Plan provides little reason to change

The Australian Financial Review, Page: 5
Wednesday, 16 August 2006

The Labor states' climate change plan will create a market price for emitting a tonne of carbon dioxide equivalent (C02) but it will initially be so low that there will be little incentive to switch to renewable or clean-coal technologies. Under the most conservative scenario proposed by the states, emissions would be reduced by just 8 per cent between 2010 and 2030. While this compares to a 33 per cent increase if nothing is done, it's well below the cuts most believe are required to control global warming (60 per cent by 2050 is the position of many business leaders and environmentalists). Under this same scenario, wholesale electricity prices are forecast to increase by 45 per cent over that 20-year period.

And under the same scenario, a tonne of C02 would be valued at around $12 in 2010, rising to around $30 by 2030. This so called "price signal" is supposed to make up the cost difference between clean technology and coal-fired generation, which is the cheapest option. But until the price moves to around $30, solar, wind and even clean-coal technology would be priced out of the market. This means much of the action in the scheme's early years would be in switching from coal-fired power plants to gas-fired, which would require a price signal of between $10 and $14. Other measures such as energy efficient light bulbs and water saving shower heads (they use less hot water and therefore less electricity) would also come into play.

This is the low-hanging fruit, designed not to shock the economyin the scheme's early years. This gradual phase-in also gives clean and renewable technology time to become cheaper. This is a compromise for Peter Beattie. The Queensland Premier is sceptical about emissions trading, which is hardly surprising for a state leader with 300 years' worth of coal at his disposal.

He's said a trading scheme should not be introduced until clean-coal technology is cost competitive. Therefore the states look to havedeliberately kept the price of carbon low in the scheme's early years in order to give clean-coal technology time to develop. It should come into play around 2020. At present, so called "carbon sequestration", which stores CO, emission underground, would require a price signal of between $45 and $95, but this is likely to drop to around $30 over the next decade.

This price signal of around $30 is more in line with the European emissions trading scheme. The market, which comes under the Kyoto Protocol, has fluctuated wildly in recent months but looks to have settled around?16 ($27). The head of government affairs at Pacific Hydro, Andrew Richards, says the proposal by the states is a step in the right direction."The scheme can always be tinkered with at a later stage, but you need to get the early ground rules set for a carbon-constrained world," Richards says.

The chief executive of the Renewable Energy Generators of Australia, Susan Jeanes, says the plan is good for both sides in the climate debate."The discussion paper clearly shows that the costs of an emissions trading scheme is not going to bring the economy to its knees," she says. But for the scheme's detractors, and there will be many, a possible 45 per cent rise in the price of electricity is a burden the economy can't take when developing countries such as China and India are not making the same cuts.