Australia’s fossil fuel dominated grid to have hefty shadow carbon price, starting at $66 a tonne

Australia’s electricity grid – still dominated by fossil fuels – is to have a hefty “shadow” carbon price that will guide regulatory and policy decisions, and help meet the country’s ambitious renewable energy goals.

The call for a shadow carbon price – in the absence of a real one after the federal Coalition killed Australia’s actual carbon price a decade ago – was made by state and federal energy ministers last year to help guide policy and investment decisions.

The Australian Energy Regulator has now published an interim guide on the “value of emissions reduction”, or VER, with the price starting at $66 a tonne of Co2 equivalent in 2023, rising to $135/t in 2033, and to more than $400/t from 2050.

This new price will become part of the National Electricity Objective, which has finally included environment as an outcome after being deliberately excluded by the then Howard Coalition government in the late 1990s.

It will be used to help assess regulatory returns, particularly for networks, and will presumably help avoid bizarre decisions like that take in NSW several years ago, when the regulator found itself forced – in the absence of an environmental consideration – to recommend a new set of diesel generators rather than a renewable micro-grid.

It will also be used by the Australian Energy Market Operator in the preparation of its Integrated System Plan, its 30 year blueprint for the grid needs for a transition to a net zero electricity system, and by the Australian Energy Market Commission as it assesses the multiple rule changes put before it.

The reversal of the carbon price by the Abbott government meant that the fossil fuel industry was allowed to continue to pollute the country without any cost impacts.

Diesel and petrol cars, along with coal and gas fired generators, the makers of fossil fuel appliances, and fossil fuel production do not bear any cost of the damage they do to the climate, or to people’s health.

Coal still dominates Australia’s power grid, accounting for 56 per cent of total production in the National Electricity Market in the past 12 months. But the federal government is firmly fixed on a new target of 82 per cent renewables by the end of 2030, which will require a significant increase in the pace of renewables and storage development.

Fossil fuel cars also continue to dominate the new vehicle market, with EVs grabbing a record 10 per cent share last month, but averaging just eight per cent over the last year or so, although proposed no vehicle emissions standards could help to accelerate the transition and bring new models to the market.

Tim Buckley, from Climate and Energy Finance, wrote on LinkedIn that the shadow price of $A105/t by 2030, rising to $A221/t by 2040 and $A420/t by 2050 gives a credible price signal consistent with the cost to Australians of carbon pollution for all new energy infrastructure assessment and approvals.

Buckley also says it shows the likely trajectory of carbon emissions pricing as strongly upwards over time, consistent with the International Energy Agency (IEA) modelling. 

“It’s past time the polluters paid,” Buckley wrote last year when assessing the NSW government’s proposed shadow carbon price, a mechanism that would have knocked controversial gas projects such as Narrabri on the head.

He said federal treasurer Jim Chalmers to also incorporate the shadow price in the investment decisions of key agencies such as the Future Fund.