Right track for a clean energy future

It has been proven that a price on carbon in combination with policies supporting renewables is the most cost-effective climate change mitigation strategy, and Australia is right to travel this path.

Australia has an alcohol problem; this really is not in dispute. Yet last week, Oliver Marc Hartwich suggested in these pages that capping the national alcohol intake while encouraging a change in habit to light beer would be a redundant exercise (A zero-sum carbon game, March 1).

An Australia that is gradually encouraged to imbibe of a healthier, cheaper alternative would be a better country, developing dietary habits that would serve its population well for decades to come, encouraging better choices for and by future generations.

Before this metaphor outlives its usefulness, let us consider Dr Hartwich’s thesis that you can have an emissions trading scheme or you can support renewable energies, but you can’t sensibly have both. It is old and flawed both on economic and sensible, cost-effective public policy grounds.

Far from having no justification, the evidence globally clearly shows that policies supporting renewable energy combined with a price on carbon are far from redundant.

Indeed, that policy option is far and away the most cost-effective climate change mitigation strategy, delivering emissions reductions at significantly lower cost.

Foremost among Dr Hartwich’s attacks is his scathing assault on the inefficiency of the German renewable energy industry.

At a time when most economies are blindly groping for industries that will create jobs and open new markets, the renewable energy industry is a global superstar. Over $260 billion was invested globally in renewables last year, with more renewable energy infrastructure built than fossil fuels since 2010.

Germany is the world’s biggest market for solar power, producing about half of all solar output in 2010, and was recently responsible for lodging around a quarter of the world’s patents for renewable energy technologies. Considering the more than $40 billion invested there last year in the midst of a tumultuous eurozone economy, and the 370,000 jobs in the renewable sector, it seems odd to suggest that support for clean energy has been poorly targeted.

German growth in this sector has without doubt been primarily due to strong government support. Having nurtured the industry to the point that it is becoming genuinely commercially competitive, the German government is now slowly unwinding its support. Far from a demonstration of the failure of public support, this is a textbook example of how innovation should be considered a public good, one that should be supported then left to stand on its own two feet once mature. Incidentally, it’s a shame the German government hasn’t behaved consistently and unwound subsidies for its coal industry.

Beyond this desire to apportion subsidies to sunset industries over newer, more innovative ones, the crucial point Dr Hartwich overlooks is the long-term advantages to encouraging investment in clean energy.

Renewable energy policies in general – and the German feed-in tariff in particular – are not primarily aimed at cutting emissions cheaply in the short term. Rather, they play a critical role in cost-effectively cutting greenhouse pollution in the medium to long term.

If Australia were to rely solely on a carbon price to lower carbon pollution, there are myriad potential market failures that would result in poor investment decisions.

Insufficient private investment in R&D, an absence of proven performance of large scale renewable technologies in Australia, regulatory uncertainty after a decade of toing and froing on climate policy, and capital capacity limits by Australian investors are all key examples of the kind of market failures we face without a comprehensive policy platform.

These investment barriers and market failures have been highlighted by the International Energy Agency, which stated that both renewable energy support plus a carbon price form an “optimal portfolio of policies [that] achieves emissions reductions at significantly lower cost than a single policy”. That “optimum mix of policies”, they concluded, includes support for R&D, a price on carbon, and support for rolling out renewable energy.

Luckily, in Australia, we are developing precisely such a policy mix. R&D support is taken care of by the Australian Renewable Energy Agency (ARENA), a price on carbon starts in mere months, and the Clean Energy Finance Corporation (CEFC) focuses on rolling out clean energy projects.

In other words, the Clean Energy Future package is the optimal means to build a cost effective response to climate change. Anything less, according to the IEA, would simply impose additional costs.

The benefits of a cohesive policy approach are many. By supporting new clean energy projects, we can create jobs, build vibrant new industries and make clean energy cheaper, sooner. But the CEFC will contribute to reducing Australia’s emissions, and like in Germany, this contribution will be fully considered by the Climate Change Authority as they recommend appropriate national targets, allowing Australia to drive deeper cuts in our pollution.

As with German renewable energy policy, a diversification of energy supply is a wise investment for Australia right now. With projections of our gas and coal prices reaching international parity in coming years as we open up so much export trade, lowering our reliance on these fuels is increasingly vital.

But most of all, Dr Hartwich’s belief that we should ditch support for renewable energy selectively attacks government support to suit. If subsidies are an economic evil, then let’s deny them across the board. Let’s wind back the billion dollar depreciation subsidies for oil and gas and wind back the billions in fuel tax exemptions for the mining industry for a start.

Anything short of this full package of measures would be a serious, long-term policy mistake, merely for some marginal gain in the short-term. The CEFC makes sense and represents a profound improvement on the ways we’ve been supporting many of our industries, ineffectively, for decades. Rather than take a swipe at the CEFC, Australia has a lot to learn from this new model of driving public benefit at least cost.

It’s high time that Australia, with its abundance of clean renewable energy assets, kicks its addiction to burning fossil fuels. And we know how to do it.

Simon O’Connor is economic adviser with the Australian Conservation Foundation.

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