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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

a question « Previous | |Next »
July 17, 2008

Why should polluting electricity generators be compensated? Cash handouts for asset write downs and some free permits. These energy companies will pass the cost of permits onto consumers regardless of how they get them. Isn't free permits for coal fired generators to continue to pollute allowing them a windfall profit, given the estimated 16 per cent increase in electricity prices (assuming the price of carbon dioxide emissions is $20 a tonne)? And these domestic free riders want Australia to be a free rider in a global emissions trading scheme.

climatechange.jpg

It sure looks as if the pressure from the emissions-intensive industries to block the full operation of an emissions trading scheme in 2010 has succeeded. And they have ensured the burden on business is eased. The actuality of special benefits for special interests and the watered down objectives is a long way from all the tough rhetoric about the greatest moral challenge likely to face humanity this century.

Even the Australian Financial Review says that the disappointment with the Green paper lies in the 'caution which seem excessive.' Some call this caution political realism---a measured transition. I would call it lacking political courage, given the generous allocation of permits covering 90% of the energy-intensive trade exposed industries and the open ended nature of the transition scheme to whittle emissions down. The date is 2025 or even latter.

There is little discussion of incentives to boost domestic and industrial energy efficiency whilst the five year cap on the carbon price effectively breaches the emissions trading scheme as it prevents the market from using price to effect behavioural change.

My interpretation of the compensation for coal-fired generators for curbing their pollution that causes global warming has little to do with 'safeguarding investment in industry' and more to do with succumbing to pressure from state Labor Governments in Queensland, NSW, SA and Victoria to protect their dirty coal fired power stations.

| Posted by Gary Sauer-Thompson at 8:09 AM | | Comments (17)
Comments

Comments

another question: is the softly softly approach by Captain Courageous and his hearty crew going to achieve anything by way of emission reduction?

Our emissions per head of the population are amongst the highest in the world. We emit about 2% of global emissions of greenhouse gases--the same as Britain or France with higher populations. Isn't that a cause of concern?

So what is going to be apart from business as usua--more economic growth and prosperity? The key groups -- big polluters, trade unions, motorists -- have been bought off . They’ll have to do little or nothing about their emissions over the medium term. What is that going to achieve by way of reducing our emissions?

Even the 2010 start date only remains an "ambition".

Nan,
its all about sheltering and protecting the big polluting industries for decades. The consequence is to shift the burden of emission reduction burden off the worst polluting sectors and onto cleaner businesses and householders.

The Greenhouse mafia have won a big victory.

The green paper goes into some detail about the rationale for providing financial support to existing coal fired generators. It's worth reading, but essentially, although the price of electricity will rise, it will not rise enough to compensate existing coal fired generators for the carbon tax. If the government were to do nothing to compensate these generators, then those who invested in those generators in the past would be left out of pocket. That might not bother people too much in itself, but the effect would be that future investment in major infrastructure would incur a cost premium (which ultimately customers would pay) to cover the risk of a future government imposed impost.

Sylvia,
that is true.

But the argument that an emissions trading scheme would force premature closure of coal-fired generators and lead to power shortages is a dubious one.

The coal-fired generators will not close until they are undercut by new lower emission generators. In the meantime they will continue to generate profits for their shareholders.

Secondly, lower emission plants--gas-fired peaking and new generation base load stations--- would attract investment because of the higher carbon price.

Anon,

No argument was offered that not providing financial assistance would result in coal-fired generators being decomissioned while their capacity is still needed. Indeed, on the figures provided in the green paper, the capacity is likely to remain in place for the remainder of its useful life, because its marginal operating costs are lower than for gas even after the carbon tax is included.

Rather, the concern is that if the Government displays a willingness to move the investment goal-posts years, and even decades, after investment decisions were made regarding coal-fired plants, it could equally well do so in respect of new capacity that is required in future to meet ever increasing demand. Investors might then decide that the risk of investing in the power sector is simply too great, and not do so. The result would be power shortfalls.

Sylvia,
you write:

although the price of electricity will rise,it will not rise enough to compensate existing coal fired generators for the carbon tax. If the government were to do nothing to compensate these generators, then those who invested in those generators in the past would be left out of pocket.

Good policy is not about compensating existing coal fired generators for the carbon tax for the decline in the value of their assets. They--eg.,the owners of Hazelwood-- have known about greenhouse pollution and global warming for a decade or more and they took a risk to invest in coal fired power stations in the 1990s. Big Tobacco was not compensated for loss of value in their assets due to smoking causing lung cancer. Why should Big Energy be treated differently?

What good policy requires is a transitional period in which investment in the existing coal fired generators shifts to more low carbon generation. So it is incentives to encourage investment in the new, not compensation for decline in the asset value the old.

Sylvia,
It is true that the Rudd Government is worried about the investment risk in the coal-fired powered generator sector, the flow-on from sharp cuts in asset values and the need to encourage the sector to invest in carbon capture and storage technology. Hence the new Electricity Sector Adjustment Scheme, which aims to retain confidence in the electricity-generation sector and smooth structural adjustment for workers, firms and regions as they enter decline.

