Ambitious? Yes. Cyrus Vance, president Jimmy Carter’s secretary of state, called it “a daring stroke.” Foolhardy? Many thought so, including members of Carter’s staff.

Failure was a real possibility and would reflect badly on Carter, already struggling with a perception that he lacked authority. Egypt and Israel were sworn enemies who had been fighting wars since the creation of the state of Israel in 1948.

Carter took Menachem Begin and Anwar Sadat to Camp David, the presidential retreat in the Maryland mountains outside Washington, and kept them there for the next thirteen days. A media blackout prevailed until an agreement was reached. Kai Bird, author of The Outlier, a 2021 biography of Carter, described his approach as “sheer relentlessness.”

Sadat and Carter wore down an intransigent Begin until he succumbed, agreeing to a peace treaty with Egypt, including relinquishing control of the Sinai Peninsula, taken from Egypt in the 1967 war, and the dismantling of Israeli settlements there.

The agreement also included the election of a self-governing Palestinian authority in the West Bank within five years, together with (according to Carter’s detailed record) a five-year freeze on Israeli settlements there. Within three months, Israel started on a major expansion of West Bank settlements, with Begin denying the freeze had been part of the official agreement and Carter telling his staff that Begin had lied to him.

The peace treaty with Egypt, the strongest Arab state, stuck, although it cost Sadat his life. He was assassinated in 1981 by members of the Egyptian Islamic Jihad, who condemned him as a traitor for the Camp David accords.

Carter’s hopes for a broader Middle East peace have proved elusive ever since, although he could clearly see the consequences. Near the end of his presidency he wrote in his diary, “I don’t see how they” — the Israeli government — “can continue as an occupying power depriving the Palestinians of basic human rights and I don’t see how they can absorb three million more Arabs in Israel without letting the Jews become a minority in their own country.”

Nevertheless the accords were a notable achievement and unimaginable in the context of the Middle East politics of recent decades. Carter reaped a political dividend but also paid a cost: relations with the enormously powerful pro-Israel lobby in the United States were never the same again. They had not expected an American president to act as an honest broker.

Carter’s single term in the White House is generally rated among the less impressive in the presidential rankings. Yet his presidency has undergone a re-evaluation given his significant achievements in foreign and domestic policy, which look all the more substantial from today’s perspective.

In the tradition of the best political biographies, Bird gained access to volumes of material, including the copious personal diaries Carter kept as president as well as those of important figures in his administration. To learn that senior members were eating sandwiches at an important meeting in the cabinet room may not be vital to our understanding but it does point to a notable attention to detail.

Reading the narrative from the inside confirmed much of what I observed from the outside as a foreign correspondent in Washington during most of the Carter presidency. But it did so in much starker relief.

For example, the tensions between secretary of state Vance, the diplomat, and national security adviser Zbigniew Brzeziński, a cold war warrior, were evident at the time, but not their depth. Bird provides instances of what he called Brzeziński’s “highly manipulative” approach; Vance called him “evil, a liar, dangerous.”

Carter, a peanut farmer from small-town Georgia with a distinctive southern drawl, was an improbable candidate for the White House. He was a practising Baptist for whom, unlike many politicians, his religion was more than a veneer.

In a south where the echoes of the civil war still resonated and segregation continued in practice if not in name, he took a stand against racism. Yet he also was a skilled politician, elected as governor of Georgia despite his reputation as not being a typical white southerner and pragmatic when he thought he needed to be, including by downplaying his anti-racist credentials.

Still, running for president was a huge leap. He wasn’t taken seriously until he won the New Hampshire primary, and even then he was viewed with scepticism by leading members of the east-coast Democratic establishment. “He can’t be president,” said former New York governor Averell Harriman. “I don’t even know him!”

Sceptics dismissed him as self-righteous. His promise to voters that “I’ll never lie to you” prompted his friend and adviser Charles Kirbo to comment, perhaps not completely in jest, “You’re going to lose the liar vote.” But he came across to voters as sincere and authentic. And then, as now, coming from outside Washington was an advantage.

Circumstances played a large part: his Republican opponent was Gerald Ford, the sometimes hapless vice-president who had served the balance of president Richard Nixon’s term following Nixon’s resignation over Watergate. Even then, Carter won only narrowly.

In elite Washington, Carter’s team of knockabout southerners were often dismissed as hicks. But, like Carter, they were not easily deterred.

Carter brought a luminous intelligence, idealism and diligence to the White House that stands in stark contrast to the era of Trump. He argued that the world was not so easily categorised in traditional American black-and-white terms — that there was more to foreign policy than a contest between the United States and the Soviet Union. He preached against the “inordinate fear of communism” that had led to Washington’s embracing of some of the world’s nastiest right-wing dictators. The Vietnam war, he said of this approach, was “the best example of its intellectual and moral poverty.”

Bird writes that Carter rejected “any reflexive notions of American exceptionalism. He preached that there were limits to American power and limits to what we could inflict on the environment.” America didn’t go to war during Carter’s presidency — an exception up to that time and since.

