Response to AIGN report critique Media Release

Oct 27, 2010 - 2:00pm


On October 19th, The Climate Institute released world first research into the direct and indirect price tags on pollution in the electricity generation sector of six major economies. This report concluded that all these economies (USA, China, UK, Australia, Japan, South Korea) are to a greater or lesser degree implementing price tags on pollution and that Australia has been falling behind in efforts to put in place incentives to drive clean energy investments.

The Australian Industry Greenhouse Network (AIGN) has released a one page critique of this analysis and here we address a number of issues raised.

Firstly it should be noted that The Climate Institute and Vivid Economics put a premium on transparency. For example, Vivid Economics full report outlines all assumptions and the calculations used to reach conclusions. This was intentional as this work is a first of its kind assessment and there are many data and conceptual difficulties to address. In this context it is important to get robust feedback on the report so it can be built on and any future, and similar, analysis can enhanced.

It is also important to note, and as The Climate Institute has emphasised, Vivid Economics’ work does not cover all the actions that countries have been or are planning to take to reduce their economies’ dependence on pollution. As such, it is likely to underestimate, not over estimate, the effort countries are making to put a price tag on pollution and drive clean energy investment.

In this context it worth addressing a few of the comments made in the AIGN critique.

1.    The report does not assess the efficiency of the policy:

Section 2.2.2 of the Vivid Economics report deals with this question directly. The report does not attempt to formally calculate the efficiency of particular policies .  
However the main point is, the price tag is being imposed on business and/or the broader economy regardless of whether it is efficient or not. From the perspective of the impact of policy on international competitiveness, the average financial incentive is more important as a measure of carbon pricing than the efficiency of government intervention.

We would also note that the UK, its involvement in the EU ETS and its focus on the use of market based policies, is likely to have more efficient policies than the other countries. Despite this, the UK has the highest overall price tag of the countries studied.

2.    A focus on the electricity sector is not relevant to international competitiveness:

It is most interesting that AIGN appear to be consigning electricity price impacts to the margin of competitiveness impacts.  Are they suggesting that the industry assistance associated with the indirect pollution price tags from the Renewable Energy Target is not warranted? It is worth noting that around half the total industry assistance associated with the Carbon Pollution Reduction Scheme was allocated to dealing with price tags on the electricity sector. While the first stage of the analysis does not consider who faces the price on pollution, electricity is a major input into some trade exposed industries. A better understanding of the direct and indirect price tag on pollution in this sector is needed for an evidence based discussion on the level on any transitional industry assistance that may be required.

3.    The research does not consider the demand side impacts of the policies:

The report is explicit that it has focused on the impacts on generation.  It is true that there are important demand and supply side interactions between policies.  The rebound effect from energy efficiency is an example, where not all the emissions reductions claimed are actually saved because of market effects.  However this increases the implicit price per tonne; it does not decrease it.  In the case of the Chinese policies, if fewer emissions are saved for the same aggregate policy cost, then the price per tonne increases; it does not decrease.  This is an important area for further research.

4.    The use of average emission intensity of conventional coal and oil is likely to overestimate the implicit price tag on pollution:

AIGN suggest that not all renewable generated electricity replaces coal-fired generation. In many circumstances in many countries, at the margin, it will replace gas-fired and perhaps even nuclear. This will therefore reduce the emissions saved and therefore reduce the carbon price. As with point 3 above, the opposite is true. If fewer emissions are saved for the same aggregate policy cost, then the price per tonne increases. Note that Appendix 1 of Vivid Economic full report includes calculations of the implicit prices under different assumptions around what generation is displaced.  In all cases the price tag is higher than presented in the full report.

5.    The Chinese policy to shut down small and highly polluting coal-fired power stations is not climate policy:

While in an ideal world you should be able to differentiate between the differing objectives of policies and isolate the climate change component this is not possible in practice.  The main reason for this is countries like China realise there are many very good reasons to reduce pollution. As a result policies have multiple objectives, as in the case of the China’s power plant policies, to reduce local air pollution, increase energy security, make their economy more competitive and address climate change.  The Climate Institute also notes that Vivid Economics’ assessed coal and oil subsidies that are clearly not climate policies but do reduce the overall pollution price tag in China. AIGN are not transparent in how they arrive at their assessment of China’s implied price so it is not possible to assess its validity.

The Climate Institute recognises Vivid Economics’ analysis is pioneering work and welcomes further transparent feedback and dialogue on this and other broader pollution and climate change issues.

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