Economic modelling is one of many tools for policy development. It is often taken out of context and misused. The present debate over the cost of Labor’s climate policy provides an example. Lack of context, modelling assumptions and selective use of modelling results risks distorting future climate and energy policy, with serious consequences.
Before entering into discussion of recent Coalition claims regarding the impact of Labor’s climate policies, we should consider some context.
The costs and social and environmental impacts of global failure to limit climate change are very large. Indeed, the probability of runaway change is increasing [ https://www.theage.com.au/environment/climate-change/our-carbon-budget-is-all-but-spent-but-who-in-canberra-is-counting-20190505-p51k8c.html?js-chunk-not-found-refresh=true ].
As noted in a previous article [ https://publish.pearlsandirritations.com/alan-pears-beyond-the-climate-chaos/ ], Australia’s present commitment falls far short of its fair share. Further the Coalition’s decision to use ‘Kyoto Carryovers’ cuts its effective 2030 target to around 15%, not the headline 26-28% cut from the 2005 level. Labor’s 45% cut is at the low end of the scientifically credible 45-65% cut.
The Coalition claims it is achieving adequate progress towards its target. However, progress is occurring largely despite, not because of, its efforts [ https://www.climatecouncil.org.au/resources/climate-cuts-cover-ups-censorship/ ].
International comparisons tell a sad story. The World Economic Forum’s 2019 assessment of progress towards energy transition [https://www.weforum.org/reports/fostering-effective-energy-transition-2019 ] ranks Australia 43rd, among the worst performing developed countries. The International Energy Agency (IEA) puts Australia among the worst performers on energy efficiency in its 2017 and 2018 rankings, with very little improvement in recent years [ https://webstore.iea.org/market-report-series-energy-efficiency-2018 ]. The American Council for an Energy Efficient Economy rating saw us slip from 10th in 2014 to 18th in 2018 [ https://aceee.org/portal/national-policy/international-scorecard ].
The IEA’s 2018 review of Australia [https://www.iea.org/countries/membercountries/australia/ ] recommendations included adoption of ambitious vehicle fuel efficiency standards – rejected by the Coalition government. IEA also recommended strong industry energy efficiency measures ‘building upon the experiences of the Energy Efficiency Opportunities program’ that was shut down by the Abbott government, despite cutting millions of tonnes of emissions from major industries at an average cost of minus $95/tonne of CO2. An independent review recommended its continuation [ https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Energy_Efficiency_Repeal_2014 ].
Analysis by Climateworks Australia as part of a global project in 2014 found that Australia could achieve very large emission reductions while maintaining economic growth. Its latest update (https://www.climateworksaustralia.org/sites/default/files/documents/publications/climateworksaustralia-tracking-progress-report-2018.pdf ), comments that ‘Recent research suggests that faster than expected technological advances have made steep cuts in emissions easier to achieve’ and estimates that a 55% cut to emissions is achievable by 2030. Their work utilises both economic modelling and thorough technology assessment with CSIRO.
So Coalition claims that stronger climate action will devastate the Australian economy should be carefully scrutinised. Numerous sources indicate that we are failing to capture substantial cost-effective emission reduction potential, and that innovation could cut costs and increase abatement.
The Coalition claims rely heavily on its interpretation of recent economic modelling by Brian Fisher of BA Economics [ http://www.baeconomics.com.au/bae-explores-some-of-the-possible-economic-outcomes-of-labors-climate-policy ]. Modeller Warwick McKibbin [ https://publish.pearlsandirritations.com/warwick-mckibbin-how-should-technocrats-count-the-true-cost-of-climate/#more-26516 ] has noted that:
“In the Fisher report the carbon price is $263 per ton CO2, which is vastly different to that estimated in G-Cubed [the model used by McKibben and others]. There are very few experts who would agree with the marginal abatement cost curve in the Fisher study. It does not mean it is wrong – but as an outlier the result needs to be understood and fully articulated. The key difference across models must come down to the assumptions about rigidities in the BAEGEM model.”
If we accept that economic models may provide different results, but they may provide useful insights, especially when one model is used to compare different scenarios, the BA Economics paper makes some interesting points (p.7):
“It is important to note however that no attempt has been made here to model the economic effects of physical climate change itself. The current exercise is intended to highlight the baseline economic effects of different policy choices with respect to access to international emissions permit trading and shielding of EITEs.”
In this context, the main finding of the study (p.7) is:
“The clear finding across the scenarios modelled is that the negative economic consequences of adopting stringent emissions reductions can be substantially ameliorated through greater trade in international permits.”
This finding is not controversial. It reinforces the case for Labor to engage with industry to negotiate the detail of its approach with key stakeholders, especially with regard to potential use of offset permits. It supports the claim that it is difficult to estimate the cost of Labor’s policy at present.
