Emissions trading for electricity is the sensible way forward

Tony Wood, Grattan Institute and David Blowers, Grattan Institute

The preliminary report from the Finkel Review of electricity market security will be presented to COAG today. Leaked versions indicate that the report notes the urgent need for long-term policy certainty on climate change and that some policies (such as carbon pricing) reduce emissions at lower cost than others (renewable energy targets or regulation).

These are hardly inflammatory observations. Yet they link directly with this week’s furious debate within the Coalition government over the inclusion of a particular form of carbon pricing, an emissions intensity scheme, and whether it, and all of its relatives, should be excluded from next year’s climate policy review.

How does it work?

An emissions intensity scheme sets an intensity baseline – effectively a limit on how much carbon dioxide the generators can emit for each unit of electricity they produce.

Power stations can produce electricity above the baseline, but they would have to buy permits for the extra CO₂. Power stations that have lower emissions intensity create permits, which they can then sell.

For example, the intensity baseline might be set at one tonne of CO₂ for every megawatt hour (MWh) of electricity. A brown coal generator produces electricity at 1.3 tonnes CO₂ per MWh.

For every MWh the generator produces, it therefore has to purchase 0.3 permits. Alternatively, a wind farm that emits no CO₂ will create 1 permit for every MWh of electricity generated.

An emissions intensity scheme increases the cost of producing electricity from high-emitting generation, while reducing the relative cost of low-emitting generation. It thus drives emissions down in the electricity sector, because the cost difference favours a switch from high- to low-emitting generators.

Why this type of scheme?

Other forms of carbon pricing, such as a cap-and-trade emissions trading scheme, also increase the costs of high-emitting generation relative to low-emitting generation. But there are differences between the two schemes.

The main one is the short-term impact on prices. A cap-and-trade scheme places a price on each tonne of CO₂ emitted, which is paid to the government. Under an emissions intensity scheme, a price is imposed only on the carbon emitted above the intensity baseline.

Under a cap-and-trade scheme, our brown coal generator would have to purchase 1.3 permits for each MWh it produced, as opposed to the 0.3 it purchases under the intensity scheme.

As a result, electricity prices do not increase as much under an emissions intensity scheme as under a cap-and-trade scheme, at least in the short term. But there are drawbacks.

An emissions intensity scheme does not raise any revenue, as permits are purchased from other generators rather than the government. No revenue means no compensation to those impacted by decarbonisation.

Smaller price increases also mean that consumers are less likely to cut back on their own electricity use. This means that overall emissions will not be reduced as much as under a cap-and-trade scheme.

On the plus side, the lower price increase also means that there is less effect on overall economic activity. This can be mitigated under a cap-and-trade scheme, however, if the government uses the revenue wisely.

Bipartisan support at last?

Consulting firm Frontier Economics assisted the New South Wales government with the design of its greenhouse gas abatement scheme, an emissions intensity scheme that ran in that state from 2003 until 2012, with some success.

In 2009, Senator Nick Xenophon championed the emissions intensity approach as a better alternative to then prime minister Kevin Rudd’s proposed Carbon Pollution Reduction Scheme (CPRS). Malcolm Turnbull joined with Xenophon to attempt to persuade Rudd to adopt the scheme as an alternative to the CPRS; that attempt failed.

In the past couple of years, an emissions intensity scheme has again been advocated as a potential circuit-breaker to the climate policy impasse that has been the norm in Australia for the past decade. The electricity market rule-maker, the Australian Energy Market Commission, the Climate Change Authority and we at the Grattan Institute have all advocated for an emissions intensity scheme in the electricity sector.

This position was also reflected in the Labor Party manifesto at the last general election. While ambivalent about what form it takes, the major generation companies and business groups have all been arguing for a form of carbon pricing.

The Coalition government could get to an emissions intensity scheme in the electricity sector from its existing policies. An absolute limit on total emissions for the sector has already been set under the safeguards mechanism. Arithmetic and legislation are required to change the absolute limit to an emissions-intensity limit.

