensible to require it to achieve 31% of the abatement (i.e. 268 Mt CO2) at a minimum.
Given that the NEM accounts for an estimated 82% of electricity emissions, it is also reasonable to assign it a pro-rata share of the 268 Mt CO2, although it should be noted that abatement from non-NEM grids may be more difficult to achieve.
This approach provides an abatement target of 220 Mt CO2 for the NEM. This is five times the abatement task the government and ESB have been using in recent modelling and undermines any conclusions drawn from those exercises.
An emissions budget for the NEM of 1,352 Mt CO2 is far too generous and puts too much reliance on other sectors which will likely increase the aggregate cost of meeting our 26% target. The NEM budget should be revised down to around 1,214 Mt CO2 for the emissions obligation of the NEG to make a proportionate contribution.
This approach is the absolute minimum abatement task which should be applied to the NEM as it is likely to be lower cost abatement than other sectors.
Decarbonisation of electricity is likely to be a precursor for decarbonisation of other sectors, especially transport where the shift to electric vehicles to reduce transport emissions requires electrical energy from low to zero emissions sources.
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Can Labor let this stand at the federal or state level? No. The renewables lobby is up in arms, also at the AFR:
The Smart Energy Council, an industry body, is preparing to campaign against the NEG and has pledged to target state and territories who sign up, while seeking commitments from the federal opposition for significant changes under a Bill Shorten-led government.
“They’re proposing a target that we’ve already hit. What it effectively does is place a cap on renewables and it removes the investment initiative and support for additional large-scale renewable projects to come on line,” he said.
“Actually doing the NEG is worse than doing nothing at all. It locks out the future and locks in the past, so why would our industry allow ourselves to essentially be kept in a box in the basement on the promise that one day, maybe, they’ll come and let us out?”
The NEG has still got to get past stage two, then get past the Cabinet, then get past the lower house, then the upper house, then the election.
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If it delivers that then Australia’s energy crisis will deepen as renewables dry up (other than rooftop solar) and no new coal power is commissioned triggering further price rises even as we blow through our Paris decarbonisation targets with a bullet.
I still don’t think it will get there. The world can’t be that MAD.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