He elevated human rights in foreign policy. It earned him derision from hardheads but it enhanced America’s reputation abroad, its so-called soft power.

Like any politician, though not as often, he compromised and backtracked when he judged that politics required it. Against his better instincts, he approved development of the MX missile, an expensive boondoggle championed by defence hawks, writing in his diary that he was sickened by “the gross waste of money going into nuclear weapons.”

In the wake of the OPEC oil embargo, when he was trying to persuade Congress to pass legislation to restrict energy consumption and provide funding for alternatives such as wind and solar, he diarised that “the influence of the oil and gas industry is unbelievable.” To set an example, he put solar panels on the White House roof and predicted that within two decades 20 per cent of the nation’s energy would be generated by solar power. He hadn’t count on his successor, Ronald Reagan, who removed the solar panels as one of his first acts as president, nor the ideological climate wars that followed.

While those actions were triggered by the energy crisis, he was receptive to the emerging issue of climate change. Just before leaving office, he released a report from his environmental think tank predicting “widespread and pervasive changes in global climatic, economic, social and agricultural patterns” if the world continued to rely on fossil fuels. It was a prescient warning almost half a century ago.

Carter’s domestic reforms included deregulation of sectors of the American economy, including banks and airlines, thereby increasing competition and reducing prices, though also bringing negative consequences. Consumer regulations led to mandatory seatbelts and airbags and fuel efficiency standards — something Australia is finally getting around to introducing almost half a century later. Environmental laws were passed to reduce air and water pollution; highly contested legislation locked up a large part of Alaska as wilderness and national parks, preventing oil and gas exploration.

In foreign policy, the Panama Canal treaties relinquished American control of the canal, returning sovereignty to Panama. Carter completed the normalisation of relations with China started under Nixon and negotiated an arms control agreement with the Soviet Union.

Other reforms proved to be harder sledding. Legislation on health reform that Carter thought could pass Congress was judged inadequate by Democratic liberals such as senator Edward Kennedy, who championed comprehensive national health insurance and used it as a platform to unsuccessfully challenge Carter for the Democratic nomination in 1980. It would take another thirty years for Barack Obama’s administration to enact significant, if still not comprehensive, healthcare reform.

Carter was never completely accepted by the traditional Democrats that people like Kennedy represented. It came down to suspicion about his Southern roots. Too conservative for northern Democrats, he was too much of a liberal for many southern Democrats and Republicans.

By 1979, with Americans waiting in long queues to buy petrol and paying what were then exorbitant prices for the privilege (US$1 a gallon), Carter’s presidency was at risk of sliding into oblivion. Against the almost unanimous advice of his staff, he decided on another Camp David retreat, this time a domestic summit, inviting some of the nation’s leading citizens to come up with ideas for the nation’s future. What was unusual then seems extraordinary now.

Over ten days a parade of “wise men” travelled to Camp David to diagnose the nation’s ailments and remedies. As with the Begin–Sadat summit, the rest of the nation was kept in the dark by a media blackout.

Carter emerged to give an address to the nation like none other. Sounding more preacher than president, he said America faced a fundamental crisis of confidence that no amount of legislation could fix. Americans were losing their faith in the future, worshiping “self-indulgence and consumption.”

Taking the side of the people while lecturing them at the same time, he said he no more liked the behaviour of a paralysed Congress pulled in every direction by special interests. The immediate test was beating the energy crisis, on which he announced a series of initiatives taking in a windfall profits tax on the oil industry to finance the development of domestic sources of energy, including coal and a national solar energy “bank.” (His focus was on cutting dependence on imported oil, rather than climate change.) He announced plans for rebuilding mass transit systems and a national program for Americans to conserve energy.

Contrary to the fears of his hard-headed advisors, the speech was a great success, reflected in surges in Carter’s approval ratings of 11 per cent in one poll and 17 per cent in another. He was able to convey that most precious of political commodities — sincerity.

But these and other achievements were overwhelmed late in his term by the Iranian hostage crisis. Its origins lay in the Islamic revolution and the toppling of the Shah, who the CIA effectively had re-instated as ruler of Iran in 1953 following the previous Iranian government’s nationalisation of the oil industry. Concerned by the risk to Americans in Iran, Carter resisted efforts to allow the Shah to seek refuge in the United States; but he eventually succumbed to pressure from David Rockefeller, Henry Kissinger and other establishment figures to allow him in on the pretext of urgent medical treatment.

Two weeks later, Carter’s worst fears were realised when Iranian students stormed the US embassy in Tehran and took sixty-six hostages. When diplomacy failed, Carter authorised a complex and risky rescue mission involving ninety-five commandos, a C-130 transport plane and six helicopters. A series of mechanical failures and accidents, including a collision between one of the helicopters and the C-130, resulted in the mission being abandoned.

The hostage crisis plagued the remainder of Carter’s term, reinforcing perceptions of him as a weak president. It subsequently became clear that the campaign team for Republican nominee Ronald Reagan worked behind the scenes with Iranian representatives to delay the release of the hostages, promising a better deal if he won the election. Yasser Arafat, leader of the Palestinian Liberation Organisation, had negotiated freedom for thirteen of the hostages the previous year and told Carter years later that he had rejected approaches from Reagan officials offering an arms deal if he could delay the release of those remaining.

