THERE IS A SIMPLE test of just how seriously Kevin Rudd takes his repeated claim that global warming presents the “greatest moral challenge of our generation.” All that’s required is to contrast his spending priorities. The federal government is now likely to give over $25 billion to big polluters to help them keep on emitting during the first five years of the Carbon Pollution Reduction Scheme, or CPRS. Well over $30 billion will be paid to households as compensation for the relatively minor impact of the scheme. This dwarfs the funding announced in the May budget for the clean technologies that are essential to reducing, rather than subsidising, the production of greenhouse gas emissions. The budget’s Clean Energy Initiative allocated $2 billion for carbon capture and storage projects over nine years, $1.5 billion for solar energy over six years and $465 million for all other renewables over four years.
The comparison is even less favourable when it becomes clear that the clean energy funding includes $1 billion left over from existing programs and $2.5 billion snatched from the Education Investment Fund. Nor, with the government committed to imposing a strict 2 per cent cap on the overall increase in government spending to help restore the budget to surplus, is there any realistic chance that this funding will be increased in future budgets. The cap is expected to start in next year’s budget, or in 2011–12 at the latest.
Given that the government has exempted many areas of spending from the cap, including defence, CPRS compensation and welfare, there is almost no way any new funding will be given to renewables. More could have been spent before the cap starts to apply if the government had used part of its anti-recessionary stimulus package to help fund alternative energy projects that were ready to go. Although South Korea devoted almost 80 per cent of its stimulus spending to this purpose, the Australian government chose not to outlay an extra cent on the sector. Instead, it spent over $16 billion to help the building industry via a frenzied rush to construct new school gyms, assembly halls and standardised classrooms.
Barely any genuine educational gains would have been sacrificed if the government had diverted $3 billion to low-emissions technologies in line with the recommendation of its independent adviser on climate change, Ross Garnaut. A highly regarded mainstream economist, Garnaut advised that at least $3 billion should be spent each year to overcome market failure in the development and commercialisation of new technologies to tackle global warming. Apart from energy efficiency measures, clean technology is crucial to cutting emissions; otherwise, most of the downward pressure on emissions will have to come from the old-fashioned government regulation that lies at the heart of the CPRS.
Some environmentalists like to demonstrate their faith in markets by saying that the CPRS will cut emissions by “putting a price on carbon.” In fact, bad policy decisions mean that the cuts will be driven mainly by government regulations imposing a tighter cap on the level of emissions allowed each year. The price of a pollution permit issued under the CPRS could play a peripheral role in creating an incentive to switch to less emissions-intensive consumer behaviour or production processes, but this effect will be greatly diminished by the compensation the government will give to industry and households. Any incentive to switch from petrol and diesel, for example, has been completely obliterated by the government’s decision to offset the cost of a pollution permit for these products with an equivalent cut in the fuel excise.
The government will give over $15 billion to trade-exposed industries during the next five years as compensation for the impact of the CPRS. Because big polluters, such as smelters, steel mills, and cement factories, will receive 95 per cent of the extra cost of the scheme, they will have almost no incentive to change to lower-emissions production processes. In many cases, the existing processes generate waste heat that could be used to produce electricity. But why should these firms bother to install the necessary equipment when the government is basically paying them to keep polluting?
A second category of polluters, including the booming natural gas industry, will receive compensation equal to 65 per cent of the cost of buying a pollution permit. Although natural gas promotes itself as a “clean green” energy source, Rudd surrendered to an outrageous lobbying campaign for compensation based on the implicit premise that it is really a dirty fuel. One consequence is that this compensation severely limits the attraction of using small renewable energy plants as a source of onsite heat for industrial processes.
The government is already committed to giving $4 billion over the next five years to the dirtiest electricity generators, mainly those burning brown coal. There are reputable reports that this figure is about to be lifted to $10 billion. Because these companies aren’t trade-exposed, this huge payment is justified on the grounds that the CPRS will cause the capital value of the power stations to fall. Several observers have noted that governments don’t compensate tobacco companies or casinos for the impact of polices designed to reduce the harm their products do.
One objection to these payments is that the money is not available if a company agrees to create a big cut in emissions by closing down, after allowing a reasonable time for much cleaner plants to come on-stream. Another is that billions will be paid with no requirement to switch to low-emissions technologies. This policy turns the “polluter pays” principle on its head by encouraging a business-as-usual approach. Coal miners are also demanding billions in extra compensation, and are expected to get enough to push the overall level of compensation for industry well past $25 billion over the next five years.