I emphasis decline and structural adjustment as the purpose of the emission trading scheme is to phase out the polluting coal-fired electricity generators that is non-viable in Australia in a carbon-constrained world. And sound economic practice is that the market, not government intervention, should determine issues of viability.

The goal posts are simple. If coal-fired generation is to survive in a low carbon world, then the sector has to invest in carbon capture and storage technology.

Sylvia,
you write:

the concern is that if the Government displays a willingness to move the investment goal-posts years, and even decades, after investment decisions were made regarding coal-fired plants, it could equally well do so in respect of new capacity that is required in future to meet ever increasing demand. Investors might then decide that the risk of investing in the power sector is simply too great, and not do so. The result would be power shortfalls.

The industry has known what was going to happen for a decade, if not more. A price was going to put on the greenhouse emissions to ensure a necessary shift away from producing energy that emitted a lot of greenhouse gases and to new (low carbon emitting) forms of generating energy.

On the second point--the one about the future---we know that the way the switch to cleaner energy sources will happen will be decided by pricing (of carbon) in the market. This price will be eventually set high enough to ensure that cleaner energy sources are competitive with coal. So if the price is initially low (as looks to be the case), then it is going to get expensive over the next decade.

Sylvia,
I appreciate that the coal-fired electricity generators have a problem. It appears that they are not being offered all that much in terms of their rent seeking. Their competiveness will be threatened, and too many free permits will undermine the whole point of the emissions trading scheme.

But honestly, The Green paper proposes, that electricity generators be compensated both by limited amounts of direct assistance when an ETS is established (though this is not specified) and by being allowed to receive up to 90 per cent of their permits free of charge.So they will develop saleable expertise in making dirty energy industries cleaner.

They seem to be well looked after.

The concern about future perception of investment risk does not just relate to future investment in coal-fired power stations. If that were the only problem, I think the Government might accept it. No, the risk relates to all future investment in power generation. What the Government does today in respect of coal, it could do again tomorrow in respect of gas. We'll be in a big mess if investors decide the risk is of investing in gas-fired generation is too great.

Sylvia,
I misunderstood.I see your point. The possibility you mention could well happen to gas power generators as the price of carbon is increased.

Gary+ Sylvia,
but the targets will be known and the price of carbon under an emissions trading scheme. That gives certainity to investors. They know that the price of carbon is going to increase and that it will get more expensive in order to meet the target.

There is risk involved, but that is normal.

Anon, the target as I understand it relates to 2050, which was presumably chosen so that the members of the present Government will be safely dead and buried before any judgement could be made as to success. However, the problem as I see it relates not so much to the stated target as to the willingness of the Government to change the rules after the game has started.

Sylvia,
how would they change the rules of the game with 2020 targets in place, a price for carbon, investment in "clean" coal technology and a policy to shift to a low carbon economy? We know the scheme would lead to reduced emissions, and that the carbon price will rise steadily over many years as the cap on emissions is progressively lowered.

So you do need to spell out the possibility that "changing the rules of the game" refers to. Otherwise the phrase is empty.

The coal fired generators do have problems of their own in making the shift to clean coal through carbon capture and storage. That technology to deal with the huge volumes of Co2 produced by coal fired electricity requires up to 30% of a generator's gross output to compress the CO2 after it is captured. It will also require big investments.

The Green paper barely mentions funding for new technology to reduce emissions in the light of market failure to develop such technology--eg., solar and geothermal. Wind research is being done in Europe. The Green paper also fails to include new buildings or environmental upgrades of existing sites in the proposed national emissions trading scheme. It is mostly about reducing the political cost of putting a price on carbon pollution paid for by those that emit the pollution.

One way the rules of the game could change is if it's subsequently realised that CO2 emissions are not important. The abolition of a carbon tax would mean that base-load gas-fired generators would become uneconomic compared with new coal-fired stations that could then be built. Alternatively, a future government could reverse Australia's stance on nuclear power, which would have much the same effect.

Power generation is a bread-and-butter and very long term investment. No one expects to get rich quick doing it. Investors need some certainty that governments won't change the rules without compensating those who lose out. Once a government displays a willingness to do that, all bets are off.

I cannot accept the idea that the problem faced by coal-fired generators is of their own making. We all wanted to use the power they generate, and government consent in one form or another was always required before they were built.

Syvia,
I think that we can discount the possibility that CO2 emissions are not important in the next couple of decades don't you.

Sure if that did happen, the abolition of a carbon "tax" would mean that base-load gas-fired generators would become uneconomic compared with new coal-fired stations that could then be built. However it is highly unlikely compared to global temperatures rising by 2 degrees due to CO2 emissions.

The possibility of a future government could reverse Australia's stance on nuclear power having much the same effect, is different scenario. A future Coalition government may well do that. However, nuclear power is only economically viable with a high emissions cap and a high carbon price. This form of power generation would then have to economically compete with other forms of renewable energy.

I just don't see what the fuss is about here. The owners of the coal fired power generators just need to develop their technology to ensure clean coal.They are getting heaps of public subsidies to do this compared to solar and geothermal power generation.