Abbott's cutting carbon already

There are a couple of political bombshells buried in a presentation Origin Energy chief executive Grant King made to the Macquarie Australia Conference in Sydney yesterday.

The first is a ringing endorsement of the Gillard government's approach to carbon pricing – one problem, one national solution to replace myriad state and federal emission reduction programs.

The second is to reveal a bit more wriggle room for a future Abbott government in hitting the '5 per cent by 2020' cut in carbon emissions – a target agreed to by both sides of parliament.

Both these points stem from a key theme in King's presentation – that as a nation we've done a bit too well in installing renewable energy, and cutting energy use.

Well, that was always going to be the view of our largest energy retailer, but the facts are independently verified nonetheless. Estimates published by the Australian Energy Market Operator – which runs the National Energy Market to trade power through interstate transmission lines known as 'interconnectors' – show that we won't be using as much power in coming years as we expected in 2009.

There's a nice chart on page 13 of the presentation, published as an ASX announcement yesterday, showing forecasts for the years ahead being revised up each year until 2009, but being revised down each year since then.

King's point in the presentation is that if we're using less energy, then the government's renewable energy target (RET) needs to be reduced. Currently the RET target is fixed at 20 per cent of our electricity to be supplied by renewable energy sources by 2020 – but when that target was set, it was calculated on AEMO's forecasts at the time, not the now-reduced forecasts for energy use.

Compounding the problem, as Origin sees it, is that wildly successful state and federal subsidies have seen solar panels popping up on rooftops across the country. Their contribution is not counted under the RET program, so when we hit '20 per cent' renewables in 2020 (which we are on-track to do), the small-scale renewables will bump that figure up to '26 per cent by 2020'.

King yesterday called on the government to call a spade a spade – to recognise that 20 per cent of our overall power from renewables is enough at 2020, and the 26 per cent imposes unnecessary costs on power consumers who are already struggling to pay their bills.

To get back to the political implications, King's endorsement of the Gillard carbon pricing model was clear: "Rationalisation of carbon reduction policy in Australia would help mitigate cost pressures for households and businesses ... Unaligned and multifaceted carbon reduction policy results in sub-optimal long-term investment decisions [and] increased costs for consumers ... Policy consolidation is now possible with the introduction of the carbon price on 1 July, 2012."

King called for policy makers to: "Rationalise state-based energy efficiency schemes; rationalise/abolish state-based carbon reduction policies; confirm or bring forward current planned reductions in the small-scale renewable energy scheme (SRES) multiplier."

The SRES scheme, King pointed out, was planned to generate 8 million carbon abatement certificates a year, but is in fact generating 45 million a year – in crude terms we've stuck about five times as many solar panels on our roofs (give or take a small-scale wind generator or two) as was planned.

The Clean Energy Futures package – known fondly by the national media as the 'carbon tax' – is a relatively simple and least-cost way to sweep aside all the itty-bitty carbon reduction schemes. One problem, one national solution that responds to market conditions – after 2015, that is, when the fixed-price 'tax' of $23 a tonne switches to a floating price that, as the European trading scheme has shown recently, makes permits very cheap indeed during times of economic hardship.

That's the kind of mechanism that makes it easy for Grant King to do business – plan investments and meet a set renewable energy target without additional market distortions from small scale schemes. So whatever else Labor is doing, the CEF gets a tick from Origin.

But King's presentation is also good news for the opposition. As my colleague Tristan Edis has explained in recent days, the Direct Action policy being championed by Tony Abbott and shadow climate minister Greg Hunt, is comprised entirely of itty-bitty 'incentives' for companies not emitting something they might otherwise have emitted.

Edis is right to call for "[a Coalition government to set up] an institution to audit Australia's progress to its emissions targets, with the board appointed by parliament rather than the government ... [more detail from the Coalition on] the level of the financial penalty firms will face for exceeding agreed emissions baselines ... [and] a transparent, rules-based approach to acquiring abatement".

Without those three things, Direct Action is little more than a hoax. With those three things it would be as efficient, in costs terms, as possible – but still more expensive per tonne of carbon abatement than an ETS or carbon tax. Markets, it's fairly well accepted these days, deliver outcomes more cheaply than command-and-control style regulation (sigh).

But even assuming Abbott wins government, wins the double-dissolution election required to repeal the CEF legislation, and implements Edis's suggestions, Direct Action might not quite hit the 5 per cent target by 2020.

And that's why King's presentation will be music to Tony Abbott's ears – his 'carbon tax bogey man' act, which been so toxic for Labor in the opinion polls, might just have had a material effect in reducing energy consumption. With a tax THAT BIG coming, let's conserve power!

Hence the AEMO revisions? Those scaled down forecasts make it easier to hit both the RET target and the '5 per cent by 2020' – even with a command and control policy.

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