Garnaut says carbon price could solve budget black hole and fill funding gap from LGC collapse

Collapsing large-scale certificate (LGC) prices and the rising cost to government budgets from supporting renewable energy investments, could be neatly solved with a carbon price, says Superpower Institute director Ross Garnaut. 

On the same morning that federal energy and climate minister Chris Bowen revealed a 25 per cent boost to the size of the Capacity Investment Scheme, which the federal government uses to underwrite new wind, solar and storage projects, Garnaut said a smarter alternative would be to boost falling LGC prices could dovetail with revenues from a carbon price.

“There are now virtually no new investment commitments for solar and wind generation that do not have CIS or other government underwriting,” Garnaut said in a speech to the Australian Clean Energy Summit in Sydney on Tuesday.

“The best cure in the national interest is a carbon price. Not by a little bit, but by a big margin. Unutilised LGCs from the RET (renewable energy target) would be credited at an appropriate carbon exchange rate against future carbon price liabilities.”

The push for a carbon price is no surprise from Garnaut, given that he was the key advisor in the design of the carbon price that was introduced in Australia by the Gillard Labor government, but was then scrapped by the Abbott government.

But Garnaut says there is renewed urgency due to budget pressures, and because LGC prices have fallen from the most recent peak of more than $60 in 2023, to a current spot price this week of $12.50. 

Image: Superpower Institute

Those prices are the canary in the coal mine showing how Australia’s renewable energy industry is being crowded out by government support while gas generators are being allowed to reap the benefits of being in an oligopoly, Garnaut says. 

“Average gas power prices are now much higher than during the height of the Ukraine disruption, despite gas commodity prices having fallen back,” he says.

“They have been driven to a considerable extent by the loosening of inhibitions in the use of oligopolistic power to lift prices. At times, gas generators reduced output when low renewable output was lifting market prices above the average.”

He said this was particularly the case in South Australia, which has reached very high levels of wind and solar (75 per cent over the last year), but is suffering high wholesale prices because of the behaviour of the handful of companies that dominate the market,

A carbon price would cover the cost of the damage a gas generator, or any high emitter’s carbon emissions impose on the rest of the country, while paying for any government support needed for transitional investment. 

The LGC issue goes even further, with Garnaut arguing there has been a corresponding decline in revenue for wind and solar projects, due to falling prices for energy and certificates. 

That has forced investors to more heavily scrutinise investments, and bring governments in to support tenders with mechanisms such as the Capacity Investment Scheme (CIS) and state auctions. 

It’s a perfect storm which could be solved with a carbon price, that adds cost to fossil fuels such as gas while paying for government support for renewables. 

An emissions trading scheme using the prevailing EU carbon price, which this month was around EUR70/tonne ($A124/tonne) could add $A24 billion to national revenues and a cumulative total of $A107 billion by 2030, the Superpower Institute said in a submission to the productivity roundtable to be held in August.

But not all economists are as enamoured of a carbon price as Garnaut. 

At the same event, BNEF’s energy transition expert Kobad Bhavnagri disagree with the idea of a carbon price being a neat solution to an investment problem.  

“Markets like the European Union, which have economy-wide carbon prices, have not seen that those sorts of mechanisms turbo-charge investment in renewables,” he said. 

“I do tend to slightly disagree with Professor Ross Garnaut’s diagnosis, that an economy-wide carbon price is the cure for all the ails of the energy transition.”

The real issue, Bhavnagri says, is around investment confidence, “which is really where our attention needs to be in order for this boat to go faster.”