Disagreeing with the King

The Origin Energy boss is a leading thinker on energy policy, but do falling energy demand and unrealistic Copenhagen hopes really justify watering down carbon pricing and renewable energy?

Yesterday I touched on something for which Grant King and I agreed in our interview* – a policy that slams on the accelerator for the next four years and then slams on the brakes afterwards for renewable energy isn’t a great idea (Grant King gets it right, September 2). That’s what we’re facing with our current Renewable Energy Target design.

Another thing that came up with which I agree with King, is that delaying action to reduce emissions means your abatement task in the future just gets harder. In King’s words:

"For me the most profound learning I took out of that Round Table (The Business Roundtable on Climate Change) … work we did back then with the CSIRO was that carbon is an inventory problem. It’s not a rate problem, it’s an inventory problem and the reason it’s an inventory problem is because of the residency of carbon in the atmosphere. So it’s far better to take a tonne out today than to wait.
So let’s say it’s 2015, just to make the maths easy … If we take a tonne out right then or wait for 35 years to 2050, we’d have to take 35 tonnes out in 2050 to have the same effect, and that’s because carbon is an inventory problem, not a rate problem."

Another thing we agree on is that a carbon price that is expected to stay below $20 per tonne of CO2 is pretty much next to useless. King told me:

"Origin has very, very consistently made the point that nought to 20 [dollars per tonne of CO2] won’t do anything. Twenty to 40 will change the future investment decisions a little bit. In other words, if you were going to build coal, maybe you’ll build gas if carbon prices are between $20-$40 a tonne range. And if you want to cause fuel substitution of your existing fleet, you’d need a price of $40-$60 a tonne for that fuel substitution to occur. Now, we’ve always consistently articulated that range."

Where we differ is that he argues circumstances have changed that justify watering down the ambition of emission reduction policies, whereas I’m still stuck on the physics of greenhouse gases being an inventory or stock accumulation problem.  

King cites the following as reasons for a need to reevaluate policy settings and a change in perspective:

– The failure of the 2009 Copenhagen UN climate negotiations to achieve a breakthrough agreement to solve climate change.

– The plummeting price of permits under the EU ETS to well below $20 per tonne of CO2.

– The drop-off in Australia’s electricity demand growth.

In relation to Copenhagen, let’s consider what happened before and after.

Prior to Copenhagen, in 2006 while George Bush was in the White House, Grant King courageously stuck his neck out forthrightly urging the Howard government to pull their head out of the sand on carbon pricing. In 2007, China’s emissions were surging and they were doing next to nothing on renewable energy or nuclear power. Yet Prime Minister John Howard accepted the advice of his hand-picked Shergold Review Taskforce which concluded:

A new, more comprehensive [emissions reduction] agreement is required. Unfortunately, discussions on a post‑2012 international climate change framework have been disappointingly slow. An outcome is likely to be some years away…
After careful consideration, the task group has concluded that Australia should not wait until a genuinely global agreement has been negotiated. It believes that there are benefits, which outweigh the costs, in early adoption by Australia of an appropriate emissions constraint.

Yes, in the lead-up to Copenhagen there were some hopelessly deluded people who thought that we’d come out of it with a legally binding global cap and trade scheme that would solve climate change once and for all. Okay, this absolutely stupendous achievement didn’t materialise – are we worse off than where we were in 2006 and 2007?

Since Copenhagen the US has made incredible progress in containing its emissions, as Grant King rightly points out in our interview, although the credit is due to a lot more than just shale gas. In addition, Obama has tasked the EPA with regulating emissions from existing coal-fired power stations, which will deliver further reductions.

Back in 2007 did anyone imagine China would surpass the US and Europe as the largest global market for wind power and completely transform the economics of solar PV production? Nor did we possibly contemplate that China’s coal consumption and emissions might begin to go down by around 2025, nor start phasing in an ETS beginning with trials in 2013.  

Yes, Europe’s carbon price is in the doldrums. But I distinctly recall back in 2006 and 2007 those opposed to an ETS argued Europe didn’t matter because they weren’t a competitor to our emissions-intensive exporters. As far as I’m aware those trade dynamics haven’t changed with the drop in the carbon price.

And yes, electricity demand has dropped away, but overall emissions are still expected to grow considerably over the next few years. The emissions problem has not been solved in Australia.   

King correctly observes that:

“I don’t recall anywhere in the discussion about the RET scheme was the stated objective to create excess capacity in the NEM [National Electricity Market]. Was that ever a stated objective of the scheme?”  

Sure, but neither was it an explicit objective to avoid overcapacity. On the other hand, it was very much agreed that one of the goals of the RET was to reduce carbon emissions. Incidentally, because demand has dropped away, the RET is reducing emissions by more than what was anticipated. That’s because the growth of renewable energy, rather than coming at the expense of new gas-fired generators, is coming at the expense of far more emissions-intensive existing coal generators. And it is doing it at a cost to electricity consumers far lower than would happen under the $40-$60 carbon price King argues would be necessary for gas to displace existing coal generators.

Grant King is a leading thinker on Australian energy and climate policy who has made a very useful contribution to our policy debate, regularly busting myths. On many things we agree. But it’s not clear to me how circumstances have changed that justify weakening Australia’s emission reduction policy settings.

*Click here for the full transcript of Climate Spectator's interview with Grant King on carbon pricing.

*Click here for the full transcript of Climate Spectator's interview with Grant King on the problems and costs of the Renewable Energy Target and support for solar PV.

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