Are current carbon policies cost-effective?

Marginal Abatement Cost (MAC) curves and cost effectiveness: a hypothetical illustration

The Productivity Commission’s new research report, Carbon emission policies in key economies, has important implications for the way emissions are managed, but it also has some key lessons for urban and transport policy (and other areas of policy, for that matter).

The report should remove any doubt that a price on carbon is far and away the most efficient and least-cost means of reducing emissions. The report’s findings are damning of so-called direct action policies and make it clear that “the abatement from existing policies could have been achieved at a fraction of the cost” if a carbon tax or emissions trading price were in place.

The Commission estimates Australia’s key supply side programs to reduce emission in the electricity sector — principally Renewable Energy Targets and solar feed-in tariffs — cost on average $44-$99 per tonne of CO2 abated. Electricity generated from solar photovoltaic cells is very expensive, costing between $431 and $1,043/t CO2 and contributing little to overall emissions reduction.

But here’s the money shot – the Commission calculates that the same level of carbon abatement produced by these supply side measures could have been obtained with a $9/tonne price on carbon! The report goes on:

This equates to about 11 per cent of the almost A$500 million estimated cost of the existing policies. Alternatively, for the same aggregate cost, more than twice the abatement could be achieved. One of the reasons an explicit carbon price would be expected to be more cost effective at such low levels of abatement is that, as modelled, it captures a considerable amount of low-cost abatement on the demand side.

The research also examined the use of bio-fuels in the transport sector. The implicit cost of carbon abatement from existing bio-fuels programs, both in Australia and overseas, is much higher than it is for electricity generation. The Commission estimates the cost of programs in Australia is $364/t CO2 but it is $600 – $700/t CO2 in Japan and the USA. It’s estimated that it is costing $6,105 to abate a tonne of CO2 in China using ethanol.

The accompanying exhibit illustrates notionally how Australia – and the other countries examined by the Commission – are tending to favour high cost abatement initiatives (the shaded bars) and ignore others that cost less per tonne and mostly yield more abatement.

Regrettably, there are many parallels with the way we go about designing policy for our cities. For example, I think it would be much more cost-effective to abate carbon (or reduce oil consumption) in the urban passenger transport sector by introducing policies such as road pricing or more fuel-efficient vehicles, than it would be to (say) build a rail line to Doncaster. Or, were the objective to increase the mobility of those without access to a car, spending funds on buses and better service coordination rather than on extensions to the rail network, would give a more cost-effective outcome.

The good news though is there might be grounds to be optimistic that PV module prices are starting to fall.

5 Comments on “Are current carbon policies cost-effective?”

  1. Michael says:

    Just when I’ve got used to a world where ALP governments promote market-based solutions to policy problems, I wake up to a conservative opposition that believes that the state will make better choices than the market. I must be missing something…

  2. Peter Hill says:

    We shouldn’t fall into the trap of misreading the Productivity Commission’s (PC) report. The abatement comparisons are not similarly based, i.e. they are not “apples with apples” comparisons. The PC report on carbon pricing strategies providing the “least cost” carbon abatement assumes the “low hanging fruit” of replacing coal-fired electricity generation with the use of natural gas as the heat source for the turbines. I suspect that the PC has looked at case studies where gas-fired boilers have replaced coal-fired units, and where combined turbine cycle power generation (“two-power-cycle” gas turbine and steam turbine mechanical power sources) using natural gas as the prime enthalpy (thermal energy) source. Combined turbine cycle power generation achieves up to 60% thermodynamic efficiency from fuel input to dynamo output, compared with the 33% – 38% efficiency of single power cycle coal-fired electricity generators.

    The point here is that, whilst meritorious in terms of reducing CO2 emission, the shift from coal-enthalpy to natural gas enthalpy will greatly foreshorten the lifetimes of known natural gas resources. As natural gas supplies decline, their cost, and thus the cost of both the output electricity and CO2 emissions will rise to levels much greater than the touted $44 – $99 per tonne CO2 reported in the PC report. Switching to natural gas as the ubiquitous source of electricity only postpones the traumatic phase of very high cost renewable (solar and wind) electricity by a few decades. The “high cliff” of massive energy cost increases is on its way, and that’s when society will be slugged by extreme energy costs, with massive payments of “permission rents” to private holders of carbon emission certificates. This is the future “Carbon Arenda”. Readers should do a Google search for the history of the “arenda” system of estate management contracts as it once was dominant in the kingdom of Poland-Lithuania in the 16th and 17th centuries.

  3. RED says:

    If greenhouse gas emissions were simply seen as a form of pollution, then they would be managed through regulation, just like any other pollution. We accept regulations on petrol quality without blinking an eyelid, even though they raise the cost of fuel, why not the same with power station emissions quality, or other emitters?
    The whole thing about taxes and emissions trading schemes is a con invented by bankers and lawyers. Heavy emitters should simply be told what is an acceptable level of emissions and how long they have got to re-tool their infrastructure to comply with the law. Just like every other pollution problem in history!
    If this had been done back in the 1990s when the problem was first discussed, the issue would be solved by now.

  4. […] already has a much more significant effect on driving than any level of carbon price that’s been seriously touted in the political debate. Based on the CSIRO’s estimates, it could be argued its effect is equivalent to a carbon tax of […]

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