Thursday, April 7, 2011

Grattan Institute Report on Australia's Carbon Emissions Reduction Policies

The Grattan Institute has put out a report reviewing the performance of Australia's policies to reduce carbon emissions. Maybe you are surprised to find that there are quite a lot of these, actually, including some semi-market based mechanisms. The most important of these is the Renewable Energy Target. Electricity generators have to generate 20% of electricity from renewable sources by 2020. They can achieve this by purchasing certificates from providers of renewable energy. This isn't exactly a market mechanism for reducing carbon emissions themselves as only renewable sources can be used. But it is better than straight regulation.

Last week I saw a presentation on this work by John Daly (Grattan Institute CEO) at the climate policy conference CCEP held at ANU. I think the key graph is this:

This shows the size of the schemes on the left and the cost per tonne of abatement on the right. Costs are measured in terms of direct payments. Hence, efficiency standards appear to be free, which of course is not really the case. Still we clearly see that the grants and rebate schemes haven't generated much abatement and that rebates have been very costly in delivering those reductions. The market based schemes have generated large reductions at reasonable nominal costs.


  1. Hi David

    Yes - market mechanisms will deliver the most abatement at the least cost from existing technologies. And pricing carbon will also foster innovation in newer technologies. But, on it's own, pricing carbon won't foster innovation efficiently. So the standard line is a carbon price is necessary but not sufficient to efficiently mitigate the risks of climate change. Support on innovation is needed.

    The report does a good job of highlighting the value of the necessary condition, but not on noting that a price alone is insufficient.

    Some of the grant schemes highlighted by the Grattan Institute are not about abatement today, but abatement in the future as they seek to accelerate demonstration activities. So on the metric of abatement today they (the CCS and Solar schemes) will always perform poorly.

    The more interesting question is how to efficiently drive innovation in large scale energy systems. Grants have formed a strong backbone in developing energy technologies (CCGT's took 30 years to become the efficient commercial machines they are today, supported by grants and markets. The SO2 scrubbers that were efficiently deployed in the SO2 markets we all like to point to, were 20 years in development with grants and under different market conditions).

    Setting aside the challenges of counterfactuals in the examples above, grants can offer efficient mechanisms for eliciting effective ideas and delivery.

    Both John Daley and Tristan Edis (from Grattan) favour a prize approach to innovation in energy, but for the larger and considerably more expensive energy technologies such as CCS and solar thermal, a prize system suffers from some of the same challenges they identify with grants and also suffer from the challenge of not solving the missing risk markets for financing such large scale projects.

    What are your views on effective mechanisms for RD&D (with the grants identified by Grattan) focused on the 2nd D) in such systems?


  2. Hi Chris

    These are all good points. I don't have any real opinions about how to encourage R&D or whether the existing Australian general R&D incentives plus government basic research funding at CSIRO, ARC, to industry etc. is sufficient. I haven't done any research on this and don't have a good enough sense of the policy framework as a whole. A lot of people are saying that we need to do more than price carbon and I agree on that but we do encourage innovation in various ways already. These commentators are not so clear on what actually should be done on this front.

  3. In response to Chris Short, I would make the following points:
    - It is true that we did not dwell on the role of government in promoting technological development but we did acknowledge that there was a justifiable role for additional policies to supplement a carbon price to promote technological development.
    - I would question the idea that grants (as they have been employed to date in Australia via highly subjective tendering selection processes) are the right way to go about promoting technological development, and certainly not as the major policy instrument for technology development. I stand to be corrected but my understanding of the development of many major electricity generation technologies is that there have been combination of niche markets, government sponsored roll-outs, that have figured prominantly in supporting their progress over time. For example gas turbines were a product of Defence jet engine development programs (which combined generalised research projects funded partly under grant models combined with procurement policies that provided early mover niche markets for cutting edge technology). The aviation industry then followed as the next market which enabled turbines to gain greater economies of scale and further incremental refinements in energy efficiency, reliability and lower O&M costs. Ultimately energy market liberalisation provided a fruitful market for low capex, high flexibility gas turbines to penetrate the electricity market. Over this period the fuel efficiency and reliability of turbines improved dramatically making them suitable baseload electricity duties. I question whether government grants were a particularly important driver but if others have additional information I would welcome feedback. There are equally interesting stories around Wind Turbines and Solar PV which illustrate a mixture of instruments including early mover niche markets have been very important to their development and improvement over time.