CLIMATE SPECTATOR: Australia's back-seat power trip

The US and other countries are likely to take Australia for a ride on energy policy, irrespective of who wins government in September.

Climate Spectator

Last week I was asked the question, what do you really think will change in terms of energy and climate change policy under an Abbott government? At the time I thought – a lot.

But after listening to President Obama’s State of the Union speech it got me thinking there’s a possibility it won’t be that much. To a large degree Australia will get taken along for the ride as the four major global energy consumers, Europe, the US, China and Japan, shape the global market for energy and energy technology.

Motor vehicles

Australia’s motor vehicle fleet technology is almost entirely driven by Europe, Japan and the United States.

Obama stated in his speech yesterday, "I propose we use some of our oil and gas revenues to fund an Energy Security Trust that will drive new research and technology to shift our cars and trucks off oil for good.”

Sounds great, but it’s a pipedream. Despite this, Obama has already enacted standards that will drive a dramatic improvement in the fuel economy of the US fleet, while Europe and Japan also have ambitious CO2 standards, as illustrated below.

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Source: ICCT

Australian standards lag considerably behind the rest of the world, yet Australian consumers will find themselves increasingly tempted with highly fuel-efficient, yet still high performing, vehicles. In addition, global sales of large capacity six and eight cylinder engines will decline as a result of these CO2 standards. With lower sales volume there will be less engineering attention on their technological development and higher manufacturing costs due to the importance of economies of scale in this industry.

Australian consumers may find themselves conforming with what the European, US and Japanese markets demand because that’s what economies of scale dictate.

Coal is facing major headwinds

In spite of an anaemic carbon price in Europe and no national carbon price in the US, coal is on the way out in these two regions. This is because increasingly stringent air quality (not CO2) regulations are near on impossible for many existing coal plants to meet, and large numbers will shut down. Cheap shale gas in the US and growing levels of renewables in Europe are also squeezing coal out of business.

On top of this President Obama, contrary to what the Coalition would have you believe, has not abandoned some form of emissions trading scheme. Yesterday he stated, "I urge this Congress to pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago.”

Of course Obama’s chances of getting such a bill passed are slim under the current make-up of Congress. Nonetheless, he isn't going to let a recalcitrant Congress stop him, stating, "... if Congress won’t act soon to protect future generations, I will. I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution … and speed the transition to more sustainable sources of energy.”

Obama, via the Environmental Protection Agency, has already imposed emission standards on new-build power stations that have for all intents and purposes banned new coal power stations.

And according to the Natural Resources Defence Council, the US EPA can use the existing Clean Air Act to impose requirements on existing power stations that would indirectly act to create a power sector emissions trading scheme.

So Europe and the US look pretty grim for coal, but this hasn’t really mattered to date because China’s growth in coal consumption completely overwhelmed these losses. But this could be about to change.

Last week it was reported by Fairfax Media that China’s state council has agreed on a target for energy demand in 2015 that would abruptly reduce energy demand growth across the board, and act to cap coal consumption at levels just a fraction above what they are today. It’s hard to explain just how huge the implications would be if the Chinese government were to succeed. China’s projected coal demand growth to 2020 is larger than the rest of the world combined. It would imply a huge leap in energy efficiency and also large-scale acceleration in renewable energy.

Equipment and appliance energy efficiency

Australia’s fridges, lights, computers, televisions, motors, pumps etc. are almost entirely imported.

Yesterday Obama issued a goal to "... cut in half the energy wasted by our homes and businesses over the next twenty years.”

The US will not be alone. Japan's top runner program has consistently pushed the envelope on appliance energy efficiency. Plus China, the major manufacturer of many of our appliances, will have to significantly lift its game if it is to meet its aggressive energy efficiency targets.

Australia’s energy efficiency regulatory standards are tied to matching world’s best practice and this was the case under the Howard government. Australia will be able to piggy-back off these other countries, although we need to do it an awful lot faster than we’ve done in the past.

Renewable energy

President Obama observed, "Four years ago, other countries dominated the clean energy market and the jobs that came with it. We’ve begun to change that. Last year, wind energy added nearly half of all new power capacity in America. So let’s generate even more. Solar energy gets cheaper by the year – so let’s drive costs down even further. As long as countries like China keep going all-in on clean energy, so must we."

Europe, China, Japan and the US are in a major battle for industrial supremacy in renewables, with major spillovers to Australia.

In spite of repeated cuts to Australian government support programs, Australian households have found the declining cost of solar systems mean they continue to represent a superior financial option to buying their energy off the grid. The US, Europe, Japan and China have now created a photovoltaic industry with such economies of scale that it is now a readily affordable consumer item you can buy on your credit card. While government policy is still very important to the uptake of solar in this country, it now seems that irrespective of whether Labor or the Coalition holds the reins, solar PV will continue to be installed on a significant scale.

With wind power and other large scale renewables, the interesting international influence is that our gas prices will be increasingly determined by China, Japan and international oil markets. These gas prices have a reasonable probability of rising to levels over the next decade that wind represents a competitive option.

Nonetheless wind power remains very vulnerable to policy change over the medium term and coal generators are calling for the renewable energy target to be slashed to what they term a "real 20 per cent” market share. Both Labor and the Coalition are yet to clarify whether they will keep the Renewable Energy Target as is or give in to the coal generators.

End result

Australia lags the world on taking action to address carbon emissions and the introduction of a carbon price hasn’t really changed that. Yet while we might lag behind, others will no doubt drag us along irrespective of which government is in power.

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