The hostages were released on the day after Reagan’s inauguration following his landslide win in the 1980 election. Soon after taking office, the new administration, despite publicly maintaining Carter’s embargo on arms sales to Iran, secretly authorised Israel to sell military equipment to Iran.

The hostage crisis was not the only reason for the relatively rare election loss by a first-term president. Carter’s support was sapped by the 1970s ailment of stagflation — high inflation and stagnant economic growth — together with the energy crisis. Reagan, the former Hollywood actor, had an appealing personality and a now-familiar slogan: “Make America great again.”

James Fallows, speechwriter for the first two years of the administration, says that Carter invented the role of former president. He certainly had an active four decades of public life following the presidency, with the 110-strong staff of the Carter Centre in Atlanta working on human rights, preventive health care, election monitoring and international conflict resolution.

Carter raised millions of dollars for a program that virtually eradicated guinea worm, a parasitic disease that had disabled and disfigured 3.5 million people a year in Africa and India. His centre helped distribute twenty-nine million tablets in Africa and Latin America for the treatment of river blindness, another disease caused by a parasitic worm. “Americans got used to seeing this ex-president, dressed in blue jeans with a carpenter’s belt, hammering nails into two-by-fours for a house under construction by a team of volunteers for Habitat for Humanity,” Bird writes.

In the 1980s, he spoke out about the concerns he had developed about the Middle East when he was president but he had judged were too dangerous to express publicly. “Israel is the problem towards peace,” he said, citing particularly the expansion of settlements on the West Bank. Accused of bias, he responded that “a lot of the accusations about bias are deliberately designed to prevent further criticism of Israel’s policies. And I don’t choose to be intimidated.” In 2006, he published his twenty-first book with the provocative title, particularly then, of Palestine: Peace Not Apartheid, earning him epithets such as “liar,” “bigot” and “anti-Semite.”

By then Carter had been awarded the 2002 Nobel Peace Prize for “decades of untiring effort to find peaceful solutions to international conflicts, to advance democracy and human rights and to promote economic and social development.”

After he was diagnosed with cancer in 2015 he said, “I’d like for the last guinea worm to die before I do.” Nine years later, aged ninety-nine and in palliative care, he is still going, if not strongly — a metaphor for a lifetime of indefatigability. •

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COP26 is not the first “last chance,” of course. Several others have been so billed over the past decade or so. But this is indeed an important meeting because it’s the moment specified under the 2015 Paris climate agreement when countries must strengthen their commitments to tackle global heating. After three years of biblical droughts, fires and floods on every inhabited continent — and melting ice sheets on the other — no leader can claim that climate can safely be left to the future.

COP26 must tackle two big issues. The first of these is the gap between the aggregate commitments countries have made to cut their greenhouse gas emissions by 2030, and the total the scientists have said is required to keep global heating to the Paris goal of 1.5°C above pre-industrial levels. To have a reasonable chance of achieving this limit will require global emissions to be around 26 gigatonnes of carbon dioxide equivalent, or GtCO2e, in 2030. Countries’ announced emissions reduction pledges will reduce global emissions to around 46–49 GtCO2e, leaving an emissions gap of 20–23 GtCO2e. Put another way, we are currently on track for an average global temperature rise not of 1.5°C but of 2.4–2.9°C, levels at which the severest climate impacts become certain.

The second issue for COP26 is the finance gap. In Paris the richest countries promised the poorest that they would mobilise US$100 billion a year by 2020 to help them tackle climate change, and more thereafter. At the last count, in 2019, they had raised around US$80 billion. Developing countries have been loud in their protests.

But there’s a problem. Although the emissions and finance gaps are the big issues COP26 must address, neither will actually be negotiated in Glasgow. They are not even on the official agenda for the talks.

How is this possible? To understand it we need to delve into the past, for what might be called the “Glasgow paradox” — that the two most important issues at COP26 will not actually be the subject of its negotiations — has its origins in the turbulent history of UN climate negotiations.

The treaty underpinning these negotiations is the UN Framework Convention on Climate Change, or UNFCCC, agreed at the first Rio Earth Summit in 1992. Just a few years after the first assessment of global warming by the Intergovernmental Panel on Climate Change, or IPCC, it set out an overall goal and some governing principles for how the international community should control emissions and adapt to a warming world. In doing so it made a very clear distinction between developed and developing countries. Countries had “common but differentiated responsibilities”: while all had a general responsibility to act, developed ones — the Western world and Eastern Europe — had the specific obligation to reduce their emissions and provide finance and technological support to developing countries. In 1992 China was still unequivocally “developing.”

These principles were then enacted in the Kyoto Protocol, agreed at COP3 in 1997. The developed countries negotiated how much each would commit to cutting its emissions by 2008–12. (Some, such as Australia, were allowed to increase them.) Developing countries took on voluntary actions only — and insisted that these depended on financial and technological assistance from the rich world.

