Experts agree emissions intensity scheme the way to go

If ever there was proof that modern-day politicians are more followers than leaders, Malcolm Turnbull must be it. Last week, under pressure from the Coalition's climate change-denying rump, he dropped the ball on global warming.

He inherited from Tony Abbott a commitment under the Paris agreement to reduce our carbon emissions by 28 per cent below 2005 levels by 2030, plus a plan for a review in 2017 to determine what policies were needed to achieve that target.

Everyone's agreed that the government's existing direct action approach, taking money from the budget to pay farmers and others to cut their carbon emissions, is quite inadequate to achieve the new target.

The authorities responsible for advising the government on energy and climate change – the Climate Change Authority, the Chief Scientist, the Australian Energy Market Commission – have each decided the best approach would be to introduce an "emissions intensity scheme" on the electricity generation industry.

But last week, when Energy Minister Josh Frydenberg mentioned that the review would include examining an intensity scheme, the Coalition's deniers went ape and Turnbull summarily excluded such schemes from the review, claiming they would add too much to electricity costs.

We're not all climate change deniers, however – and far from all Coalition voters – so if we think something decisive should be done, the way forward is to convince Turnbull this is what most of his potential followers want.

In other words, it's our community and our economy and prime ministers don't get to dismiss options without us even being allowed to think about them and decide what we prefer.

Since electricity generation accounts for about a third of our total carbon emissions, it's pretty clear it will be the main focus of our efforts to reduce emissions, especially because of the emergence of renewable energy from wind and solar.

The final report of the energy market commission, released at the Council of Australian Governments meeting on Friday, evaluated three different policies for achieving the pledged reduction in emissions.

The first was one that would appeal to many environmentalists: extending the existing large-scale renewable energy target.

At present, the target is to achieve 33,000 gigawatt hours of renewable energy a year by 2020. To achieve our commitment under the Paris agreement, we'd have to more than double the target to 86,000 gigawatt hours a year by 2030.

The second approach was for a government regulator to work out which coal-fired power stations should be required to close down at which times, as renewable energy expanded.

You'd start with the oldest generators, including the particularly polluting brown coal generators.

The third approach was the one Turnbull rejected sight unseen: imposing an emissions intensity scheme on electricity generators.

You start by measuring the industry's present emissions intensity by dividing its total emissions of carbon dioxide in a year by its total production of electricity in the year.

This average becomes the industry's emissions intensity standard. Those generators operating above the standard have to get down to it by buying "credits" from those that are below it.

The standard is lowered – made more demanding – each year by the set amount needed to achieve the desired reduction in emissions.

See how it would work? The "dirtiest" generators – the coal-fired generators – also happen to be the ones whose electricity is cheapest to produce, whereas the cleanest producers – wind and solar – are the ones whose electricity is dearest.

So the cheap dirty generators are required to subsidise the expensive clean producers, thus creating a price incentive for the clean producers to expand and the dirty producers to contract.

It also means the overall price doesn't change much.

So how do the three approaches compare, according to the modelling done for the report – remembering that all modelling is built on a host of assumptions?

The extended renewable energy target turns out to be the worst approach. It leads to almost the biggest increase in the cost of electricity to consumers over the years to 2030.

It also has the highest cost per tonne of emissions reduced – $42 a throw.

This is because it doesn't allow businesses to pick the type of technology most appropriate to their needs. Dirtier brown coal would remain in the market for longer, while black coal and gas-fired generation were forced out.

Regulated closure of generators would cause the highest increase in prices to consumers, though its cost of emissions reduction is the second lowest - $19.50 a tonne.

The bureaucrats and politicians making decisions about which generators to close would have to get it right, avoiding the temptation to take account of political pressures and the interests of generous donors to party funds.

This leaves the emissions intensity scheme. It has the lowest effect on consumer prices relative to what the model assumes would happen to prices even if no attempt were made to reduce emissions.

It assumes consumer prices would still go up under "business as usual", but would rise by less under the intensity scheme.

It also has the lowest cost of reducing emissions – $17.50 a tonne.

So the option the formerly studious Turnbull rejected without considering is the best, and the one least likely to put prices up.

Well done, Malcolm. Especially as it's a safe bet Labor will be offering such a scheme at the next election.

