Carbon emissions: “Charismatic abatement” lacks compelling numbers

The latest Productivity Commission 5-year productivity inquiry report has again starkly highlighted the high indirect carbon costs of a range of fragmented government policies that have emerged to achieve emission reductions in the absence of explicit carbon pricing.

Volume 6 of the final report – Managing the climate transition – includes an updated and detailed analysis of the estimated cost per tonne of various measures introduced to address carbon emissions across Australian jurisdictions (see table 1). It builds on an interim report released in October last year and is the second of the Productivity Commission’s inquiry final reports, with the first released in 2017.

Unsurprisingly, the Productivity Commission reaffirms its view that economy-wide settings that produce enduring incentives to achieve “credible” abatement are the most cost-effective for Australia. In contrast, it finds piecemeal interventions aimed at specific sources of emissions or technologies lead to greater overall abatement costs than is necessary.

While the Federal Government’s recently agreed Safeguard Mechanism reforms will be the centrepiece driving Australia towards its 2030 and 2050 emissions reductions targets and could help shift the country to a lower cost approach in doing so, the report warns that ongoing use of ad hoc sectoral policy measures “will unnecessarily reduce productivity growth and living standards”. We take a look.

How did we get here?

The dramatically named “climate wars” that have prevented the emergence of a bipartisan approach to climate policy have also led governments from all jurisdictions to introduce and maintain alternative abatement policies. Those policies have included federal and state renewable energy targets (RETs), solar feed-in tariffs, energy efficiency trading schemes, public funding for sectoral abatement projects, and various tax concessions for biofuel production and electric vehicles.

In the Productivity Commission’s assessment some of the higher costs come from what it labels as a “charismatic abatement” problem – this is where government support is directed towards more visible and more politically popular technologies and approaches, even though they come with a higher cost of carbon abatement. In the words of the Commission:

“This charismatic abatement problem might help explain the high levels of government support provided to home solar panel installation during the late 2000s, and the high levels of government support being provided to electric vehicles today, despite these being some of the highest cost abatement options available.”

All of the jurisdictional policies impose an indirect or shadow carbon price on the economy “many higher than would be expected to be delivered via an emissions trading scheme”. The Commission’s report calculates the carbon cost implied by the indirect approaches that have been adopted (see table 1).

Table 1 Indirect Carbon Prices from Selected Policies

Source: Productivity Commission 

The Commission is not the first independent government body to point to the additional costs and implications of a fragmented or technology-specific approach. In its original Retail Electricity Pricing Inquiry – Final Report[i] the Australian Competition and Consumer Commission (ACCC) pointed to very generous solar feed-in tariff schemes “that paid consumers many multiples of the value of energy produced by their systems.” This meant that the “substantial” costs of the schemes were passed through to all electricity users (as shown in figure 1).

Figure 1: Environmental Costs in residential bills, 20017–18, (real $2016–2017)

Source: ACCC

Because solar feed-in tariff schemes can have a distributional effect on energy affordability, the ACCC at the time argued that any costs remaining from premium solar feed-in schemes should be carried by state governments through their budgets rather than all customers. It also recommended the small-scale renewable energy scheme (SRES) be wound down and abolished by 2021 to reduce its impact on consumer prices. These recommendations were never accepted.

EVs

Demand-side electric vehicle (EV) policies are also highlighted in the Productivity Commission report. As we noted previously the high effective cost per tonne of abated carbon of government measures to support EV uptake stands out in the cost estimations. A notable change since its interim report is the estimated carbon cost implied by the introduction of the exemption of EVs from fringe benefits tax. At the same time earlier calculations of the range of costs of state-based EV subsidies have been adjusted and are now lower. The estimations reflect the fiscal costs per tonne of abatement, not the broader economic cost per tonne of abatement, which would include the impact of reduced revenue as a result of tax concessions. The new estimations also reflect greater consideration of abatement from EVs in the second-hand market.

Regardless, the abatement costs are still relatively high and reflect the current uptake of EVs. EVs will be able to leverage the decarbonisation of the electricity system and given EV subsidies are designed to incentivise future uptake, as more EVs are put on the road as a result of these support mechanisms the overall effective carbon price should fall further.

Increased use of renewables as a power source for charging EVs would also have an impact and reduce the estimated abatement costs. The Commission states that if only renewable energy charging occurred for EVs it could reduce the indirect carbon abatement cost by between 8 and 33 per cent. It goes on to note, however, that demand-side EV subsidies would still be “amongst the most expensive options for emissions abatement”.

Double Whammy?

Aside from the assumed indirect costs of carbon abatement approaches that are not targeted economy-wide, the Productivity Commission argues that the less visible approach to climate policy also risks exposing Australian industry to additional carbon pricing overseas through mechanisms like the EU’s Carbon Board Adjustment Mechanism (CBAM).  The EU scheme may only recognise direct carbon prices faced by foreign producers. While the CBAM may have only limited reach for Australia, the impact would broaden if other international jurisdictions follow the EU’s example. On that basis the Commission sees a risk that the economy could be exposed to the higher cost of the indirect carbon policies as well as imposition of direct carbon prices on exports.

The Productivity Commission has again provided good insight into the hidden costs to date resulting from some of the more politically expedient carbon policy approaches that have been adopted in Australia. Hopefully the Government’s Safeguard Mechanism can go some way to redirecting our efforts to where they are most valuable.

[i] Restoring electricity affordability and Australia’s competitive advantage, ACCC, June 2018.