Labor embraces renewables at the cost of good climate policy

At this weekend’s ALP National Conference, Bill Shorten is likely to propose a target of 50% renewable electricity by 2030 as Labor’s central climate change policy.

This proposal demonstrates in spades how poisonous climate change politics has trumped good policy. As with taxation, neither main party seems prepared to develop an effective and efficient climate change policy and make a case for it in a way the electorate will embrace.

From emissions trading to the carbon tax

For a brief golden moment around 2008 we had the prospect that a firm cap on emissions would drive an economically efficient carbon price – an emissions trading scheme – with bipartisan support.

And, for the majority of economists and policy architects this represented the preferred policy approach to effectively address climate change at lowest cost.

As this carbon price steadily increased, the need for a Renewable Energy Target, also a policy with bipartisan support, would simply fall away as the carbon price did all the lifting to reduce emissions.

Alas, the fixed carbon price that was finally introduced in 2012 was not economically efficient as a falling European price meant it looked unreasonably high at its fixed level of A$23 per tonne.

It was removed in 2014, leaving the RET as “the central policy instrument for reducing electricity sector emissions,” to quote the Climate Change Authority.

Yet the Authority also noted the RET was not the best approach to reducing emissions in the electricity sector.

Economic modelling for the Warburton Review of the RET also concluded that “whilst the policy is somewhat effective in the abatement of emissions, it is at high cost compared to current global pricing and is therefore not the most efficient means of emissions abatement”.

Renewables over carbon pricing

Yet the Labor Party seems prepared to embrace renewable energy as the central plank of the climate change platform it will take to the next election and into government if it wins. It is a brave move, given the inevitable accusations of high cost this approach will attract.

Bill Shorten and Mark Butler have committed to an emissions cap to meet Australia’s post-2020 target for emissions reductions.

In an ideal policy world, a market mechanism such as emissions trading would be used to meet the target, and renewable energy would play whatever role was economically efficient to meet the cap at lowest cost.

Yet Labor seems unprepared, at least for now, to advocate such a lowest-cost policy to turn the cap into a carbon price. The scorning response last week from some media outlets and the government to a leaked Labor Part policy option paper indicates why Labor is being so circumspect.

Labor must now put together a comprehensive climate policy framework that can deliver Australia’s fair share of a global emissions target, provide a credible and predictable direction for investors, and survive the political barrage that the government will no doubt unleash against it.

This will likely involve a series of carefully crafted individual elements stitched together into an ugly, albeit comforting, patchwork policy quilt. Although not the ideal policy mix, it may yet turn out to be politically astute. Labor’s assessment of political reality seems to be that it has no other option.

No solutions on the other side either

Of course, the government remains bereft of a policy to achieve these same objectives. Direct Action, with its Emissions Reduction Fund and Safeguard Mechanism, is designed to help meet the government’s target of a 5% reduction in emissions against 2000 levels by 2020. The government is expected to announce its post-2020 target in August.

This target is likely to be for 2025 or 2030 and will require a lift in aspiration. Indeed, the Prime Minister pledged that Australia will “take a strong and credible position" to December’s United Nations climate negotiations in Paris.

Yet the current policy is not fit for that purpose and will require replacement or substantial re-engineering to make it so. The government has spent more time defining what its policy will not be than the alternative. That flexibility is about to expire as a credible domestic policy will be required to achieve the announced target.

Many political pundits and advocates for vested interests on both sides will welcome a genuine debate over alternative climate change policies in the lead-up to the next election. Let the battle and blood-letting continue.

Yet investors in the energy sector and those concerned about the urgency with which climate change must be addressed will mourn the passing of one more opportunity to forge a genuine consensus on how to address a problem that will hurt all Australians as well as our global sisters and brothers.

Tony Wood owns shares in Origin Energy and other energy and resource stocks through his superannuation fund.