The compensation for households, costing at least $30 billion, is even harder to justify. When fully operational, the CPRS is expected to add about 1.1 per cent to consumer prices when inflation is low. (The GST added over 4 per cent.) This compensation could be halved with barely any impact on household budgets, particularly as various efficiency measures can cut energy bills.
Given that energy plays a highly useful role in society, the aim should be to improve efficiency on the consumption side and switch to lower emissions production technologies. But the excessive compensation, which creates such disincentives to changes in behaviour, and the trivial levels of funding for new technology, work in the opposite direction. This means that the CPRS can only achieve its emissions targets by large cuts in energy use, unrelated to efficiency gains. Although the government loves to talk about how the CPRS will give business “certainty,” it never mentions that an unnecessarily large squeeze on energy consumption will be a near certain outcome.
Garnaut wanted his recommended funding of a minimum of $3 billion a year for low-emissions technology to come from the $13 billion worth of pollution permits expected to be issued in 2012–13, the first year the CPRS is due to be fully operational. But the government has refused to allocate a cent of this revenue for this purpose. Instead, it boasts that all revenue will go to compensate polluters and households.
THIS LEAVES general revenue as the only source of funding for new technology. Because of the 2 per cent cap on outlays, though, no new spending on clean technology will be possible. The compensation paid for the CPRS will force particularly big cuts in areas like education that aren’t exempted from the cap. The spending squeeze would be even tighter if the government were not giving most of its handouts in the form of free pollution permits for industry and a mix of cash and tax cuts for households. The permits and tax cuts have the same adverse impact on the deficit as cash payments, but don’t breach the spending cap.
Almost no new research spending will occur beyond the modest commitment to the Clean Energy Initiative and the small amounts already announced for other programs. Some of this funding is miniscule. The energy minister, Martin Ferguson, has only given $4 million for research into converting algae into biofuels, even though this process has great potential to sequester a significant proportion of the emissions from coal- and gas-fired power stations. A mere $1.4 million has been announced for research into biochar, despite its ability not only to generate renewable fuel from waste vegetation and manures but also to store emissions in a form that can improve Australia’s degraded soils.
If the experience to date is any guide then the available funding for renewables will be dribbled out at a leisurely pace, or not renewed if it is a legacy of the Howard government. Labor inherited a $328 million program to help solar energy replace diesel in remote and regional Australia, but stripped out $42 million and then scrapped the scheme when the remainder of the money ran out. Before the election, Kevin Rudd promised to spend $500 million on a fresh renewable energy program; nothing has been spent to date. Although geothermal energy could provide vast quantities of zero-emissions baseload power at a relatively low cost, only $20 million has been spent on this option – and even this minor amount was diverted from the Energy Innovation Fund, which was supposed to be used for research on photovoltaic and hydrogen energy.
The government defends the paucity of its funding for clean energy technologies by pointing to its Renewable Energy Target, which requires that 20 per cent of electricity will come from renewables by 2020 – up from the 15 per cent mandated by a Howard government initiative. But a mature technology – wind power – is expected to meet most of the target. The rest will probably come from the strange decision to include solar hot water, even though it does not produce electricity.
There would be no problem finding $3 billion a year from the CPRS revenue for new technology if the government had accepted advice to set a limit on the amount of compensation and then let an independent panel distribute it. But Rudd insisted he is good at negotiating with business in what he calls a game of “argy bargy.” He’s not. He always loses. Which mightn’t matter, except that the effort to meet the moral challenge of global warming loses out in the process. •
Brian Toohey writes regularly on national affairs for Inside Story.
Photo: R. Walker/ Flickr
6 Comments
On the money as ever, Brian. I went into such budget numbers in some detail in chapters 1 and 2 [and I referenced your AFR story 'Lots of argy-bargy, not much to show for it'] in my new book ‘Crunch Time: Using and Abusing Keynes to Fight the Twin Crises of Our Era’. The numbers there confirm the truth of the story you tell here.
