Pricing policy and substitutes: To gas or not to gas?

November 27, 2010
LNG gas tanker.

On October 23, the Age reported that increased alcohol prices are driving many young people to switch to the party drug ecstasy, according to drug researchers, nightclub owners and young people themselves.

“It is cheaper and convenient to use pills”, said Professor Jake Najman, director of the University of Queensland’s Alcohol and Drug Research and Education Centre. “A lot of young people are making that choice to switch between alcohol and ecstasy. Pills can be cheaper, there is no question.”

If you are wondering what the hell ecstasy has to do with climate change policy, the answer is simple: the case highlights the unintended consequences of pricing-based policy and the substitution effect.

The verdict is still out on the extent to which the Labor government’s “alcopops” tax rises are responsible, but we can safely assume that policymakers did not intend to encourage ecstasy use.

Despite the obvious differences between public health and climate change, the occurrence raises an interesting question about carbon pricing, as the government’s new Climate Change Committee begins its work. Is there a risk that carbon prices could encourage a shift to undesirable energy substitutes?

ClimateWorks Australia’s March 2010 Low Carbon Growth Plan for Australia says: “The power or electricity generation sector is Australia’s single largest sector for direct [greenhouse gas] emissions, accounting for 35% of Australia’s total in 2010”.

Rapidly transitioning the sector to cleaner energy sources is an essential ingredient of effective climate change policy. Switching to renewable electricity generation promises significant reductions in carbon emissions. Replacing coal-fired power stations with gas would deliver more incremental progress.

Executive director of Beyond Zero Emissions Matthew Wright has been vocal about the risks associated with a low carbon price. He warns that a weak price will encourage investment in gas-fired power plants and delay investment in large-scale renewable energy projects.

“Australia would need a carbon price at $50 per tonne for wind and between $180 and $200 to make the first baseload concentrating solar thermal economically viable. The slowly increasing carbon price we can expect from an emissions trading scheme favours gas electricity projects which become cost competitive at around $25 per tonne.

“It’s important for policymakers to realise that while the first baseload solar plants would cost $180-$200 a tonne they would rapidly decline and eventually be more cost effective than wind today. Wind is also coming down the cost curve — but it hasn’t got as far to travel as solar thermal.”

Wright recommends policymakers and climate advocates think carefully about locking in at least 25-plus years of carbon-emitting gas power infrastructure.

As an author the Zero Carbon Australia 2020 Stationary Energy Plan, Wright is a forceful advocate for deploying concentrating solar thermal power (CSP) and wind for providing reliable baseload power.

“Carbon pricing is the wrong mechanism for driving renewable energy down the cost reduction curve. While it’s good for corporations to put a line item on the books, we know where the bulk of the emissions reductions can be achieved in the stationary energy sector, and this is through the wide deployment of baseload solar thermal and wind.

“Australia needs a policy framework to achieve that end. While successful renewable energy deployment policies require upfront investments they ultimately achieve economic efficiencies though scale. This makes renewable energy a better long-term decision than gas.”

Those who spruik the benefits of emissions trading should be transparent about questions of how anticipated carbon prices over the next decade will transform our energy sector. Will they drive a rapid transition to renewables or encourage investment in less carbon-intensive fossil fuel?

[Reprinted from . Leigh Ewbank was a 2009 summer fellow at the US-based climate change think tank, the Breakthrough Institute. You can follow Leigh's Twitter feed at @theRealEwbank.]

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