Kyoto was a landmark agreement, backed by sanctions in international law for non-compliance. But it failed at its first hurdle. Though personally negotiated by US vice-president Al Gore, it attracted not a single vote in the US Senate. America, its legislators agreed, could not accept a treaty in which China did not have the same legal obligation to act.

The emissions reduction targets negotiated under the Kyoto Protocol were largely achieved. But the US’s absence was not acceptable to the European Union, Japan and the rest of the developed country signatories, and they sought to negotiate a new agreement at COP15 in Copenhagen in 2009. Copenhagen foundered, though, when the United States insisted that China — now a rapidly growing “emerging economy” — must take on the same legal obligations to cut its emissions (and to be transparent about reporting them) as it had. China refused, and the negotiations broke down in acrimony and recrimination.

Fast-forward to COP21 in Paris in 2015. A third attempt was being made to agree on an implementing treaty. Now China was the world’s second-largest polluter and a major economic competitor to the United States and the rest of the developed world. Brazil, South Africa, India and other emerging economies had also become major contributors to climate change, and each was now willing to take on emissions reduction commitments. But they weren’t willing to negotiate these with other countries. And they were not prepared to have them made legally binding in international law, with Kyoto-style sanctions for non-compliance.

If the emerging economies wouldn’t do this, nor would the United States, which still insisted on legal parity. So the Paris agreement found a compromise. It set out a new and comprehensive set of rules on how governments should act, including the legal requirement that they must make a “nationally determined contribution” to the global climate process. But it was up to each country to decide for itself what that contribution should be.

The Paris agreement was undoubtedly a breakthrough. For the first time, every country in the world had to tackle its emissions, and to do so in pursuit of a specific temperature goal — limiting heating to “well below” 2°C, with an aspiration to keep it to 1.5°C. The agreement even set a “net zero” goal, albeit for some time in the second half of the century.

But Paris had a huge flaw. The contributions submitted by countries alongside the agreement didn’t add up to the agreed aggregate goal. The emissions gap was born.

Paris has a mechanism designed  to patch this up. It requires the IPCC to conduct a “stocktake” of the climate science three years after the agreement, and assess progress so far. And two years after that, countries must return to the table with stronger commitments.

The IPCC duly reported in 2018, with a much starker injunction that global emissions had to be cut by 45 per cent by 2030 to hold heating to 1.5°C. COP26 is now the five-year moment (having been postponed from 2020 because of Covid) when the emissions and finance gaps must be dealt with.

But the Paris compromise still rules. It is still up to individual countries to make their emissions cuts and finance pledges on their own. It is still not the task of the UN climate talks to negotiate these, and still not even the job of countries to discuss with one another what they each should be doing. Hence their absence from the COP agenda.

And despite much stronger commitments, countries are still not doing enough. The United States, the European Union, Britain, Japan and others have all this year strengthened their emissions reduction pledges for 2030, some very dramatically. But the gap to the 1.5°C trajectory remains. Although China and India have not yet announced their contributions (the only major emitters not to have done so), they can’t get near to closing the gap on their own.

So the emissions and finance gaps are what COP26 is primarily about, but neither is on the actual agenda. Of course, the conference will discuss emissions reductions and finance in general, and no doubt bitter speeches from developing countries about the inadequate commitments of the developed world. But there will be nowhere in the talks where the gaps can be narrowed.

So what will be negotiated at COP26? The official agenda is all about the “Paris rulebook,” the task of turning the general principles of the Paris agreement into specific, detailed regulations. Much has already been done in the intervening years, but there are still some major sticking points.

The largest of these is about “carbon markets.” These are the mechanisms by which developed countries, including Australia, and companies hope to be able to buy emissions reductions (such as tree planting) done in developing countries, to save them the difficulty and cost of reducing emissions themselves. Many companies claiming to be committed to acting on climate change (notably in the oil and gas and airline sectors) are expecting to get much of their emissions cut in this way — to the great consternation of climate campaigners, who see such “offsetting” largely as an unsustainable scam. Many developing countries are not happy about carbon markets either, and the Glasgow talks are likely to be tough.

So the Paris rulebook is not insignificant. But it is hard to argue that it is what’s really important. The negotiations over the regulations are highly technical, barely needing ministers, let alone leaders. And they are certainly not what climate activists, the public or the media think COP26 is about.

So how can this mismatch of expectation and reality be overcome? As the COP convenor, the British government hopes to bridge the gap in three ways.

First, it has brought the leaders together (which does not normally happen at COPs) precisely to discuss the shortfalls in emissions cuts and finance. In an ideal world it would be extracting stronger commitments than the assembled presidents and prime ministers have so far announced.

They might — just — achieve this on the finance gap, where recent announcements by the United States and others have offered hope that the US$100 billion promise could finally be achieved, and maintained up to 2025. But it seems extremely unlikely that any major country will improve its emissions pledge. In most cases, these have been painstakingly won in each country’s domestic politics, and no leader will want to reopen the argument at home. With China’s leader absent, the idea of a new “grand bargain” between the great powers looks out of the question, too.