The advantages and disadvantages of an emissions intensity scheme against other forms of carbon pricing have been debated by academics, economists and policy wonks ever since Australia first committed to tackling climate change. But two things are clear.

First, an emissions intensity scheme would provide the stable carbon policy that the electricity sector needs to have investment confidence and contribute to electricity security.

Second, an emissions intensity scheme would, for some time, limit the impact on electricity prices. Apparently, these are matters of importance to both sides of politics.

Tony Wood, Program Director, Energy, Grattan Institute and David Blowers, Energy Fellow, Grattan Institute

This article was originally published on The Conversation. Read the original article.

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Climate shenanigans at the ends of the Earth: why has sea ice gone haywire?

Nerilie Abram, Australian National University

There is no doubt that 2016 has been a record-breaking year for Earth’s climate.

We will have to wait another couple of months for the final tally, but 2016 will be the hottest year in recorded history globally. Average temperatures are well above 1℃ warmer than a century ago.

Global average temperatures, and “global warming”, often give the impression of a gradual change in Earth’s climate occurring uniformly across the planet. This is far from the truth – particularly at the ends of the Earth. The Arctic and Antarctic are behaving very differently from the global picture.

One particular polar change that has caught the attention of scientists and the media this year has been the state of sea ice. The seasonal growth and decay of sea ice over the Arctic and Southern oceans is one of the most visible changes on Earth.

But in the past few months its seasonal progression has stalled, plunging Earth’s sea ice cover off the charts to the lowest levels on record for November. Explaining what has caused this unexpectedly dramatic downturn in sea ice is a tale of two poles.

Global sea ice area (including Antarctica and the Arctic) by year, 1977-2016. National Snow and Ice Data Centre.
Wipneus/NSIDC

Arctic amplifiers

The northern polar region is an epicentre for change in our warming world.

On average, the Arctic is warming at around twice the global average rate. This is due to several environmental processes in the Arctic that amplify the warming caused by rising atmospheric greenhouse gas levels.

One of these amplifiers is the sea ice itself.

As the climate warms, it’s no surprise that ice melts. What is less obvious is that when bright, white ice melts it is replaced with a dark surface (the ocean or land). Just as a black car parked in the sun will warm up faster than a white one, so the dark surface absorbs more heat from the sun than ice. This extra heat promotes more ice loss, and so the cycle goes.

This can explain the marked long-term decline of Arctic sea ice. But it can’t explain why the past month has seen such a sudden and dramatic change. For this we need to look to the weather.

Arctic climate is characterised by very large natural swings – so much so that in the past few weeks some regions of the Arctic have been a whopping 20℃ warmer than expected for this time of year.

The polar regions are separated from milder equatorial climates by a belt of westerly winds. In the northern hemisphere these winds are commonly referred to as the jet stream.

The strength of the jet stream is related to the north-to-south (cold-to-warm) gradient in northern hemisphere climate. The amplification of warming in the Arctic has reduced this gradient, and some scientists believe that this is allowing the northern jet stream to develop a more meandering path as it travels around the globe.

Jet stream winds in the northern hemisphere, November 11 2016.
Screenshot from Global Forecast System/National Centres for Environmental Information/US National Weather Service.

A weaving jet stream allows warm air to penetrate further northwards over the Arctic (the flip side is that extremely cold polar air can also be pulled south over the northern hemisphere continents, causing extreme cold snaps). This appears to be responsible for the current extremely warm temperatures over the Arctic Ocean, which have caused the normal advance of winter sea ice to stall.

In effect, what we are seeing in the Arctic is the combined effect of long-term climate change and an extreme short-term weather event (which itself is probably becoming more common because of climate change).

The southern story

It’s a different story when we look at the ocean-dominated southern hemisphere.

Antarctic climate records point to a delay in some of the effects of “global warming”. The reasons are still debated, partly because of the much shorter climate records that scientists have to work with in the Antarctic.

But it is likely that the expansive Southern Ocean is an important climate change dampener that is able to “hide” some of the extra heat being absorbed by our planet beneath the ocean surface where we don’t feel it – yet.

