Carbon pricing was once political poison. Now it’s just good economics for the grid

For more than a decade, Australia’s politicians have dodged legislating carbon pricing for the electricity sector, terrified of being blamed for higher power bills. But that fear, according to new modelling and analysis from the Grattan Institute, is now outdated.

“There is a case for putting some kind of signal into the electricity sector, so that coal leaves faster,” says Alison Reeve, Program Director for Energy and Climate Change at the Grattan Institute, speaking on the SwitchedOn Australia podcast.

“Between 2008 and 2011 when we were talking about carbon pricing and designing carbon pricing, the cost of renewables was so much higher than it is today. That’s really, really changed over the last 15 years.

“The cost of solar has come down about eight-fold. The cost of wind has come down 25 to 30% … and even though we are having to spend more on transmission, that’s not really wiping out those savings.”

“We are genuinely in a world where the alternatives now are cheaper rather than more expensive …. and the benefits are actually a lot clearer than they used to be.”

To date, the Renewable Energy Target (RET) has done much of the heavy decarbonisation lifting from electricity generation, driving new wind and solar into the grid and pushing out coal.

But because the RET only rewards renewables and doesn’t penalise pollution, Reeve argues that emissions from fossil-fuel generation will remain too high for too long.

In its recent report Bills Down, Emissions Down: A practical path to net-zero electricity, Grattan suggests a carbon pricing mechanism that could help speed up the transition, one that is not new.

Introduced by the Coalition Government in 2015, the Safeguard Mechanism caps emissions from big industrial polluters, including airlines and a few large rail and logistics companies.

If these facilities emit more than 100,000 tonnes of greenhouse gases a year, they must buy credits to offset those emissions, while those under the limit can sell credits to others.

“Over time those baselines go down, and so facilities have to make a decision about, do they keep buying more and more offsets, or do they change something about how they operate that facility … to bring the emissions down,” Reeve explains.

Although electricity generation has always been an adjunct part of the Safeguard Mechanism, “in practice it has never been activated.” When the Safeguard was first put in place, instead of giving an individual baseline to every power station, a single baseline was applied to the whole electricity sector.

Reeve argues the baseline allocated to the electricity sector — 198 million tonnes — “was set way too high,” so the Safeguard has never been triggered.

Grattan’s modelling shows that extending the Safeguard Mechanism now to electricity could cut emissions faster without significantly raising household bills.

The report shows how household energy bills are set to halve by 2050 because most households will have solar panels, a battery, an electric car, and all-electric appliances: “cutting greenhouse gas emissions from electricity in line with the net-zero 2050 national target results in average household energy bills of about $3,000 in 2050 – down from an average of about $5,800 today.”

That, Reeve says, leaves room for government to act. “We’ve actually got room to act more to reduce emissions, to do more to reduce emissions, because the flip side of that is that we get the benefits.”

“What we wanted to show with this report is that there are benefits, particularly to households, but potentially to everyone,” she says. “We need to think about what the benefits are, not just about what it costs.”

Reeve believes the Safeguard Mechanism has a better chance of political acceptance because it already exists, and it was introduced by a Coalition government. “We already know how it works. You wouldn’t need to make major legislation changes in order to do it, and it seems to be fairly well tolerated by the industrial sector.”

But she concedes it is not a perfect solution. “The Safeguard definitely has some flaws, and there’s a review of it coming up next year, and that’s going to be the forum to debate what parts of it could be improved.”

One reform she says should be considered is that the Safeguard currently doesn’t allow renewable generators to earn credits.

“We need to think about what signals it sends to people to build zero emissions facilities, not just to operate an existing facility more efficiently,” Reeve argues. “That’s exactly the sort of facility that we want to be encouraging.”

Reeve also acknowledges that Grattan’s modelling depends on several things going right — that transmission lines get built, there are enough skilled workers, planning is streamlined, and local communities buy in.

But, she adds, “we can’t let the perfect be the enemy of the good anymore.”

You can hear the full interview with Alison Reeve on the SwitchedOn Australia podcast.

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