Supplements to beef up Hunt's Direct Action

Last week Climate Spectator caught up with Danny Price, who is the managing director of Frontier Economics, an economics consultancy with particular expertise in energy and carbon market regulatory issues. He is famous - or notorious, depending on your point of view - for being the lone reputable Australian economist that backs the Direct Action Emissions Reduction Auction Scheme over the prior Labor government’s emissions trading scheme.

Since the Coalition was elected to government, Price has subsequently been appointed as the chair of the government’s Emissions Reduction Fund Expert Reference Group. This group is intended to provide advice to the government on the design of the ERF from a variety of stakeholder perspectives and act as an expert sounding board.

Now, while it is true that Price is highly critical of the current carbon price legislation, it’s important to ask precisely what is the nature of the ‘direct action’ scheme it is that he happens to support. That’s because the definition of what the Direct Action ERF will actually do, how much budget it has to spend and how it will function, seems to vary widely from one person to the next. Given the open-ended and relatively vague design features outlined in the Green Paper it seems the government itself doesn't really have a concrete definition of the scheme, either.

In our brief chat, Price floated a few ideas for what the government might need to consider if it is to achieve its 2020 target and set up Australia for deeper cuts over the long term. Two key ideas stood out which go beyond simply the government buying abatement with taxpayer money:

1) The Renewable Energy Target should be built upon and certainly not scrapped, because it works well as a mechanism for supporting long-term investments in high capital cost, low carbon infrastructure. Price believes that it might be worthwhile for the RET to be expanded to other capital-intensive abatement options, such as gas-fired power stations.

2) The government should consider the potential to build upon the Victorian and NSW governments' energy efficiency tradeable credit target schemes, converting them into a larger national scheme.

Price outlined how the big licks of abatement tend to fall into two buckets:

1) Big capital equipment - like power stations and industrial facilities.

2) Smaller-scale generic energy efficient equipment - like light-globes, water heaters, televisions, solar PV panels, motors and air conditioners.

In terms of the smaller scale energy efficient equipment, Price said he learnt a lot from prior schemes about how this form of abatement can come from nowhere to scale-up very quickly and deliver large amounts of abatement without the need for long-term investment certainty. For Price, this category of abatement will be very important in meeting the 2020 emissions reduction target given the small amount of time left.

But the challenge for such a form of abatement to come forward requires a policy mechanism with low transaction costs. Price appreciates that if providers of abatement in these technologies have to go through lengthy tender rounds and onerous legal contracting, this abatement won’t be forthcoming. Price suggested that the Victorian and NSW energy efficiency credit schemes appear to be a good way for mobilising this abatement.

In the longer term, though, Price notes that it’s critical that the government’s emissions reduction policy framework support decarbonisation of large capital-intensive infrastructure. For such equipment the challenge for policy is to provide investors with confidence to make large investments upfront on the basis of financial rewards for abatement distant in the future.

Price points out that the RET has done exactly that, with a track record of electricity retailers entering into long-term power purchase contracts and banks willing to finance projects on the basis of these contracts.

He argues that eligibility for the RET could be broadened to additional forms of abatement beyond renewable energy. Something which has already occurred for coal mine waste gas. One example could be newly constructed gas fired power stations being able to earn a REC discounted for the lower abatement they deliver per megawatt-hour relative to renewables. While the renewable energy sector might face greater competition, at the same time Price points out this would make the scheme less vulnerable to political attack. In addition, with the price of gas rising considerably, renewables would probably have little difficulty competing in a broader scheme.

These ideas are a long way from current government policy which Price readily acknowledges. He’s not suggesting for a moment that these two policy initiatives would supplant the government’s plan to use budget funds to purchase abatement, but rather supplement it. And at present they are more ideas to consider and debate rather than something Price is firmly committed to.

Given the lack of time the government has left to reach its 2020 target and the considerable challenges surrounding implementing the Emissions Reduction Fund auction scheme, the government sure needs some ready-to-roll policy supplements.