Read more >>

Politicised Treasury bites own tail, covers for Turnbull

Shadow treasurer Chris Bowen is right: One of the Abbott-Turnbull government's various acts of economic vandalism is its politicisation of the once-proud federal Treasury.

Among Tony Abbott's first acts upon becoming prime minister in 2013 was to sack the secretary to Treasury, Dr Martin Parkinson.

Even so, Parkinson was left in place for more than a year before being replaced by John Fraser, a retired funds manager, hand-picked by Abbott.

Fraser had risen through the ranks of Treasury under the formative influence of the legendary John Stone, until he left in the early 1990s to make his fortune in the money market.

When Fraser returned in triumph to take the top job, singing the praises of Margaret Thatcher, Ronald Reagan and David Cameron's austerity policy in Britain, it seemed clear he hadn't spent the intervening decades keeping up with developments in thinking about fiscal (budgetary) policy.

The Abbott government's next act of politicisation came a few months later with the publication of Treasury's fourth five-yearly intergenerational report.

It had been turned into a partisan propaganda rag, full of dubious figuring intended to prove the Abbott government's failure to return the budget to surplus as promised was all the fault of the previous Labor government. The media tossed the report aside.

The latest stage in the politicisation of Treasury came last week with its publication of a report on The Effectiveness of Federal Fiscal Policy, commissioned from Professor Tony Makin, of Griffith University.

If you've never heard of Makin's work, you'll be surprised to learn he regards fiscal policy as utterly ineffective and probably counterproductive.

If you have heard of it, you won't be. Makin's views on the ineffectiveness of fiscal "activism" – using budgetary stimulus to assist recovery during recessions – are well known, unchanged and unchanging.

He's the go-to guy for anyone who'd like an independent report asserting that fiscal policy doesn't work – never has and never could.

In all the decades since Makin made up his mind on this question, all the academic theorising and empirical evidence from the real world have served only to confirm the wisdom of that decision.

His paper's "review" starts by rubbishing that deluded fool John Maynard Keynes – who, presumably, will never attain the intellectual heights reached by Makin and his mates – and praising such giants of the profession as Robert Mundell, Marcus Fleming, Robert Lucas and Thomas Sargent.

It then reprises Makin's well-rehearsed argument that the Rudd government's budgetary stimulus – undertaken at the urging of the then Treasury secretary, Dr Ken Henry – was unnecessary and unhelpful.

And finally it does a lot of hand-wringing about the rapid growth in the public debt (especially when you exaggerate the size of the debt by quoting gross rather than net, a trick Makin seems to have learnt from Barnaby Joyce), the burden being left to our children, and the need to make reducing recurrent government spending our top fiscal priority.

One small problem – the last time Makin ran his anti-activism line, in a paper commissioned by the Minerals Council, Treasury issued a detailed refutation. Makin seems to have taken none of its substantive criticisms into account in his Treasury-commissioned version.

This is a measure of the extent to which politicisation has changed Treasury's tune.

Apart from correcting various factual errors, old Treasury noted that the 1960s-era Mundell-Fleming open economy model Makin uses relies on extreme assumptions that don't hold in Australia's case, and certainly didn't hold during the global financial crisis.

Makin is unimpressed that, at that time, such lightweights as the International Monetary Fund and the Organisation for Economic Co-operation and Development heaped praise on the Rudd government's budgetary stimulus.

So why has new Treasury chosen now to pay one of its former critics to repeat his ill-founded criticisms?

One reason is that Fraser left Treasury not long after it had advised the Hawke government not to use fiscal policy to respond to the severe recession of the early 1990s, but to rely solely on monetary policy (lower interest rates).

Henry and others in Treasury eventually realised how bad that advice had been. Indeed, Henry's advice to Rudd was influenced by a determination not to repeat the mistake. But Fraser had left the building by then and didn't read the memo.

Another reason is that, now, both the IMF and the OECD are urging the Turnbull government to help strengthen the economy by increasing its spending on worthwhile infrastructure.

What's more, some guy called Dr Philip Lowe has been saying the same thing. Forcefully.

Makin has been hired to tell these idiots they don't know what they're talking about.

Read more >>