But Britain still hopes that it can at least get the leaders to acknowledge that they’re not doing enough, and to commit conclusively to the 1.5°C goal and to the new goal of achieving net zero emissions by 2050. This certainly looks possible.

Second, Britain hopes to get some “side agreements” in four key areas where emissions need to be brought down. These are on building and financing new coal-fired power stations; slowing deforestation; accelerating the phase-out of petrol and diesel cars; and mobilising trillions of dollars of private finance for investment in green infrastructure and technologies. In each of these areas countries and companies have both been signing up to new commitments. So Britain hopes that “real economy” announcements in these areas will show that genuine progress is being made. It will try to bring these for the first time into the formal declaration at the end of the conference.

Third, Britain will encourage the demand by vulnerable countries that parties to the agreement should come back earlier to review their pledges. Under the Paris agreement this is due in 2025: given the continuing emissions gap, there will be huge pressure to agree an earlier review date, probably 2023.

But even if they are achieved, will these moves assuage the public demand for more urgent and stronger action? It is hard to see how they could. The climate scientists and campaigners — with Greta Thunberg their clear-eyed clarion — will say that it isn’t enough. In the conference hall they will be joined by the most climate-vulnerable countries. It will be hard for the media to report anything else. •

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In Texas, the results were disastrous. The electricity generation system failed, leaving millions of people without power for days on end. Dozens of people froze to death or died from carbon monoxide poisoning when they used car heaters to keep warm. In many places the water supply system failed to restart even after power was restored.

Immediately after the blackouts came an outbreak of culture war blame-shifting familiar from extreme weather events in Australia. Republican politicians amplified by Fox News claimed that the power failures were a result of a rapidly increasing reliance on wind power. Wind turbines, ill-prepared for extreme cold, simply froze.

But it soon became clear that coal-fired and nuclear plants had failed too. And gas-fired power stations were responsible for the biggest falls in output, not because they are uniquely vulnerable but simply because they are the main source of electricity in Texas.

The real question is why Texas lost power when neighbouring states, also experiencing the freeze, did not. The answer involves regulatory failures, some of which have important implications for Australia.

The first part of the problem is that most of Texas is not connected to the rest of the US power grid. This is deliberate: the Texas Interconnection has been kept separate to ensure that it remains under Texas rather than federal control. That means the state can’t draw on electricity from the major “power pools,” notably the Southwest Power Pool. By contrast, the city of El Paso, which is connected to the SPP, maintained its power supply throughout the extreme weather.

Texas kept itself separate so it could replace its traditional integrated electricity supply with a structure that combined a pool market for the generation stage of electricity supply with a competitive market in retailing, and lightly regulated transmission and distribution. The system is run by ERCOT, the ironically titled Electric Reliability Council of Texas.

Australia’s system bears an uncanny resemblance to Texas’s. The National Electricity Market, which works in much the same way as ERCOT, was established on the pretext that it was needed to manage the National Grid, which has connected systems in Eastern Australia since the 1990s. In the market reform era, the alternative of integrating the separate state-owned systems into a single national system was never seriously considered.

After this month’s crisis, it seems unlikely that ERCOT can avoid interconnecting with the SPP. But the United States really needs a single national grid. To move away from carbon-based fuels, the entire economy will need to be electrified, which will increase the need for a reliable supply. And the benefits of interconnection will only grow as time-varying sources like solar and wind become more important. With a national grid, mid-afternoon sun in California could send power to meet early-evening peak demand in the eastern states.

A truly national grid would require connecting the eastern and western United States with transmission lines, probably using high-voltage direct current transmission. In technological terms, this is a big but manageable project. The real challenge is dealing with the political and regulatory obstacles. It will be interesting to see whether the Biden administration attempts to tackle this task and, if so, whether it succeeds.

The other failure in Texas had to do with the operation of the electricity market run by ERCOT, which was the reason the grid was kept separate. As in Australia, it’s an electricity pool market in which generators bid to supply power to the grid each day. The power failure highlighted two problems that turn out to be interconnected.

First, when lots of power plants went offline, the market price of power soared to US$9000/MWh, producing ruinous bills for customers who had chosen supply deals based on the wholesale price rather than a fixed rate. Second, the system made it unprofitable for generators to invest in “winterising” their plants to protect them against rare extreme events like the polar vortex.

The connection between the two is that in an “electricity only” market, ultra-high prices are supposed to encourage firms to invest in generation capacity or backup systems that will be used only very rarely, when the rest of the network fails. In an extreme shortage, though, prices could theoretically go far higher than the US$9000/MWh observed in Texas. That’s why, as in Australia, the designers of the system imposed a limit on the price the market can reach.

The result is a system that falls between two stools. The maximum price is high enough to create both risk and opportunities for market manipulation, but not high enough to provide incentives to invest in reliable supply.

In response to this mess, some electricity regulators have reintroduced an element of central planning by making “capacity payments” to generators willing to guarantee supply. Australia has responded with a hodgepodge of interventions run through the Energy Security Board at the national level, along with state measures such as South Australia’s “big battery.”

