Reducing pollution - not half as hard as governments think

The government may have overestimated the gap to achieve its 2020 emissions reduction target by close to 100%. This comes on top of it cutting the projected abatement task almost in half less than a year earlier. Is cutting carbon pollution really as hard as economists believe?

This week’s chart of the week comes from Frontier Economics and serves to illustrate that we seem to be repeatedly overestimating how hard it will be for Australia to reduce its emissions.

Frontier are the first to do the numbers to assess how the major drop away in electricity consumption growth – as projected by the Australian Energy Market Operator – changes what our emissions path is relative to the unconditional 2020 emission reduction target we’ve signed up to under Kyoto MkII.

This is often referred to as a target to reduce emissions by 5 per cent below 2000 level emissions by 2020. But it’s more accurately thought of as a target to reduce emissions 0.5 per cent from 2000 levels over the 2013-2020 period. That’s because the Kyoto II international agreement assesses our cumulative emissions over 2013-2020 so we can overshoot 5 per cent below 2000 levels in 2020, provided we go under 0.5 per cent below 2000 levels for the earlier years.  

As explained in Greg Hunt – the lazy student who got lucky, the conclusion Frontier have reached is extraordinary – the drop in electricity demand has cut the required level of abatement the government needs to meet its minimum 2020 emission target from 421 million tonnes down to 225-279 million (if the RET is left unchanged). This gives the Abbott Government at least half a hope of achieving the target, even with its half-baked and behind-schedule scheme for taxpayers to pay polluters to reduce their emissions – although they need to get a hurry on, and they also need to cough up some more money.

The dramatic difference in expected electricity sector emissions is detailed in the chart below. The light blue line at the top is where the government thought emissions would track, based on its 2013 projections. These were already overestimating emissions the day they were released (due to lags in processing information). The darker blue line up to 2013 is actual emissions, with the diamond in 2014 representing where emissions appear headed based on the latest available data.  A very large gap has now opened up, of more than 20 million tonnes of CO2, between the government’s 2013 projections and where the latest data suggests we’re headed.

Figure 1: Emissions from Australia’s electricity sector – 2013 government projections versus latest data
(click chart to enlarge)

Source: Frontier Economics (2014)  Can Australia still meet its emissions target with changes in the RET?

So if Frontier’s analysis is accurate, and the government doesn’t cut the Renewable Energy Target, Australia’s emissions from electricity will be 20-30 million tonnes lower each year (the dark blue line at the bottom of the chart) than had been estimated only in December last year.

What’s more, a cursory review of the latest emissions inventory data released just two days ago suggests that the projections have also noticeably overestimated emissions from agriculture and fugitive methane from coal mining and gas extraction.  The overestimates look to be in the realm of 10 million tonnes per annum for each of these emission sources, although this needs to confirmed with the government’s emissions monitoring group.

What makes this all the more amazing is that this down-scaling in the gap to the emissions target of a third to a half, comes on top of the last government’s official projections down-scaling the gap to the target by 45 per cent, from 755 million tonnes of CO2 to 421 million tonnes. 

And to think, as recently as November 2011 former Prime Minister Kevin Rudd’s economic adviser, Andrew Charlton, exclaimed:

“The point that critics of Australia’s target miss is that rapid population and economic growth are working against us. This means that relative to 2000 levels, a 5 per cent reduction in 2020 is a big ask for our economy. As of 2010, Australia’s emissions were already about 5 per cent higher than in 2000 ... To overcome these headwinds ... Australia will need a massive shift to clean energy if we are to reduce our energy emissions, equivalent to a 31 per cent reduction in Australia’s emissions. This is an enormous challenge.”

Well the latest figures now put Australia’s emissions close to 5 per cent below 2000 levels and close to 10 per cent below the levels the government expected them to be as recently as the official 2012 emissions projections. Also, rather than a 31 per cent reduction in emissions from our current pathway, it now looks like it will be less than 10 per cent.  

As detailed in the Grattan Institute report I wrote with John Daley in December 2010, Markets to reduce pollution – cheaper than expected, history repeatedly shows that there seems to be an inbuilt bias for economic modellers to overestimate the difficulty and cost of reducing pollution.