Productivity Commission calls for carbon price

The Productivity Commission has called on the Australian Government to “stop the piecemeal and stop-start approach to emission reduction, and adopt a proper vehicle for reducing carbon emissions that puts a single effective price on carbon".

The recommendation was the part of the Commission's first Productivity Review, a 1200-page document which examined a broad sweep of issues and factors that inflence Australia's economic performance and identified priorities to enhance national welfare.

In a section entitled 'Fixing the energy mess', the Commission set out a reform process to resolve the energy sector's problems. This included:

  • restore national agreement on simple, clear objectives — that recognise the inherent tensions between prices (costs), reliability and emissions, and provide guidance on acceptable trade-offs — then leave the field to expert implementation;

  • determine which institutions do what — then let them get on with their work, holding them to account for their stated responsibilities;

  • ensure that the energy sector can access the full set of instruments in doing their work — not locking in or out technologies, or excluding other solutions by design;

  • set out a clear roadmap for reforms — ideally with cross-jurisdictional commitment.

The review noted that the current regulated price is not an effective way of dealing with the trade-off between reliability, cost and emissions.

“It is a principle of every properly-designed pricing system that the charge should reflect its harms. Thus carbon emission intensity is necessarily a matter to be reflected in the regulated pricing system. The compromises necessary to do this are much-debated, but what should be accepted is that low carbon technologies (such as solar and wind generation) are inherently part of the properly-priced future.”

“Some renewable technologies also impose systemic costs. They can be intermittent — with limited predictability of supply, and require frequency management services. These issues can be managed, such as by battery storage, greater linking across the network (the wind is blowing somewhere), and other ancillary services, but these raise costs, which is not well-reflected in the current system of regulated pricing.”

The Commission emphasised the need for governments to have an emissions target to provide certainty for the sector about the trade-offs allowed between emission reduction and cost.

“From these judgments better decision-making will flow on how and where to invest in future system reliability. From the user’s perspective, reliability can be as much about predictability as the ability of the system to always deliver on demand — the system must be able to deliver a reliable supply to users who face high costs of disruption.

“A broadly accepted commitment on emission reduction targets over the investment profile for electricity assets is essential to give firms sufficient confidence to make the investments needed to deliver electricity at the lowest possible cost and the right levels of reliability for users over the next few decades.”

“In the case of Finkel, 49 out of 50 is not a pass mark.”

Regarding the current regulatory structure – comprising the Australian Energy Market Commission (AEMC), the Australian Energy Regulator (AER) and the Australian Energy Market Operator (AEMO). - the Commission noted that “insufficient use has been made of the independent expertise and public explanations of those three bodies when forming energy policy.”

It called for Australian governments to jointly set “a clear long-term strategic vision using outcome focused language that integrates energy and environment policy”.

The report, Shifting the Dial, is available here.

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