We need to take this further by creating what might be called a “capacity only” market. Rather than bidding to supply power in the short term, generators should tender to supply power to the market for a period of several years, specifying both their generating capacity and the reliability with which they can supply power. The market operator would then use an “order of merit” to decide which generators should operate at any given time, just as was done in the pre-privatisation days of an integrated electricity supply industry. Such a system would maintain competition in generation and retail, but would otherwise be centrally planned. •

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In some senses, this is not surprising. The cost of solar PV has been declining steadily for decades as a result of technological innovations. The cost of the silicon wafers on which solar cells are based has fallen dramatically, the efficiency with which they convert sunlight into electricity has increased, and all aspects of the manufacturing process have improved. Advances in wind power have been only slightly less dramatic.

At the same time, and despite laggards like Australia and the United States, governments around the world have committed to decarbonising the global energy system.

But the sharp change in the IEA’s analysis wasn’t primarily a reflection of technological progress or climate policy. Rather it was prompted by a decline in the interest rate used to calculate the cost of investments in energy.

Solar modules cost virtually nothing to operate, and last a long time. Manufacturers’ warranties typically run for twenty-five years, guaranteeing at least 80 per cent performance. Experience and experimental evidence suggest this is conservative: even after thirty years, modules installed today should still be working at around 85 per cent of their initial capacity. A working lifetime of twenty-five years is therefore conservative.

Solar PV is so cheap to operate that its cost arises almost entirely from the need for investors to earn a rate of return on the capital they put into constructing a solar project and connecting it to the grid. This is commonly expressed in terms of a “payback period,” the time in which a successful investment must return the capital invested. Until now, the IEA has used real rates of return ranging from 7 to 8 per cent, which implies payback periods of nine to ten years.

In its 2020 report, the IEA acknowledged how low interest rates have fallen by reducing the cost of capital to between 2.6 and 5 per cent for Europe and the United States, with somewhat higher rates for China and India. On average, the cost of capital has almost halved, implying a near doubling of the time a project needs to pay a full return to investors.

Now suppose, instead of private capital, solar projects were financed using thirty-year government bonds. Remarkably, the real rate of interest on these bonds has fallen to zero or below — and if the current judgements of investors are correct, rates will remain at or close to zero for decades to come.

Ultra-low interest rates have been obvious to anyone with a bank account or a variable rate mortgage. Until recently they have been seen as an anomaly, the result of emergency measures taken in response to the global financial crisis and then the Covid-19 pandemic. But twelve years after the GFC, and with years of low rates ahead of us, emergency conditions have become the norm.

The Australian government recently sold $15 billion in thirty-year bonds offering a yield of 1.7 per cent, less than the likely rate of inflation. European countries like France and Austria are selling bonds with maturities of fifty and even one hundred years. The US government is selling inflation-protected bonds of the same maturity for negative rates of interest. Some economists (including me) are now suggesting governments issue perpetual bonds, with a real return of zero (that is, an interest payment exactly sufficient to offset inflation).

What happens in the extreme case where interest rates fall to zero? In these circumstances, the notion of a payback period ceases to be relevant. All that is required for an investment to be justified is that its lifetime returns should exceed the cost of construction.

Once a solar module has been installed, a zero rate of interest means that the electricity it generates is virtually free. Spread over the lifetime of the module, the cost is around 2c/kWh (assuming $1/watt cost, 2000 operating hours per year and a twenty-five-year lifetime). That cost would be indexed to the rate of inflation, but would probably never exceed 3c/kWh.

There is, then, a real possibility that solar PV and other renewable technologies could fulfil the promise made decades ago by the promoters of nuclear power: that they will deliver electricity “too cheap to meter.” (Even with access to cheap capital, nuclear power never delivered on that promise.)

The prospect of electricity this cheap might seem counterintuitive to anyone whose model of investment analysis is based on concepts like “present value” and payback periods. But in the world of zero real interest rates that now appears to be upon us, such concepts are no longer relevant. Governments can, and should, invest in projects whenever the total benefits exceed the costs, regardless of how those benefits are spread over time. •

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The proposed solar farm, near Tennant Creek, would be the world’s biggest by a comfortable margin. It would stretch as far as the eye can see across an area equal to more than 20,000 soccer fields.

Despite Cannon-Brookes’s self-deprecating description of the project as “batshit insane,” it might actually make technical and economic sense. And it’s not the only mega-renewable energy project being pursued by credible Australian companies with the aim of powering the many hundreds of millions of people living to the north of us.

The scheme is a long way from a done deal, of course. Its commercial and technical challenges are enormous, and with a $20 billion price tag it would be one of Australia’s largest-ever construction projects.

Making sense: Mike Cannon-Brookes, chief executive officer of Atlassian. Karen Dias/Bloomberg via Getty Images

But people who know the man behind the project — David Griffin, chief executive of Sun Cable — talk in glowing terms about his ability to take an empty paddock and convert it into a power station fuelled by wind or sun. Griffin hails from one of Australia’s pioneering renewable energy companies, Infigen Energy. Most recently he sewed up a deal to provide Australia’s second-largest employer, Coles, with 10 per cent of its electricity from solar. As one former colleague says, whenever Griffin encounters a barrier — and there are plenty ahead — he manages to “go round, go over, or… blows [it] up.”

