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Emissions intensity scheme – another act in tragic comedy of errors

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We are now well into Act Three of the tragic comedy of errors that is Australia’s carbon and energy play. What a depressing and tedious play it has turned out to be.

In Act One, an Emissions Trading Scheme took centre stage. An Emission Intensity Scheme scheme had a walk-on part in Act One, but the leading actor in Act One, Senator Wong, called it a mongrel and it was booed off the stage by all and sundry (except Senator Xenophon and later Leader of the Opposition, Malcolm Turnbull).

Of Act Two – “scrap the carbon tax” – the less said the better. Now in Act Three, ten years later, the Emission Intensity Scheme has taken centre stage and the Emissions Trading Scheme is the naughty boy in the corner. In fact the big end of town and their representatives, some environmental organisations, influential agencies, the Federal Labor Party and even some customer groups are falling over themselves to declare their love of an EIS.

But what is this EIS? Well, in essence, it’s a rob-Peter-to-pay-Paul scheme. The Peters in the scheme are the coal-fired generators, particularly the emission-intensive brown coal generators. The Pauls in the scheme are those generators whose emission intensity is less than a “baseline” that the Government will define. The way that the money is taken from the Peters and distributed amongst the Pauls is critical.

One way to raise is to take from the Peters in proportion to their emission intensity relative to the baseline. This means brown coal generators pay the most. The money so raised can be distributed amongst the Pauls in the same way so that almost all the money goes to existing and new renewable generators that emit nothing.

In this way, a meaningful penalty on the Peters will raise a great deal of money and will provide a huge push for renewables development. This will lead to an unsustainable boom and windfall gains for existing and new renewable electricity producers.

This is poor economics and even the most ardent environmentalist would not want a scheme that delivers such large excesses as to undermine the public support for the pursuit of renewable energy.

Another way to distribute money would be to discriminate amongst the Paul’s, not on the basis of their emission intensity but based on their technology type. So for example, the rule could be that the money raised from the Peters goes to the group of Pauls that produce electricity from gas-fired generators.

A worked example illustrates this. Without an emission penalty, brown coal generators will today produce electricity if they are paid more than, say, $15/MWh. At current gas prices, combined cycle gas generators (the most efficient such generators) need prices to be above $65/MWh before they produce.

So to make coal and gas comparably competitive, split the difference ($50) by charging the brown coal generators $25/MWh and give this to the gas-generators. Now the coal and gas generators will both require electricity prices to be $40/MWh or more before they will produce (i.e. $15+$25 =$40/MWh for the coal, and $65-$25 = $40/MWh for the gas). So now the gas and coal are neck-and-neck and if you take another $5/MWh from coal and give it to gas, gas will now be ahead and in this way lower emission gas generation will substitute the coal generation.

Lets look at this arrangement in terms of emission abatement costs. Substituting the most emission-intensive brown coal plant for a modern combined-cycle gas plant will reduce emissions by around 0.8 tonnes CO2-e per MWh. At a penalty price of $30 per MWh, this means $37.5 per tonne CO2-e abated ($30 divided by 0.8).

But if we distribute the $30/MWh penalty not on the basis of a preferred technology (gas generation) but to the generators that reduce emissions the most (i.e. renewables) we get a 1.4 tonne abatement for the $30, i.e. an abatement cost of $21 per tonne. So, as a consequence of the technology discrimination (gas rather than renewables as the beneficiary of the money gathered from the coal generators) we effectively almost double the cost of abatement.

This is wasteful and means prices to consumers higher than they should be. The modelling of an EIS undertaken for the Australian Energy Markets Commission, as the modellers have configured it, shows that their EIS will substitute gas for coal, instead of renewables for coal – precisely the wasteful outcome we should be trying to avoid.

You can see where an EIS ends up: its a recipe for rent seeking by lower emission generators to get their snouts more deeply into the trough of funds raised from the coal generators. And the coal generators will no doubt demand compensation and lobby the Government to shift the burden onto someone else. Technology neutral? Not in the slightest. Market-based? Not by a country mile.

There is a sparse academic literature on Emission Intensity Schemes. It quickly withered under critical scrutiny. It is no surprise then that we can no find no example of such an approach to emission reduction in the electricity sector being adopted in any other country, ever. Telling, no?

To those that seek safety in numbers and have set their sails to the prevailing wind, dig out the tapes of Act One of this comedy of errors and spend some time on them. It would be surprising if you conclude that Senator Wong called it wrong.

If you work for one those representative organisations, authorities, political or customer groups that now think an EIS is great, I challenge you to explain why you think so now when, ten years ago, you apparently thought the opposite. Conversely it would be valuable to understand why our Prime Minister thinks an EIS is so bad now, after having previously been one of its few disciples.

One might conclude from this just how little currency proper economic analysis has in this dismal Third Act. Bring on Act Four someone, please.


Bruce Mountain is the Director of consultancy Carbon and Energy Markets and co-founder of retail market data provider, MarkIntell.

   

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  • trackdaze

    Since the scrapping of the carbon tax prices for electricity have gone up. And with no price signal for investment and a government shouting witch on renewables its no wonder 1000’s of jobs have been lost in all energy sectors.

    With the republicans in the USA seriously pondering a carbon tax and tariff prompting other countries to follow or wear the costs its going to make Australia a laughing stock.

    • Kevan Daly

      Keep up trackdaze. What the Republicans are seriously contemplating is abandoning the COP21 emissions agreement.