On your argument that Rudd keeps losing in his argy-bargy with GHG-emitting industry, it defends how you define winning. If keeping Labor securely in government is more important to Rudd than responsibly caring for his own and all of our children’s climate security, Rudd is actually winning. I fear that this is his scale of priorities, for as long as he is in the seat as prime minister. Like Tony Blair on the Iraq War, we will have to await Rudd’s post-career memoirs to hear how hard he tried to overcome the force of the coal power lobbies and their formidable allies in society like News Limited, Heather Ridout, Paul Kelly, Paul Howes, Martin Ferguson etc. It would be nice if Rudd could stand up to them. If he did, he could still become a great prime minister. As he is going now, 22 months into his first term, he will be remembered as the prime minister who failed to take effective policy action against disruptive climate change.
The following passage referring to natural gas, which includes gas used in combined cycle gas turbines (CCGTs) generating electricity, is unclear: ‘Although natural gas promotes itself as a “clean green” energy source, Rudd surrendered to an outrageous lobbying campaign for compensation based on the implicit premise that it is really a dirty fuel.’
The fact of the matter is that per kWh, CCGTs emit less than half the CO2 from coal-fired power stations. CCGTs are close to being cost-competitive with new coal-fired power even without a price on CO2. They can radically reduce emissions cost-effectively including by encouraging the earlier retirement of older coal-fired capacity. In addition, CCGTs are more compatible with intermittent renewable technologies such as solar and wind, and gas also lends itself to highly fuel-efficient decentralised cogeneration.
Further, the short lead-times associated with CCGTs compared with coal (and nuclear) mean that it is more compatible with vigorous programs promoting end-use electricity savings and improved end-use efficiencies (whereas the lumpy coal-fired technologies periodically lead to supply over-capacity which jeopardises end-use efficiency programs).
On the merits of CCGTs and gas in cost-effective CO2 reduction, see:
Climate change: Transition fuel or true low carbon option? By Ed Crooks, Financial Times, October 2 2009: http://www.ft.com/reports/gas-industry-2009
In averting dangerous climate change, the greatest possible benefit globally could be obtained by encouraging China to desist from expanding its coal-fired electricity capacity (at 50-100 GW annually!) and replacing this as much as possible by CCGTs using gas imported from West Asia, where 70% of global supplies are located (especially in Russia, Iran, Qatar and Turkmenistan). Similarly in the other critical case of India.
Sure, Barry, gas is cleaner than coal. I didn’t say otherwise. But this not does mean that it “clean and green”, which is how it promotes itself. It emits about half that of a coal power station, which is still not good. The figure is higher where fugitive emissions are higher than average.
Gas certainly won’t let us meet out emissions targets for 2050. But it can help the transition, as I have written elsewhere. My point remains that it does not deserve compensation. For good reason, the govt’s own Green Paper which said it shouldn’t get a cent. Rudd simply surrendered to Woodside’s bullying.
The massive boom in investment in export projects, including those for coal seam gas, suggests that the industry could afford the minor cost of a pollution permit for its local fugitive emissions. (When Australia’s natural gas is burnt overseas, the exporters don’t pay for a pollution permit).
On the ‘compensation’ issue, I agree with you, Brian, and especially with Ross Garnaut when he harshly criticised the Rudd Government for its “having caved in to the most pervasive vested-interest pressure on the policy process since the Scullin Government and … the most expensive, elaborate and sophisticated lobbying pressure on the policy process ever.”
However, on the cost-effective role of gas-fired CCGTs we may differ. I’m not quite clear what your position is on this. For my part, I write as a former modeller of cost-effective, national energy-sector greenhouse gas abatement, under various assumptions. I’ve closely followed the more recent work of the IEA on this research issue (see here and here), using similar modelling approaches with a technology-rich database (here and here), noting that such modelling has been at the global level.
I also take very seriously the injunction of Nicholas Stern, Ross Garnaut, the IPCC and others that it is very important to find the most cost-effective overall solution to abatement of emissions, over time. I also fully accept the need for rigorous policies to encourage RD&D and ‘learning by doing’ (principles that don’t apply just to renewables!). It’s important politically and in terms of the economic impact; and it’s important in terms of getting the most stringent possible targets in place given what the climate scientists are urgently telling us.
On this basis, and with respect to a target for a year such as 2025, even in an OECD country like Australia, it is irresponsible and ill-informed nonsense to be talking about ‘100 per cent renewables’ energy sector, or electricity sector. Such a solution may be conceivable but most unlikely to be cost-effective, given any feasible OECD-acceptable emissions target.