So how can Griffin go from powering a tenth of Coles to powering a fifth of Singapore? In terms of technology, it’s not a big jump. The Tennant Creek farm will use the same type of solar panel, just a heck of a lot more of them.

One difference, though, is that the project will use an ingenious Australian-made technology to simplify and accelerate the installation of the panels. Rather than construct the framing out in the field, an Australian company, 5B, in conjunction with former car-parts supplier IXL, will assemble the panels into a concertina-style kit in factories in Darwin and Adelaide. They will then be progressively transported to Tennant Creek in shipping containers on a staggering kilometre-long train. There, a forklift will simply unload and unfold the concertinas to create rows of panels arranged in A frames facing east or west.

Unlike the alternating current system that transports the vast bulk of Australia’s electricity, the cable to Singapore will use direct current, minimising the loss of electricity over those thousands of kilometres. While it isn’t common, this technology is already deployed at different sites across the globe, including under Bass Strait.

So how on earth does it stack up economically?

What is yet to sink into the minds of many Australian policy-makers and commentators is that solar panels have dropped so much in cost, and are so quick and easy to install, that they are approaching the point of being the cheapest-available source of electricity globally. Importantly, solar is already cheaper than the fuel Singapore gets most of its power from — imported liquefied natural gas, or LNG.

The cost of electricity from LNG lies somewhere between $80 and $120 per megawatt-hour. By comparison, Snowy Hydro says it has signed up several solar farms to supply power in the $40s. Given its scale and solar resource, it’s conceivable that the Tennant Creek project could get this down to a flat $40 or possibly as low as $35 prior to transmission to Singapore.

The difference between that figure of $35–$40 and the cost of LNG — a gap of at least $40 and as much as $85 — provides the room to pay for the cable to Singapore and, the project’s proponents hope, generate a profit.

Why wouldn’t Singapore install solar panels itself? The other factor that plays in Australia’s favour and counts against many of our northern neighbours is that we have lots of very sunny and sparsely populated space.

Almost every skerrick of Singapore is taken up with buildings, and where that isn’t the case the island state has its highly prized parkland. Sure, they could install solar on top of the buildings, but the roofs of high-rises are often cluttered with building services equipment or shadowed by even taller buildings. And even if lots of solar panels were deployed — on floating pontoons, for instance — they would be subject to wide and rapid variations in cloud cover. Being almost right on the equator, the city is often subject to long periods of cloudy, rainy weather.

You couldn’t find a much greater contrast with Tennant Creek, a place almost completely devoid of people with an average annual rainfall of just 399 millimetres compared to Singapore’s 2340 millimetres. A satellite-eye view on Google Maps reveals that a solar farm at Tennant Creek would be situated just south of where the Northern Territory turns from shades of green and grey to a distinct red–brown colour, signifying a climate free of tropical monsoons. While the solar farm would take up an area even smaller than Singapore, the less frequent and less intense cloud cover means batteries could more easily manage the variation in solar output.

Ideal conditions: the proposed solar farm site near Tennant Creek. Google Maps

Garnaut’s pathways

Singapore represents a true extreme, but other parts of Asia confront similar challenges. Prime minister Bob Hawke’s economic adviser and former ambassador to China, Ross Garnaut, lays out the broader opportunity for Australia offered by cheap renewable energy in his book, Superpower: Australia’s Low-Carbon Opportunity.

Garnaut describes Australian renewable energy as “a path to low-cost reductions in emissions in the rest of the world.” This can happen, he says, through three pathways. We can use direct-current cables to supply electricity to Southeast Asia. We can use the electricity from wind and solar plants to convert water into hydrogen and ship this to the “renewable-energy-resource-poor countries of Asia, notably Japan and Korea,” where land is scarce and energy demand high. And we can use both the electricity and the hydrogen from renewable energy to process ores into metals (or batteries) for export.

Beyond Tennant Creek, two other mega-renewable energy projects are taking shape to take advantage not just of Australia’s superior solar resource but also of our world-class wind resource. Both are located in Western Australia, one in the Pilbara and the other further south near Kalbarri.

The Pilbara project, which is by far the largest, had its genesis in disappointment. Several years ago the company behind the project, CWP Renewables, sought to expand into Indonesia. It was lured there by the country’s huge population, a government policy to expand renewable energy, and a demand for electricity that will massively expand over the next few decades. But finding good wind sites and negotiating some degree of security over development rights proved too difficult.

CWP Australia’s managing director, Alex Hewitt, wasn’t prepared to give up. For anyone passionate about combatting global warming, Indonesia is one of the big fish. Reliant on coal for electricity, it is going through a rapid process of economic development, much like China did two decades ago, with an accompanying growth in electricity demand. The fact that Japan has just half the population of Indonesia but consumes close to four times as much electricity gives an idea of how much demand could grow. What’s more, Japan is quite an energy-efficient economy. Powered by coal, Indonesia’s likely expansion in electricity consumption over the next few decades would be disastrous for containing global warming.