And it is worth remembering McKibbin’s comment that “Around 80 per cent of the loss in GDP in Australia [due to the Paris Agreement] is caused by the policies of other countries. This clearly indicates that the debate on climate policy should be focused on making sure the world follows a sensible climate policy rather than debating the size of the Australian target.”
With regard to electricity costs, the BA Economics study states (p.14):
“…the wholesale electricity price under Labor’s climate policy is around 20 per cent higher than that resulting from the Coalition policy…..”
This higher electricity price results from assumptions about renewable electricity prices, the extent to which fossil fuel generation is replaced, and the resulting impact of high carbon prices, as noted on p.13:
“Output falls in most sectors as a result of the Plan. The emissions target generates a price on carbon which raises electricity prices. This higher input cost then flows through to all sectors that directly or indirectly use electricity. The sectors most adversely affected by the Plan are electricity, thermal coal, metallurgical coal, oil refining, non-ferrous metals, and chemicals, rubber and plastic.”
CSIRO, Bloomberg, AEMO and many others estimate that a renewable electricity future will be cheaper, and is occurring quickly. Faster transition to renewable energy would reduce the impact of a carbon price on average electricity prices. The IEA is confident that more aggressive energy efficiency improvement would add to savings. I trust these specialist judgements over those of less well-informed economic modellers.
While, at present, electricity comprises only a third of Australian emissions, electric vehicles charged by renewable electricity, enhanced rail infrastructure, public transport and smart urban planning will cut transport emissions that now comprise almost a fifth of our emissions. Emerging solutions, including efficiency improvement, electrification (using heat pumps and other technologies as proposed by Beyond Zero Emissions [www.bze.org.au ] and the Australian Alliance for Energy Productivity [ http://a2ep.org.au/ ] in their reports), renewable hydrogen and structural change will drive large emission reductions across combustion and process emissions, now a quarter of emissions. Effective policies can cut emissions from forestry and land use, while increasing sequestration. For example Ross Garnaut [ https://www.bing.com/search?q=Ross+Garnaut+superpower&pc=EUPP_ASTE&mkt=en-au&httpsmsn=1&refig=1cf34f6e0d9c4bb0bededc4263ac0757&sp=-1&ghc=1&pq=ross+garnaut+superpower&sc=0-23&qs=n&sk=&cvid=1cf34f6e0d9c4bb0bededc4263ac0757&first=21&FORM=PERE1 ], chief scientist Alan Finkel [ https://www.chiefscientist.gov.au/wp-content/uploads/HydrogenCOAGWhitePaper_WEB.pdf ] and others have outlined our potential to cut our emissions and become a major renewable energy exporter.
A successful low carbon Australian economy is attainable – with the right policies.
Alan Pears AM has worked on clean energy and climate policy for several decades. His work spans all sectors of the economy, ranging from practical site-level projects to program development and implementation, policy analysis and education.
This post kindly provided to us by one of our many occasional contributors.
Comments
2 responses to “ALAN PEARS. The cost of Labor’s Paris Climate Change Policies”
Simple version
Here is the equation. In the last 12 months coal generators have averaged $ 97 per MWh and Gas $135. At the same time literally dozens of companies have signed contracts to buy power from wind and solar farms for $48 to $55. This price includes RECs so every extra MWh of wind or solar that displaces gas saves $80 or more. Every extra MWh that displaces coal saves $42+. so more renewables and a bit of market fragmentation will save money for businesses and households.
As for emissions,
1. The UK has lower unemployment than us, more than double the population and four times as much manufacturing industry, wholesale power prices 20% below ours, yet its total emissions (336m tonnes)are 40% lower than ours (566 m tonnes) while wind and solar provide 21% of their power vs 14% here
2. California has an economy 2.3 times as large as ours with lower unemployment 4 times as much manufacturing and yet its total emissions are 30% lower than ours and non hydro renewables are 33% of their power generation
3. Germany with an economy 3.2 times as large as ours with slightly more than 3 times the population and 9 times the manufacturing output. It has a current account surplus of 8% of GDP vs our 3% deficit, a fiscal surplus and lower unemployment than us. Yet its total emissions that are only 60% larger than ours. Year to date Germany has 46.7% renewables and wholesale power prices are half ours
In other words if we were as efficient as Germany our emissions per $ of output would be less than half what they are. If we were as efficient as California our emissions would be 1/3rd of what they are and if we were as efficient as the UK our emissions would be a little over a quarter of what they are.