Getting to a target of 90% reduction in emissions by 2050 is another matter. Gas and CCGTs are of course not a panacea on the road to such a target. There is no such thing – certainly not nuclear! But gas-fired CCGTs are likely to be a key ‘bridging technology’ in Australia and elsewhere. This is especially so given the modelling tells us (if the abatement target is a sufficiently serious one) that must actively and immediately begin to retire the existing coal-fired power stations, beginning with the older and more polluting ones, as in the Latrobe Valley.
From the global perspective, it is much more vital that everything be done to discourage China and India from continuing to rapidly expand their coal-fired capacity. Increased dependence on secure imports of natural gas from a range of West Asian source (where 70% of global gas is located) is an obvious component of such an alternative solution, one that would not conflict with the legitimate developmental aspirations of these rising and populous economies. It would be a path that is consistent with their encouraging greater use of renewables (highly complementary with CCGTs) and with end-use efficiency, and also with cleaner air and fewer deaths in coal mines.
Encouraging secure supplies of gas to China and India is a matter that cuts across US foreign policy, with its long-standing economic sanctions against Iran, the world’s second largest holder of gas reserves. The US has for many years actively opposed a gas pipeline from Iran to Pakistan and India. It is just one good reasons for serious engagement with Iran, that is not merely an ultimatum and a charade.
These are central problems in dealing with the global issue of CO2 abatement; problems that I don’t see (for example) the Australian Greens grappling with.
The interesting correspondence between Brian and Barry confirms my judgement that we still lack, but desperately need in this country now, a respected, uncorrupted and unbiassed agency (think Productivity Commision for a model) to explore and assess the real feasible pathways to a 100% non-GHG emitting energy grid in Australia to be built as soon as is possible, by dint of applying enough concerted national Keynesian investment to the goal. We simply don’t know enough yet about the feasibility of a, diversified as to location and power source, renewable energy power grid or grids, supplemented by available energy storage and smart grid supply-demand matching technologies. No one really knows. Experts (like Barry on gas) in some aspects of the subject argue with people whose expertise is focussed elsewhere.
I suggest in my book, ‘Crunch Time’ that the Australian Institute of Engineers whose integrity is presumably unquestioned, should run a major national conference, inviting papers from independent experts all over Australia and public panel discussions and symposia, to get to the real truth on all this. With respect to all involved, we should not have to be arguing about these things on political websites: we need a structured and unimpeachable advisory process, snd we need it fast.
I believe that gas does have a useful transitional role to play – I say so in my book. But I also think that we need to understand our biasses and limited perspectives snd knowledge bases, and support more authoritative ways of getting the right answers on these interlinked energy questions. At the moment, all the dice are loaded in favour of the status quo. No agency in government can be trusted to tell a true and full story on all this – not even Martin Ferguson’s Department of Resources and Energy.
Tony Kevin
Tony Kevin has kindly described this conversation as ‘interesting’ and I note he has recognised the ‘bridging’ role of gas.
Many (including Brian Toohey) quote that line about emissions from gas-fired CCGTs being less than half those from coal-fired capacity (per kWh). That is important but it is only half the story. The second half is about costs, meaning the cost to the economy of the full range of responses necessary to meet a defined target by a defined year such as 2025.
My previous posts have sought to endorse the call of Nicholas Stern and others for an approach to policy on abating greenhouse gas emissions that has such a commitment to system-wide cost-effectiveness. That means (inter alia) pricing greenhouse gas emissions. That in turn is likely, in the medium to longer term, to mean an increased role for gas-fired CCGTs (inter alia!) rather than certain higher cost (but mind-grabbing) renewables technologies. The danger is that some Greens will wrongly take this as evidence of the shortcomings not only of emissions pricing but, by implication and more alarmingly, of the cost-effectiveness principle itself.
Tony has labeled me an ‘expert’ in natural gas. That is emphatically not the reality and is not why I take seriously the case for CCGTs. What I do have is experience as an energy economist and energy systems analyst, and that background clearly influences my perspective. This is not the same as being an ‘expert’ in (much less a spokesperson for) any particular form of ‘technology fix’ or panacea. None exists!
In terms of political weight though, some options are ‘more equal than others’. The ‘politics’ of climate change policy is not only about resisting sufficiently stringent emissions targets–and countering that resistance. It is also about (ill-advisedly) resisting — intentionally or otherwise — a system-wide solution that meets those national caps on emissions in a cost-effective manner. In fact, the second of these becomes the first. This is because failing to meet the test of system-wide cost-effectiveness will make more ambitious targets seem too ‘difficult’ when they are in reality so necessary.