Unlike the dramatic declines in Arctic sea ice over recent decades, the sea ice that surrounds Antarctica has been increasing slightly over the past three-and-a-half decades and 2014 set records for the most extensive Antarctic sea ice on record. So the decline in Antarctic sea ice since August this year to record low levels has come as somewhat of a surprise.

Again, the weather may hold part of the answer.

The westerly winds that circle the Southern Ocean (analogous to the northern hemisphere’s jet stream) have strengthened and moved closer to Antarctica over the past few decades. One of the effects of this has been to push sea ice away from the Antarctic continent, making for a more expansive coverage across the surrounding ocean.

But the westerly winds are fickle. They are able to change their path across the Southern Ocean very quickly. And so while the southward march in their average position over many years is clear, predicting their behaviour from month to month remains difficult. This spring the westerly winds have tended to sit closer to Australia and out of reach of Antarctica’s sea ice.

What Antarctica’s sea ice will do in the future is still an open question. Climate models indicate that Antarctica won’t remain protected from global warming forever, but just if and when this might cause Antarctica’s sea ice to replicate the Arctic sea ice loss is still anyone’s guess.

Lessons in the madness

Extreme years, such as 2016, are important as they provide glimpses of what the new normal of our climate system may look like in the not-too-distant future.

But these pointers to where we are going also need to be assessed in terms of where we have come from. For sea ice, logbooks from the age of heroic exploration suggest that the Antarctic system is mostly still operating within its normal bounds.

The same cannot be said for the Arctic. The decline of sea ice there has been likened to a ball bouncing down a bumpy hill – some years it will bounce higher than others, but eventually the ball will reach the bottom.

When it does, the Arctic Ocean will be ice-free in summer. That’s a boon for shipping, but don’t expect to see any polar bears on those Arctic cruises.

Nerilie Abram, ARC Future Fellow, Research School of Earth Sciences; Associate Investigator for the ARC Centre of Excellence for Climate System Science, Australian National University

This article was originally published on The Conversation. Read the original article.

Ten years of backflips over emissions trading leave climate policy in the lurch

Marc Hudson, University of Manchester

Ten years ago on Saturday (December 10) Prime Minister John Howard announced the Coalition government would investigate an emissions trading scheme to reduce greenhouse gas emissions.

It was a remarkable backflip after a decade of rejecting such a policy. But fast-forward ten years and we have seen a dizzying array of U-turns on climate, most of them bad news for the atmosphere.

In the latest turn of events, the Coalition government has ruled out an emissions intensity scheme (a form of carbon trading) ahead of a national review of climate policy.

So as Australia gears up to review both its electricity market, with an initial report to be released on Friday, and climate policies, what might the future hold?

Howard’s slow warming

Emissions trading and carbon taxes were considered as far back as the very early 1990s.

In August 2000 an emissions trading proposal from the Australian Greenhouse Office fell in Cabinet, a result ascribed by journalists to then-Senator Nick Minchin. A second proposal, in July 2003 from at least five ministers, was personally vetoed by John Howard.

However, the pressure became overwhelming as the Millennium Drought wore on and states proposed to knit together a national scheme from below. Federal bureaucrats forced Howard’s hand. In Triumph and Demise, journalist Paul Kelly describes the moment Howard realised he would need to consider emissions trading:

[Department of Prime Minister and Cabinet secretary Peter] Shergold reached the bullet point advocating an ETS [Emissions Trading Scheme], Howard asked: “What’s that doing there?” It was the decisive moment; the next exchange was a classic in the advisory art.

[Treasury secretary Ken] Henry said: “Prime Minister, I’m taking as my starting point that during your prime ministership you will want to commit us to a cap on national emissions. If my view on that is wrong, there is really nothing more I can say.” It was a threshold moment.

“Yes, that’s right,” Howard said cautiously. Henry continued: “If you want a cap on emissions then it stands to reason that you want the most cost-effective way of doing that. That brings us to emissions trading, unless you want a tax on carbon.”

Howard did not want a tax on carbon.