Even if we could only match the Germans the cost of energy across the whole economy would be between $20-40 bn per year less than it is today.
i.e, we can reduce emissions and reduce costs for families and businesses
Direct contra to Brian Fisher
1. If Dr. Fisher was writing a legitimate paper he would list all his input and output assumptions so they could be checked. He does not.
2. In table 1 increasing thermal efficiency of gas and coal plants by 0.5% per year. This means that they will increase from the current 30-33% to 36-39%. Coal plant, in fact all heat engines, get less efficient as ambient temperature rises. so if the rating is 38% at full load at standard ISO conditions i.e. 15C, it is down to 35% at 35C or 33.5% at 40C. In addition at part load, efficiency declines and Australian coal plants only average 65% load. A typical coal plant has 30-40 MW of friction losses and coal handling, fans, feedwater pumps etc running. This does not change much as load falls. Thus on a hot day at 60% load, efficiency can be below 30% even for the best plants in Australia. The idea that we can push it up to an average 39% is just fantasy. Even the best plants in the world could not achieve that under our load conditions and temperatures and ours use old technology and have been wearing out for 25-40 years.
3. Figure 2. Cost of abatement curve is 10 times higher than other economic modellers. Many sources of abatement actually are cost negative, for example replacing an immersion hot water heater with a heat pump unit saves money and emissions. Replacing old lights with modern LEDs saves money and emissions. Replacing old electric motors with new high efficiency models often pays for itself within 2 years and continues to save emissions, electrifying buses and garbage trucks saves money and emissions etc etc. The cost before taxes and excise of electricity to run an EV is a little over one third of the pretax cost of petrol or diesel and saves emissions
4. Total wholesale expenditure on electricity in Australia at spot prices was about $20bn, Last year spot prices averaged $85. Even if Dr Fishers $130 came to pass that works out at in increase across the whole economy of $9.6 bn. Across a workforce of about 15 m by 2030 that works out at about $640/ per worker not his ridiculous $9,500
5. Table 6 Gas share of electricity 37% in Scenario 4. Classic example of Garbage in Garbage out. In the last year gas provided 8% of our power and earned an average of $150/MWh. This was down from 12.9% in 2014. According to AEMO There is currently 210 MW of new gas committed and 990 MW proposed. There is 3,267 MW of new solar committed and 22,469 MW proposed, 3,622 MW of wind committed an 15,900 proposed as well as 6,200 MW of proposed hydro expansion.
Where, in any of that, is there a likelihood of gas rising by 450%
6. Snowy Hydro says it is buying wind and solar for less than $50/MWh including RECs and is offering wind and solar firmed by gas and hydro for $70. Similarly AGL, Origin, Powershop, Telstra, Victorian Government, CUB etc etc have been signing PPAs from $48-65. If 50% of power is being sold at an average of $50-55 and coal generators are profitable at $65, why will average power costs reach $130. In fact once the currently contracted 7-8,000 MW of wind and solar come into the market why won’t prices fall toward the marginal cost of production.
In the USA wind + storage has been offered at around $23/MWh and solar + storage less than $27. Allowing for various tax credits that is less than US$40/MWh unsubsidised. In the Middle East, Canada and Mexico prices below US$27 and India less than US$35 have been achieved without subsidies so the low prices here are not an aberration
7. Table ???? current costs and price trends for various generation and storage options. i.e if you don’t know where you are starting how can you judge the result. What we do know is that in Texas where where natural gas is the predominant fuel and has about the same cost per unit of electricity as captive coal costs here but non hydro renewables are 21% of generation vs 15% here, wholesale power prices are 1/3rd of what they are here and in Germanywith 46.5% renewables year to date wholesale power prices are half what we have here
Finally Fisher’s background entitles us to treat him with little credibility. He was the man who predicted in 2006 that power from coal power would be $35/MWh and Gas $40 by 2020. According to Open NEM, so far this year coal is around $110 and gas $250. The economic model he uses is clearly flawed
In summary not only does this so called model exaggerate the costs by a factor of four, the likelihood is that there will be a reduction in costs and increase in employment. This is illustrated by the Sun Metals expansion in Townsville, Nectar farms in Stawell and One Steel expansion in Whyalla, where cheap renewable energy results in an increase in jobs and a reduction in power costs. The China Steel investigation of a 10 m tonne per year steel plant in SA is based on renewable power not coal
In Australia we have the resources, the expertise and the materials to profit extensively from transition to renewable energy supplies.
What we do not have is the political will to exploit them.
The consistently negative approach by the commercial mainstream media, lead by the Institute for Public Affairs and its vested interests in the status quo who are finding themselves left with stranded assets, has blindsided the voting public into a whole raft of beliefs which have no basis in fact.
They have been left behind by the advancing technologies, unable to appreciate the great benefits which could ensue because of their fixation on not losing their existing assets.