Tough choices for Australia

By the time I left Australia on Wednesday evening the debate over a carbon price in the economy had reached what I can only describe as fever pitch. It dominated the daily headlines in almost every mainstream newspaper and in Federal parliament it dominated the debate, even resulting in numerous divisions of the House as censure motions were put to the floor. Doubtless there is much more to come and it is not hard to imagine that this one issue, that has at least in part contributed to the fall of two Prime Ministers and a Leader of the Opposition, has more surprises in store.

The choices for Australia are also quite limited and the clock is certainly ticking. For starters, much of the power generation capacity is coal and there are a number of ageing  coal fired power stations. These could probably run for several more years at relatively low cost but their best days are certainly behind them. From a big picture resource point of view the obvious replacement is natural gas, which will also deliver significant emission reductions, particularly given the low efficiency of the old brown coal facilities. But the abundant supplies of natural gas are in Western Australia whereas the demand if used for electricity is in the South East regions around Sydney and Melbourne. There is also the prospect for significant coal-bed methane supply in Queensland, but the infrastructure to take it South is currently lacking. In any case, this is being targeted for export as LNG.

 

Some are looking at the prospect of renewable energy, mainly concentrated solar (CSP) and wind. Those that are, also worry that immediately replacing coal with natural gas will push CSP off the agenda and lock in future, albeit much lower than present, emissions. Others believe that the way forward may be nuclear, particularly given the vast uranium reserves in Australia although I personally doubt that the social issue of going nuclear could be resolved any time soon, let alone the site selection and ultimately construction of nuclear power plants. Australia also has geothermal potential.

An uncertain but critical element of the mix is the role of land use and agriculture. Some argue that this represents the single biggest reduction opportunity and that it should be vigorously pursued, with a particular focus on soil carbon and land clearing. But there also remain issues with measurement and verification in this sector. Longevity of the reductions in a country that is regularly plagued by drought must also be considered.

Against this backdrop is the Australian commitment to reduce emissions by 5% by 2020 relative to a 2000 baseline. This corresponds to a near 30% reduction from today in under ten years. Those in the government tasked with planning the way forward see this being met through a number of measures, with a reduction in the use of coal for power generation being a key component. Other elements include changes in land use practices, reducing methane emissions from coal mines, changes in the transport sector and then a broad range of smaller reductions. Set against this is continued growth in the resource sector with its consequent rise in emissions. But the sums do not really add up, which means international offsets will probably have to play a role, either on a government to government basis (e.g. REDD in Indonesia) or through an emissions trading systems with emitters having access to international markets.

In the EU with its hundreds of GW of capacity and broad access to gas, renewables, nuclear and now even CCS (via the NER 300 demonstration programme support mechanism), operating in combination with the EU-ETS and the Renewables Energy Directive acting as the drivers of change, there is sufficient flexibility to meet the 2020 goals. But I discovered when visiting Canberra and talking with policy makers that the EU-ETS is looked upon as a failure by some which means that emissions trading faces an uphill battle before it even starts.

This all adds up to a set of difficult choices. Which policy framework is best suited to trigger the needed change in the power sector and can reductions be delivered in the available time? Given the relatively small size of the sector (~ 30 GW of coal generation capacity), is there a case for the government to simply intervene and set the outcome within narrow parameters or is a market signal sufficient to do the job and if the latter how is it best delivered? Should road transport be included with power generation and subjected to the same policy instrument (e.g. a carbon tax)?

 

Like almost every other country on the planet, the solution set is almost certainly multiple. Australia is going to have to diversify its energy matrix as it moves forward, not only to meet environmental targets but also to satisfy burgeoning demand. The policy story isn’t just about a carbon price, which is where the focus lies today, but about a broader range of  instruments, both market based in sectors such as power but also standards based to drive efficiency improvements (e.g. vehicles). What is very clear though is that the debate needs to reach clear resolution in the near future so that business can begin the task of responding. As was pointed out to me by one observer, this debate didn’t just start with Ross Garnaut in 2008, but has been ongoing for over a decade now.