Homework for Bernie Fraser and the Climate Change Authority

The Climate Change Authority has adopted a broad scope for its Renewable Energy Target review, but provided it reads the leading research on clean energy technology, the result should be positive for renewables.

The Climate Change Authority, headed up by former Reserve Bank Governor Bernie Fraser, has decided to take a broad interpretation of its brief in reviewing the Renewable Energy Target.  

This is not great for developing a sense of regulatory stability essential to investor confidence, at least in the short-term.

However if the Authority undertakes a thorough analysis of the research available globally on technological change and innovation in the energy sector, it may end up working in the industry’s favour.

To help the Authority, particularly those members of the board who have zero background on this topic (of which there are a few), below is a reading list of some of the leading thinking.

Martin L. Weitzman: We should set targets for reducing carbon emissions like a form of insurance that minimises the chances of worst case events, rather than basing them on the average outcome we expect

(GHG Targets as Insurance Against Catastrophic Climate Damages)

Before one can comment intelligently on policy relating to controlling greenhouse gas emissions, whether that be the Renewable Energy Target, or any other measure, it’s important to understand the broader problem you are dealing with.

This paper by Weitzman, a professor of economics at Harvard University, illustrates that managing the risks of dangerous climate change is much like buying insurance. You don’t buy insurance based on the most likely events you’ll face, but rather to mitigate the low probability of catastrophic events that could occur. It all sounds like commonsense and it is, but before Weitzman illustrated this in mathematical terms, thinking on the topic was dominated by analysis by William Nordhaus that uses simplistic averaging of impacts.

Michael Grubb: The development of low carbon electricity technologies is about more than just R&D and a carbon price

(Technology Innovation and Climate Change Policy: an overview of issues and options, Keio Journal of Economics)

Cambridge University Professor Michael Grubb’s 2004 paper stands-out as one of the most lucid and effective put downs of the highly popular schools of thought that to address climate change we either:

a) Just put in place a carbon price; or

b) Just give government money to scientists to dream up a miraculous technological fix

I find it truly bizarre how many protagonists in the Australian debate around renewable energy policy regularly refer to the “Grubb curve” in making arguments that Michael Grubb would furiously disagree with.

This paper explains that developing low carbon electricity technologies is a multi-stage, long term process that requires a mixture of government interventions tailored to each stage. Critically Grubb points out this requires support for deployment of technologies, not just big ticket demonstrations that lack thought as to what happens after the technology is ‘demonstrated’.

The key attraction of Michael Grubb’s work is that it is grounded in the practical experience of history, rather than just mathematical proofs. It is rather bizarre how some economists seem able to live their lives playing with mathematical proofs, while studiously ignoring that messy thing called reality. Michael Grubb isn’t afraid of getting grubby in reality.  

Vogt-Schilb and Hallegatte: addressing climate change requires use of options with long lead times, that need to be deployed now or we’ll run out of time

(World Bank Working Paper - When starting with the most expensive option makes sense: Use and misuse of marginal abatement cost curves).

The dominant logic amongst many policymakers is that you should start with the cheapest abatement options and don’t do anything about the more expensive options until well out into the future. Hence they argue we should rely solely on a carbon price that will get gas to replace coal, before we do anything to roll-out renewables.

However this World Bank paper points out that this simplistic logic misses an important real-world limitation – technological and social inertia.

In order for us to reach our ultimate emission reduction goals, some of the abatement options that are quite expensive now, such as renewable energy or electrification of vehicles, will be essential. You just can’t reach 50 per cent, let alone 90 per cent emission reduction targets without widespread use of these technologies. The problem is that getting these technologies to a point where they could be scaled-up to meet the lion’s share of our energy needs at a reasonable cost will take several decades.

The paper illustrates that if we do nothing to develop and roll-out these more expensive technologies in the short-term, we’ll face a much steeper bill later on.

International Energy Agency: Everything you wanted to know but were afraid to ask

(e.g. Interactions of Policies for Renewable Energy and Climate; Deploying renewables – principles for effective policies; Policy considerations for deploying renewables; Creating markets for energy technologies; the list goes on)

If you intend to give government advice on energy and climate change policy, consult the body who’s professional day job for the past 30 years is energy policy. The International Energy Agency, established by developed nations in response to the oil crisis, has undertaken an extensive body of research on the experience with government policies to foster energy technologies including renewables. It brings together some of the best thinkers and researchers on energy policy and condenses this into well articulated policy recommendations.

The IEA isn’t infalible, but the fact that the Australian bureaucracy issues reports (e.g. the Wilkins Review) that ignore its recommendations is inexcusable.

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