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Powering the next boom—Climate & Energy

We propose market-based solutions in a bid to depoliticise climate and energy policy. In our 'Powering the next boom' series, we tell an optimistic story about Australia’s future as a renewable energy superpower. We outline and address key challenges the nation will face as the world shifts towards renewables.

Phasing down gracefully: Halving electricity emissions this decade

Net-zero is inevitable, by 2050 or even earlier. To get there, our economy will need to undergo a tremendous structural transformation. The longer we delay, the costlier it will be. Our 2030 emissions target is a critical milestone on the path to net-zero. Relying on the COVID-19 slowdown and uncoordinated state action only to fall short of our Paris target isn’t a promising start.

To begin the transformation, we should commit to halving emissions from coal-fired electricity this decade. Given the states are already committed to forcing renewables into the grid at record pace, we could very well reach our 2030 target without federal action. But this ad-hoc and scattershot process will be unnecessarily costly, and poses significant risks. One only needs to remember the debacles that were Port Augusta and Hazelwood—and imagine them on a national scale—to appreciate the threat we face. Failing to act risks supply shortfalls and price spikes.

We need national leadership to secure certainty for energy communities, workers, consumers, and investors around the inevitable phasedown of coal-fired generation. To that end, the Government should introduce the Coal-Generation Phasedown Mechanism (CPM), to be administered by the Clean Energy Regulator as with the Emissions Reduction Fund and Safeguard Mechanism.

The CPM has five components:

1. ANNOUNCE SECTORAL EMISSIONS TARGETS FOR 2026, 2028, AND BEYOND 2030. Under the Safeguard Mechanism, sectoral emissions caps can be applied to generators down to 50% by 2030 to drive participation in the CPM. A certain stepdown in coal generation would generate a clear market signal, pulling investment in renewables and firming into the grid in advance.

2. OFFER CONTRACTS ACROSS THE THREE TIMEFRAMES FOR EMISSIONS SUMMING TO THE TARGETS. Contracts for emissions (rather than electricity supply) for the three timeframes would be determined simultaneously, favouring less emissions-intensive plants. The contracts wouldn’t only cap emissions, but also guarantee a minimum electricity supply right up to contract expiration.

3. IMPLEMENT A SEALED-BID AUCTION SYSTEM FOR ALLOCATING THE CONTRACTS. Participants would submit their valuations for generating quantities of emissions for each timeframe. The auction system would then allocate contracts and determine relative prices to minimise economic costs, but could also accommodate other factors; e.g., geographic concentration.

4. IMPOSE MUTUAL OBLIGATIONS TO AFFECTED WORKERS UPON EXPIRY OF THE CONTRACTS. In order to participate in the CPM, generators would be required to offer redeployment opportunities for affected workers upon contract expiry. Where this is not possible, retraining and generous remuneration arrangements would be required.

5. ACCOMMODATE A GOVERNMENT FUNDING ALLOCATION (POSITIVE, ZERO, OR NEGATIVE). At one extreme, the CPM could generate revenue to be redirected to local communities. At the other, generators could be fully compensated for their lost profits, though this would come at considerable cost to taxpayers. The CPM can also accommodate any intermediate funding allocation.

What energy communities, workers, consumers, and investors have long desired is the certainty that comes from national leadership. It isn’t about ending coal-fired generation—the plummeting cost of renewables and state policies to push them into the grid have already made that decision. But the last thing anybody wants is an uncontrolled detonation. The Commonwealth’s role is to coordinate an orderly phasedown at minimum economic cost, and to ensure that cost is shared fairly. It’s time to step up.

Powering the next boom

Australia has committed to full decarbonisation by some point this century. But if we don’t commit soon to rapidly decarbonise, the decision may be forced upon us. Japan, South Korea, the UK, and the EU, among others, have already committed to net-zero by 2050. China has pledged net-zero by 2060. The Biden campaign in the US has committed to net-zero by 2050 and $2.4 trillion in climate initiatives. Canada has a nation-wide carbon price. Failing to commit soon to net-zero by 2050 will diminish our international standing, and harm our competitiveness.

But a net-zero commitment isn’t enough. We’re due to reduce our emissions by just 4.2% over the coming decade. On our current trajectory, we will only meet our Paris commitment by using carryover credits from the soon-defunct Kyoto Protocol. We should commit today to meet our Paris target without using our Kyoto credits. This can be achieved by halving our emissions from electricity within 10 years, as the UK did to 2018.

Reforming our energy sector can unlock the economic potential of our abundant natural resources, create new industries, and propel our economy into the future. We will need to overcome barriers to the transition, including disincentives to investment in transmission, the negative impacts on coal communities, and threats to the reliability of our electricity supply. Our goal should be to transition at minimum economic cost.

This consultation paper launches Blueprint Institute’s new energy policy initiative—Powering the next boom. It sets out the decarbonisation challenge we face in the decades ahead, and how we can confront it.

We canvas five topics critical to this effort:

  • AUSTRALIA’S INTERNATIONAL STANDING. To protect our reputation and trade prospects, we should meet our Paris targets without Kyoto credits, and commit to net-zero by 2050.
  • TRANSMISSION. We should remove the impediments to new transmission investment that exist, and accelerate projects that enable reliable decarbonisation.
  • A FAIR TRANSITION FOR COAL COMMUNITIES. A path to net-zero must receive broad community support, which means supporting those harmed by the transition.
  • CLEANTECH FINANCE. Further support for energy RD&D and commercialisation can help accelerate global decarbonisation, drive economic growth, and foster new industries.
  • GREEN HYDROGEN. To unlock our natural advantage in green hydrogen, the Government should advance feasibility studies, pilot projects, and green aluminium and steel.

Electricity is the low-hanging fruit of decarbonisation. The path to net-zero extends far beyond the electricity sector. The Government should also consider investments to support decarbonisation through soil carbon, the lithium value chain, electric vehicles, energy IT, energy efficiency, and conservation and restoration, among others. Our future research will produce evidence-based recommendations to advance these solutions at lowest cost.