The government can reduce emissions without reinstating a carbon tax – this is how

The renewable energet target (RET) review has concluded with largely expected results. After hand picking a review panel led by a noted climate change skeptic, the review has recommended scrapping or substantially scaling back the RET. The panel’s findings are neither surprising nor consequential: without the support of the Labour party or the Palmer United party, major changes to the RET are likely to be very challenging to implement.

Stepping back from the RET, it is remarkable that Australian climate and energy policy has made no forward progress. After repealing a carbon tax that appeared to perform exactly as price theory 101 would suggest – carbon emissions down, revenues up – the Liberal party has tied itself in knots devolving the previously dry field of environmental economics and externality pricing into a kind of internal cultural identity politics.

As someone who considers himself green, Liberal and fond of science and policy making that are evidence-based, it is utterly maddening – but it is where we are now and from whence we have to move forward.

Between the RET and the carbon tax, Australia’s efforts to cut emissions in the electricity sector have been impressive. Data from Pitt Sherry indicates that electricity emissions are down 14-15% from June 2006 on the back of a decline in power demand. Part of this can be attributed to the carbon tax and RET, but a far greater portion is due to other factors. A ~6% decline in demand has been caused by a storm of more energy efficient appliances, lighting, and a collapse in the price of solar panels (from ~$3.50 per Watt for modules in 2008 to approximately $0.65 per Watt today).

Try as policymakers might to load the dice, technology has and always will be a far greater force over the long run. As far as can be determined, cheaper solar is here to stay and will only get cheaper. You can deplete a resource but not technology or knowledge; if policymakers and power generators wish to swim against the rip tide broad based technological progress they can, but it is unlikely to have any lasting effects. For investors such as myself, the coal fired generation sector of Australia has a finite life. It is a matter of when, not if.

For example, the current dynamics in the eastern Australia power market are dire. The market is egregiously oversupplied with baseload power, according to data from AGL. AGL would know – they own the largest baseload generator in the country, Loy Yang A.

Peaking power is in relatively short supply and expensive due to the fact that the only thing more politically radioactive in NSW and Queensland politics than putting a nuclear plant on Fort Denison is regulating fracking and coal seam gas. There are issues with fracking, but similarly there are issues with acute gas shortages.

This is unlikely to be resolved as long as this political deadlock continues. Similarly, the oversupply of baseload power is not likely to be resolved without a carbon tax, since the generators with the cheapest cost of power in the LaTrobe Valley are also the most carbon intensive.

It is an endless source of wonder to me that with power generators unwilling to draw straws as to which units should exit the market, that the Energy Suppliers Association of Australia has not split with less carbon intensive generators pushing for a carbon tax or some means by which to force more carbon intensives generators to exit. Until that happens and the government buys into such a strategy, Australia cannot expect any sudden change to electricity sector emissions – just the gradual water torture of having demand eaten away by distributed solar.

With the stationary energy sector at deadlock barring some rift emerging between cleaner generators and the most carbon intensive ones, is there anything that the Abbott government can do to reduce emissions without reinstating a carbon tax?

There is, and it is completely consistent with the government’s foreign policy and desire to end the “age of entitlement”. The answer is in the Cedex data below. The only sector that has shown a substantial increase in carbon emissions is petroleum or transport fuels.

As can be seen above, most of that has been in bulk diesel used in the mining industry though aviation and passenger vehicles have also notched substantial increases in demand. While the budget has been poorly received, there is an essential truth in much of what has been said by the government in that the deficit is high and a lot of public funds were wasted by the previous government.

The problem has largely been that the belt tightening on the household sector in the budget is acute, whereas corporates and particularly the mining sector has been non-existent. Indeed, members of the minerals council have had a mining tax removed and the carbon tax repealed and can now expect a drop in the corporate tax rate. It is not hard to see how Australian voters’ sense of fairness has been offended by this.

One smart thing the government might consider is a scrapping or paring of the diesel excise exemption. It would save in the order of $6bn per annum according to budget estimates, and would ensure that the load is shared between households and a sector that has done very well indeed out of the change in government.

A change in the diesel price would lead to more frugal use of the fuel, likely through mine sites using solar or solar and diesel in place of diesel for power generation. While mining companies may not like it, there is not much they can do about it: manufacturers and service businesses can relocate but unless you move the minerals abroad it is hard for miners to do the same.

For passenger vehicles, the treasurer has already found little sympathy for the policy of re-indexing fuel excise and not without cause – this is a regressive change to the tax. A compensatory move may be to turn the small and ineffectual luxury car tax into something more meaningful – a fuel efficiency tax.

By encouraging higher fuel efficiency in the vehicle fleet and a transition to electric vehicles, the government could offer rebates to buyers of smaller, more fuel efficient vehicles and heavily tax Ferraris, stretch Humvees and their like.

This would have four key benefits. Firstly, it would cut emissions from transport even after accounting for Australia’s high carbon power grid. Any decarbonisation of the power grid in the future would have more “punch” in the future. Secondly, it would increase power demand and slow the “death spiral” of higher power prices leading to lower demand leading to higher power prices which has led to reduced profitability at generators and higher prices for consumers. Thirdly, it would reduce Australia’s exposure to imported commodity price volatility and cut the trade deficit while also reducing the country’s exposure and dependence upon oil exporting nations like Russia, with which Australia’s relationship is charitably described as complicated.

There are no political impediments to such a move now. Australia no longer has any car industry to speak of that churns out fuel inefficient, overpowered sedans and the power sector has everything to gain from such a change. The increase in power demand would make the RET’s 20% renewable target by 2020 more of an achievable possibility by offsetting declining demand.

It is long overdue that environmentalists and the media move past the Punch and Judy of the carbon tax and RET to other more politically workable environmental legislation.

The carbon tax will likely come back if only because it is harder to “double Irish” away a ton of emissions than a million dollars in profits. Nonetheless, there is plenty we can do now and which the current government is in no way impeded from doing both ideologically and practically.