What the CCA’s own modelling shows an emission intensity scheme will need to do Media Release

Sep 06, 2016 - 3:00pm

The Climate Change Authority recommended that electricity sector emissions should be addressed through an emission intensity-based baseline and credit scheme. The CCA said this should start in 2018, and the baseline for the sector should decline over time to reach zero “well before 2050”.

The CCA’s own electricity sector modelling shows an emission intensity-based baseline and credit scheme that is not inconsistent with the broadly defined parameters above. However, the modelling takes a more stringent approach to electricity emissions than the CCA’s recommendations do. The modelling is based on a sectoral carbon budget, defined as the amount of Australian electricity emissions consistent with global action to limit global temperature rise to less than 2°C.

The emissions intensity baseline and credit scheme (in the figures below as “Emissions intensity” or “EI”) is one of seven policy mechanisms modelled to meet this carbon budget.

  1. Whatever the policy, all existing coal stations have to close by 2035

    The excerpt from Figure 12 shows coal-fired power generation and capacity across the seven modelled policy scenarios (and a reference case where no effort is made to reduce emissions). All the policy cases see a rapid replacement of coal power, with coal generation and capacity declining fastest in the regulated closure scenario (brown line) and slowest in the absolute baselines scenario. The emissions intensity scheme (dotted red line) phases out coal by the very early 2030s.

    Figure 12: Generation and capacity by technology type, 2°C emissions constraint


    In scenarios where coal replacement is faster, there is more opportunity for gas-fired generation. The slower coal is replaced, the less opportunity for gas, and the greater share of renewable and other near-zero emissions energy sources. This is because of the limits set by the carbon budget: if coal generators consume more of the budget, there is less available for gas, requiring a faster switch from coal to zero and near zero emission technologies.

    This modelling highlights that fact that, no matter what policy is applied to the electricity sector, it needs to drive a rapid replacement of existing coal generators with cleaner energy.

  2. The baseline in an emissions intensity scheme would have to fall fast and far to meet the 2°C carbon budget

    Currently, the emission intensity of Australia’s electricity is about 0.8 tonnes CO2e per megawatt hour (tCO2e/MWh). Figure 42 shows how the sector’s emission intensity baseline would need to decline to keep within the <2°C carbon budget: rapidly and steeply through the 2020s, to settle at less than 0.1t CO2e/MWh by 2031. This would drive a decline in electricity emissions of 11 per cent per year, on average, over that time.

    Figure 42: Emissions intensity permit price and baseline

    Note that the right-hand axis label is incorrect; it should be ‘tCO2e/MWh’.

    The carbon price in this scheme is the “EI certificate price” in Figure 42. Unlike a cap-and-trade scheme, this carbon price does not apply to all emissions, just to those over the baseline. For this reason, the EI certificate price - starting at $100/tonne and rising to $300/tonne - starts off significantly higher than the carbon price in the modelled carbon pricing scenario (which starts at about $70). The price trajectories converge over time, however, as the amount of unpriced emissions declines.

  3. The CCA assumes away electricity system transition issues

    As is standard practice, this modelling assumes that climate and clean energy policies operate with perfect foresight. Future carbon prices, for example, are modelled as visible to investors many years ahead, and are reliable enough to efficiently drive billions of dollars of investment.

    As The Climate Institute noted in our Switch in Time report on electricity decarbonisation, this does not at all reflect investors’ real-world experiences with carbon pricing. Australia is far from the only market where carbon market parameters have been characterised by weak parameters, adjustments and reversals.

    Given recent history, it is worth questioning whether investors would bank on the stability of an emission intensity mechanism where carbon prices would need to rise above $100/tonne to drive needed change. Previous research by CSIRO has found that an uncertain carbon price would lead to investment in generation that is sub-optimal but more resilient to policy changes (e.g. open-cycle gas turbines), resulting in electricity prices 17 per cent higher than they would have been under policy certainty.[1]

    More fundamentally, successful transition from a high-carbon to a decarbonised power supply requires both significant changes to the planning and operation of the electricity market and assistance to communities impacted by the shift away from coal power. These issues are already emerging, as demonstrated by the consequences - both for the electricity system and the Port Augusta community - of the closure of SA’s Northern power station in May.

    By supporting only a vaguely defined emissions intensity scheme, without acknowledging the full scale of the task it must achieve and the associated impacts that must be managed, the CCA dodged key issues and undermined the usefulness of its own contribution to the increasingly urgent discussion over the future of Australia’s electricity supply.

The Climate Institute’s criteria for an effective electricity decarbonisation policy framework remain:

  • Consistency with a predictable pathway to net zero emissions by mid-century, and a 1.5-2°C national carbon budget;
  • Systematic and steady retirement of all existing high-carbon generators by 2035;
  • Replacement of high-carbon generation with zero or near-zero emission energy;
  • Well-funded and well-planned structural adjustment provision for communities affected by generator closure;
  • Strategic design and use of energy efficiency policies to minimise costs to energy users and further reduce emissions;Inclusion of a carbon pricing mechanism that is capable of scaling up over time to provide a bankable signal for investment consistent with net zero emissions by mid-century. There is a low probability that a price of sufficient strength and reliability will emerge in the medium term, so the measures listed above are needed to deliver a timely transition.

[1] Future Grid Forum, 2013. Change and choice: The Future Grid Forum’s analysis of Australia’s potential electricity pathways to 2050. CSIRO, Canberra.  

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