Australia’s large brown-coal-fired power stations are among the highest carbon-emitting power plants in the world.

Yet even with increasing amounts of renewable sources added to the electricity network, and more power capacity than we need in the network, these stations are still running.

We have a suggestion for how the problem could be solved, in a way that is cost-effective and should be politically acceptable.

Which coal should bow out?

Australia’s renewable energy target brings new power-generating capacity online, but overall electricity demand fell over recent years.

As a result, fossil fuel power stations are running for less of the time. Ultimately not all will be able to survive. But which ones will go?

Within the fossil fuel power fleet, the plants with the highest emissions are the brown-coal-fired power plants in Victoria’s Latrobe Valley. (The South Australian brown coal plants are due to be closed in 2016). So these plants should go first, in the interest of reducing Australia’s carbon emissions.

With a high enough carbon price, the cost of running high-emissions brown coal plants would be higher than the cost of lower-emissions black coal plants. Indeed brown coal plants were running less during the two years that the carbon pricing mechanism was in place, which contributed to emissions reductions during those years.

But without a carbon price in place, the running costs of brown-coal-fired plants are extremely low: they sit right next to open-cut coal mines and there is no alternative use for the brown coal, so the fuel cost is minimal.

And so there is the risk that the next large power station to shut down is one that produces electricity with much fewer carbon emissions than the brown coal plants, and that the high-emitting brown coal plants stay put.

To see the magnitude of the issue, consider that the average emissions intensity for Australia’s black-coal-fired plants is around 0.9 kg of CO₂ per kilowatt-hour, while Victoria’s brown coal plants run at 1.2-1.5 kg of CO₂ per kilowatt-hour.

We estimate that the closure of one of the more emissions intensive of Victoria’s brown coal fired power plants could save between 2 million and 7 million tonnes of CO₂ per year. This accounts for extra electricity produced by black coal power plants, and that the remaining brown coal plants might be run a little harder too.

Closing plants a tough sell

Australia has a target to reduce national emissions and the government has stated that it is not planning to reintroduce a comprehensive carbon price. This would suggest that specific government intervention to close brown coal power stations is warranted. However, the policy mechanisms usually suggested have substantial drawbacks.

One way to go about closing power stations is for government to pay subsidies for plants to close. Germany is preparing a variant of this to retire three brown coal fired plants. Under the Gillard government in Australia, there was a plan to make payments for closure, however it was abandoned.

But it would not be politically acceptable for the government to pay large amounts of taxpayers’ dollars to the owners of an old high polluting plant. It would also be difficult for government to choose the right plant, and to calibrate the payment, because much of the information needed is available only to the operators of the power plants.

Another approach is to simply use government regulatory powers to force shutdowns of particular plants, say on the basis of age or emissions intensity. But it would not be desirable for government to intervene by singling out one or more particular plants and forcing them to exit the market – and it would similarly be politically unacceptable in any case.

Let the market decide

In our new paper Brown coal exit: a market mechanism for regulated closure of highly emissions intensive power stations, soon to be published in the journal Economic Analysis and Policy, we sketch a solution to the dilemma.

Under our approach, the government leaves it to a competitive bidding process to determine which plant will close and at what payment level. Plants bid over the payment they require for closure, the regulator chooses the most cost-effective bid. The plants remaining in operation then make financial transfers to the plant that exits, in line with their emissions, under government regulation.

Such a mechanism can provide emissions savings from plant closure at least cost, avoid budgetary costs by sourcing the payments for closure from the plants remaining in production, and provide some incentives to adjust the power mix to reduce emissions. Payment by remaining generators on the basis of emissions also encourages plant owners to submit lower bids than otherwise, given that they would be faced with emissions-related payments should they remain open.

Additional costs would ultimately be borne by consumers as electricity prices rise to accommodate more expensive power sources. However the impost would be small and temporary because the payments would likely be small compared to the overall size of the market.

More detailed analysis will be needed, including about strategic bidding in a market with a small number of candidate plants, and detailed modelling of likely effects on emissions, prices and revenue. But with this proposal we hope to rekindle a discussion in Australia about closing brown coal stations, which might not happen as soon as it should without a carbon price.

Frank Jotzo has received funding from various organisation, and holds various positions related to climate change policy. There is no conflict of interest with regard to this article. There was no funding for the research on the paper underlying this article.

Salim Mazouz does not work for, consult with or own shares in any company or organisation that would benefit from this article. There is no conflict of interest with regard to this article. There was no funding for the research on the paper underlying this article.