Howard after a speech outlining his ETS policy on the third day of the Liberal Party’s Federal Council in June 2007.
AAP Image/Paul Miller, CC BY

Kelly goes on to describe the shift in the business community as a “tipping point”.

So, on December 10 2006, John Howard put out a press release declaring that Peter Shergold and a panel would investigate an ETS. Shergold delivered his report in May 2007, and both the Coalition and Labor went to the 2007 election with an ETS policy.

Rudd’s great backflip

Kevin Rudd began auspiciously, receiving a standing ovation for ratifying the Kyoto Protocol, and famously declaring that:

climate change represents one of the greatest moral, economic and environmental challenges of our age.

But then Rudd and his inner circle began the tortuous process of formulating their own Carbon Pollution Reduction Scheme.

Rudd formally hands over the official document ratifying the Kyoto Protocol to UN Secretary-General Ban Ki-moon.
AAP Image/Ardiles Rante, CC BY

It quickly became bogged down in concessions to the mining and electricity sectors. The first attempt at legislation, in May 2009, had a higher emissions reduction target of up to 25% if international action materialised, but failed.

The second effort created an even more generous cushion for the miners (doubled to A$1.5 billion)
, but also failed after the Liberals replaced Turnbull with Tony Abbott on December 1, and the Greens in the Senate refused to vote for the plan.

Fresh from the horror of the Copenhagen climate conference, Rudd could have triggered a double-dissolution election over the scheme, but didn’t. A Greens proposal for an interim carbon tax was ignored. Rudd toyed with a behaviour change package, but was overruled.

On April 27 2010, Lenore Taylor broke the story that Rudd was kicking an ETS into the long grass for at least three years. Rudd’s approval ratings plummeted.

The toxic tax

After Julia Gillard replaced Rudd in 2010, she negotiated a three-year fixed carbon price as part of an emissions trading scheme. It was quickly politicised as a “great big tax on everything”, and lasted two years after coming into effect.

Abbott proposed a different way of reaching the same emissions reduction target – a Direct Action scheme, which critics said simply subsidised polluters. Turnbull famously called it “bullshit” in 2009.

A pro-carbon tax protest for climate action in Sydney in June 2011.
AAP Image/Dean Lewins, CC BY

Turnbull didn’t change Abbott’s policy when he became prime minister in September 2015. It has been recently reported that the Direct Action scheme’s Emissions Reductions Fund is “running out of steam”.

What next?

Only the brave or ignorant would make any specific predictions about the absurd(ist) rollercoaster that is Australian climate change policy.

In the last few months we’ve seen the Climate Change Authority issue a majority and minority report.

On Tuesday, transmission companies called for a trading scheme at least for the electricity sector, but the right wing of Turnbull’s own party seems implacably opposed, as do commentators such as Andrew Bolt. Now the Turnbull government appears to have capitulated.

Business, industry and green groups have been crying out for policy consistency and an orderly transition away from coal.

Now we wait for the results of the two reviews into Australia’s electricity and climate policy.

There’s the Finkel Review into the reliability and stability of the National Electricity Market, which was commissioned in response to the South Australian blackout of September 28. That will presumably create new terrain in the debate on renewable energy for which there is currently no additional target beyond 2020.

Then there’s the review of Direct Action itself, and its safeguard mechanism. In 2015, under pressure from Nick Xenophon, the government promised it would begin the review on “30 June 2017, and complete it within five months”.

Meanwhile, the Labor Party will have to come up with its own specifics for how it would hit the Paris targets. It’s hard to see the Liberal and National parties changing their minds on this issue, having somewhat painted themselves into a corner (it was not always so).

Ten years ago, after successfully fending off action, John Howard finally had to do a U-turn, but it was too little too late. The pressures are now building again. It will be interesting to see if Labor is capable of capitalising on them, and if social movements are more able than they were to keep Labor to its rhetoric this time around.

Ten years from now, will we be charting another ten tempestuous and wasted years?

Marc Hudson, PhD Candidate, Sustainable Consumption Institute, University of Manchester

This article was originally published on The Conversation. Read the original article.