      • trackdaze

        True, they do have coal at less than 30% generation with massive gas reserves and want to sting importers what better way than carbon tax at the border.

  • Tim Forcey

    “for a modern combined-cycle gas plant will reduce emissions by around 0.8 tonnes CO2-e per MWh.”

    Bruce, in that figure, how much methane is assumed to be emitted to the atmosphere as a result of gas production and transmission to the power station?

    The point is that in Australia, there is no published information on this, only assumptions that the methane emissions from gas production aren;t much at all.

    See our University of Melbourne research here:
    http://www.climate-energy-college.net/review-current-and-future-methane-emissions-australian-unconventional-oil-and-gas-production

    “despite Australian Government greenhouse-gas reporting requirements having been established in 2009 and Australia’s unconventional gas industry operating at significant scale since 2010 and rapidly expanding since, there has as yet been no comprehensive, rigorous, independently-verifiable audit of gas emissions. Indeed, to quote CSIRO, “reliable measurements on Australian oil and gas production facilities are yet to be made.” (Day, Dell’Amico et al. (2014))

    Talking about the greenhouse gas impact of generating electricity with gas, while ignoring (or making minimal assumptions) about the upstream methane emissions tht result from gas production… is like talking about solar PV without mentioning energy storage.

    Half the story I’m afraid.

    • bruce mountain

      thanks Tim. In my analysis I assumed 0.2 tonnes CO2-e per MWh in allowance principally for upstream emissions. Do you think this is wrong?

      • Tim Forcey

        Hi Bruce: I shall catch you offline re what might be a reasonable range of numbers to use in your calculations…

        …but re what is the amount of methane emissions associated with gas production (CSG production in particular)…

        NO ONE KNOWS.

        Or in any case, no one has published any complete data, so we are all in the dark.

        Again: “reliable measurements on Australian oil and gas production facilities are yet to be made.” CSIRO Day, Dell’Amico et al. (2014)

        “there has as yet been no comprehensive, rigorous, independently-verifiable audit of gas emissions.” (Univ of Melbourne 2016)

        “In company reports and in the national emissions inventory… emissions from… the extensive network of gathering lines, compressors and pumps… are set at zero. Consequently it is probable that official data on total GHG emissions rising form the production of coal seam gas significantly understate the true level of emissions.” (Univ of Melbourne 2016)

        “There is effectively no public information about methane emissions associated with unconventional gas production in Australia. This is a matter of some public policy concern…” (Pitt & Sherry)

        “Current estimates are made using methods for the conventional gas industry and do not take into account factors in the CSG industry…” (NSW Chief Scientist)

        “[We] recommend that Australia make efforts to improve the data for the emissions from this category, including the development of updated EFs that represent production activities in unconventional gas production.” (The UN 2016)

        So again, there being no comprehensive data available to the public, no one can say (based on “true facts”) that gas for electricity for generation is cleaner than any other fuel (i.e. coal).

        Gas, in Australia, might be the dirtiest fuel of all.

        We are all waiting for actual real data to prove otherwise.

        This is all in our Univ of Melbourne paper:

        “A review of current and future methane emissions from Australian unconventional oil and gas production” Oct 2016

        http://www.climate-energy-college.net/review-current-and-future-methane-emissions-australian-unconventional-oil-and-gas-production

  • … am thinking it through, and will post more on Wattclarity in next week or two, Bruce.

  • Tom

    That’s an awful lot of assumptions about such a scheme. Labor hasn’t described the policy mechanism in any detail.
    It could be international emissions trading on the affected tons-CO2 in which case the cost will be bugger all and so will the effect.
    It could take the fees and plough them back to customers.
    The important bit is that it gives a signal not to invest in coal power unless it’s with CCS. I’d say that’s quite complementary to their 50% renewable target.

    • bruce mountain

      No Tom, this is just not good enough. It is way past time that the progressive forces in Australian politics and economics got real on this and stopped faffing about with half-baked ideas. On an issue as critically important as this we need to see carefully researched and properly thought through policy that is communicated with commitment.

  • Miriam Lyons

    Of course, the Pauls could be people, and instead of giving the $$ to either gas or renewable generators, it could be paid as an energy supplement to households, more than compensating for the impact of higher wholesale prices. Now, where have I heard of a scheme like that before?

  • Jane R

    Bruce- You quickly dismiss the idea that the $$ taken from high emitters under an EIS would be given mainly to the lowest emitters (renewables) saying this would produce an “unsustainable boom” in renewables. Couldn’t this be managed by calibrating the speed with which the emissions intensity baseline is reduced?
    In any case, given we face a climate emergency and need to get to zero emissions ASAP, then a sudden flush of money into renewables is just what we need. And that’s what you are saying that an EIS type 1 ($$ redistributed fairly based on EI) would deliver. What makes you think Labor is proposing an EIS type 2 ($$ redistributed to advantage gas)? Is this specified somewhere?

    Could you flesh out your concerns outlined in these paragraphs please? It’s not clear to me why a well managed but speedy roll out of renewables would alienate the public.

    “In this way, a meaningful penalty on the Peters will raise a great deal of money and will provide a huge push for renewables development. This will lead to an unsustainable boom and windfall gains for existing and new renewable electricity producers.

    This is poor economics and even the most ardent environmentalist would not want a scheme that delivers such large excesses as to undermine the public support for the pursuit of renewable energy …”