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15 November 2006

The Stern Review: how does Australia measure up?

The Stern Review commissioned by the UK Government and released on 30 October 2006 is one of the first reports to critically examine the global economic impact of climate change over the medium and long term.

Based on scientific evidence, the Review argues that serious, long-term and irreversible damage will occur from business-as-usual paths for emissions. It warns that warming at the predicted levels will have an adverse effect on human activity and the environment. Without action, it is very likely that the global temperature increase by 2050 will be about 2oC, with a 50% chance of a 5oC increase by the end of the century. Stern concludes that if no action is taken the costs of climate change are to be around 5% of GDP each year, now and forever.

In contrast, the Review suggests that it will cost just 1% of GDP each year to take action to reduce greenhouse gas emissions and stabilise. Stern predicts that by taking action the NPV (net present value) of the benefits will exceed the costs of action by approximately $2.5 trillion.

The Review emphasises that:

  • a common global carbon price should be established (preferably by way of a carbon tax coupled with a universal trading scheme) and mechanisms implemented to link carbon finance to policies and programs rather than individual projects;
  • governments should promote low carbon technology and instigate behavioural change through regulation, information and education
  • international cooperation is vital;
  • corporations play a critical role, often having longer time horizons than governments; and
  • a long-term approach is crucial but immediate action is also necessary.

Introduction of a carbon price

The Review states that a global trading scheme with a global carbon price is an essential element of any future international legal framework for climate change. It makes it clear that such a framework must bind developing, as well as developed countries. In light of this conclusion, Australia may face increasing international pressure to participate in a multilateral legal framework rather than rely on national and voluntary action alone.

Such a scheme is designed to make emitters bear the marginal cost of their emissions by placing a quota or cap on the level of emissions permitted by a country/company. Those countries/companies can then trade their quota allowance with others based on whether they are under or over emitting. With a limited supply, the idea is that demand will increase the price of buying additional emission allowances, making investment in low-carbon alternatives more attractive.

Stern argues that short-term price instability might result from the introduction of a broad based carbon price. However the long-term impact would be positive due to cost savings arising from cheaper, more widespread use of low carbon technologies. There would also be compliance costs associated with the changeover and the resultant further regulation of the industry.

The Australian government has consistently stated its opposition to introducing a carbon tax or entering into a global or regional emissions trading scheme. According to the Prime Minister, Australia’s first priority in respect of climate change must be to protect the Australian economy and that Australia’s competitors in industry must bear a proportionate burden in reducing greenhouse emissions. However, since the release of the Stern Review, the government has partially stepped back from this position. It has indicated that it would be willing to consider a global emissions trading scheme if all countries were involved. The Prime Minister took this further in announcing that a business-government group will be set up to consider and prepare for Australia’s potential participation in a global emissions trading scheme.

The proposed inter-state “cap and trade” emissions trading scheme, modelled on the EU Emission Trading Scheme and relying on market forces to determine the price of permits, has gained momentum since the Review’s release. Such a scheme could be operational by 2009. Submissions to the National Emissions Trading Taskforce Discussion Paper: Possible Design for a National Greenhouse Gas Emissions Trading Scheme are due by 15 December.

In New South Wales, the Greenhouse Abatement Scheme has just been extended out to 2020 under the Electricity Supply Amendment (Greenhouse Gas Abatement) Act 2006, providing more certainty for clean energy investment in NSW (and the other National Electricity Market states and territory). The Act will abate a further 86 million tonnes of greenhouse gases, increase the penalty for non-compliance by electricity retailers from $11.50 to $15.50 (CPI indexed) per abatement certificate and provide for greater transparency. The per capita emissions target will not change.

Stern broadly favours an approach similar to that proposed by the states, but it adopts a social cost of carbon method of pricing rather than a market forces-based approach. The social cost of carbon approach means the price should rise over time to reflect the increasing damage as the stock of greenhouse gases grows.

Promotion of low carbon technology and instigation of behavioural change

The Australian government has frequently stated its preference for promoting low carbon technology over implementing carbon pricing measures, both before and since the release of the Review. The measures the government prefers include those below.

  • Mandatory Renewable Energy Target Scheme (imposed on wholesale buyers of electricity and scheduled to expire in 2020 with targets already substantially met).
  • Funding 42 new clean-energy projects with a total cost of A$60 million as part of the government’s $100 million involvement with the Asia Pacific Partnership on Clean Development and Climate Change.
  • $500 million Low Emission Technology Demonstration Fund, under which the first stage of funding has been granted for two Victorian projects ($75 million for Solar Systems’ 154 MW solar concentrator project near Mildura and $50 million for International Power’s Hazelwood Power Station towards its pilot for carbon capture and storage) and two Queensland projects ($75 million for the 100MW Fairview Power Project which plans to extract methane from the coal seam, combust it, and then capture and store the resulting carbon dioxide in the coal seam and $50 million for CS Energy's Oxy-Fuel demonstration project to retrofit the Callide power plant).
  • $75 million solar cities trial to support the introduction of working solar models in urban areas. Three cities, Adelaide, Townsville and Blacktown, have now been chosen to conduct trials.
  • Solar panels installation rebate, which now appears to have the support of the Federal Treasurer and is likely to be extended.
  • Establishment of the Nuclear Energy Taskforce, due to deliver its findings on whether nuclear power is a viable low emission alternative to meet Australia’s future energy needs by the end of November 2006.

The Victorian Renewable Energy Target scheme (VRET), which has not yet commenced, goes further than the Federal Mandatory Renewable Energy Target. The Victorian scheme operates to 2030 and aims to increase renewable electricity generation by 4674GWh by 2016 with 10% of Victoria’s electricity to be supplied from renewable sources by 2010.

Since the Review was released, New South Wales has also proposed its own renewable energy target scheme compatible with VRET. The NSW scheme aims to secure 10% of the state’s energy from renewable sources by 2010, and 15% by 2020. Legislation will be introduced to implement NRET after the state election in March 2007 if the current government is re-elected.

The predominantly ad hoc approach to renewable and low emission technology subsidies currently adopted by federal and state governments falls some way short of the Review’s recommendations. The Review advocates the direct promotion of new technology through a two to five fold increase in investment by government worldwide as well as emission standards for buildings and appliances.

What does it mean for you?

The Review is likely to have an immediate, potentially dramatic effect on UK and EU energy and climate change policy and regulation. However, the implications for regulation in Australia are more difficult to discern. Aside from the Federal Government’s strong commitment to the Asia Pacific Partnership on Climate Change and Clean Development, it appears that in the foreseeable future it will fall to the states to develop a coordinated approach more consistent with the Review’s recommendations, particularly in relation to the development of a carbon market. Business is unlikely to the get the certainty it requires for some time yet.

The move towards clean energy will create business opportunities as new and emerging markets and energy technologies grow and develop. The Stern Report has estimated that low-carbon energy technologies and markets will be worth around $500 billion by 2050. There will also be the emergence of other low-carbon goods and services and new trading and financial instruments in areas relating to carbon trading, the financing of clean energy and new technologies and other related products such as insurance.