What Hewitt’s team found was that an area in the northwest of Western Australia, inland from the Eighty Mile Beach Caravan Park and the Pardoo Roadhouse in the Pilbara, experiences consistently high winds over an extraordinarily large area. It also receives among the highest level of solar radiation in the world. If you only had an eye to domestic needs, the location would be highly problematic: remote, without transmission infrastructure, several hundred kilometres from any major electricity demand. Getting people and materials to such a location would be an enormous logistical challenge. Only a gigawatt-scale project could be viable.

So two problems coalesced into an opportunity called the Asian Renewable Energy Hub. It is planned to combine the world’s biggest wind farm with the world’s second-biggest solar farm (Sun Cable’s Tennant Creek would be the biggest), all feeding zero-emissions electricity to Indonesia by high-voltage direct current cable. This single project would produce more power than all the wind farms and solar farms built so far in this country.

CWP’s Hewitt says this is the project that would allow him to die a happy man. He was smiling when he made the remark, but underneath you could sense a deadly serious ambition to make a major and lasting contribution to containing global warming.

Enter the miracle molecule

In a sign of the challenges that might await Sun Cable, the Asian Renewable Energy Hub has now pivoted away from direct-current transmission to Indonesia. Instead, the project has focused on Garnaut’s second opportunity, an export industry built on generating electricity to produce hydrogen from water via electrolysis. It will also supply three of its fifteen gigawatts to the Pilbara’s iron ore and LNG producers.

Hydrogen opens the possibility of supplying not just electricity and not just Southeast Asia. We could provide zero-emissions fuel for heating and transport to countries as far afield as Japan and Korea, and possibly even to Europe. But the technology and economics are more challenging than supplying power via cable.

On the customer side, the equipment that would use hydrogen as a fuel to power cars or provide heat for industrial processes is still only small-scale. Further technological progress is required to bring down costs and ensure reliability. On the production side, savings are needed at all stages. In favourable circumstances, with renewable energy costing about $45 per MWh, hydrogen could potentially be produced via electrolysis for around $25 to $30 per gigajoule. This looks reasonably competitive: while petrol is around $17.50 to $23.40 per gigajoule, hydrogen fuel cell-electric cars are about double the efficiency of a conventional petrol car. But then there’s the cost of transporting the hydrogen to Asia. With present technologies, this makes it more expensive than petrol (ignoring carbon externalities), let alone LNG, which costs roughly $9 to $14 per gigajoule delivered to north Asia.

But a range of foreseeable innovations and greater economies of scale could bring down the cost of producing hydrogen to around $11 to $12 per gigajoule by 2030, and it could then be delivered to ports in North Asia for around $26 to $28 per gigajoule. Given the superior efficiency of fuel cells, that kind of price tag would make it an attractive option for decarbonising transport. This would be a massive market, although further cost reductions would be necessary to displace gas as well.

By shifting focus to hydrogen, in other words, the Asian Renewable Energy Hub has sacrificed speed in the expectation it will capture a far larger prize.

The high cost of transporting hydrogen shows why Ross Garnaut sees Australia’s biggest opportunity not in the direct export of renewable energy but in using cheap renewable energy to produce metal products for export. Transporting oil, coal or gas over long distances overseas has become relatively cheap and easy. Direct current power lines have also been demonstrated to work well, but they don’t come cheap if you want to run them thousands of kilometres through the ocean. And, as we saw with the extended Tasmania Bass Link outage in 2016, if these cables suffer a fault it can be hard to diagnose and fix. Hydrogen’s problem is that it takes lots of energy and expensive equipment to convert it into a liquid small enough in volume to viably ship overseas.

Producing metals in Australia would save on transport costs because Australia already produces a large proportion of the world’s metal ores. Refined metals weigh much less than ore but are worth significantly more. Garnaut’s partnership with the British steel tycoon, Sanjeev Gupta, to revive the Whyalla Steel Mill and build an energy company backed by renewables is an effort to realise this vision.

Glimpses of an alternative future: steel tycoon Sanjeev Gupta. Liberty2017/Wikimedia Commons

But that pathway is not without challenges either. Just like those Aussie men who have little to no involvement in construction yet somehow feel they must drive a hulking dual-cab ute, politicians the world over seem to think that if you don’t have metal smelters you aren’t a real economy. Consequently, metal smelters across the globe are heavily subsidised and the market burdened by excess production capacity.

Australia’s steel mills, aluminium smelters and other industrial plants are struggling, and Gupta’s Whyalla plant, which lost $185 million last year, is no exception While power from wind and solar in Australia is approaching world-competitive prices, we haven’t yet got the cost of storage and hydrogen technologies down to where they need to be. This is beginning to look possible by as soon as 2030, but we need to encourage other countries to accelerate their efforts in decarbonising energy.

How the economics is transforming the politics

What Ross Garnaut highlights is that the rapid decline in the cost of wind and solar, alongside further reductions in battery and hydrogen-processing costs, can slice through the Gordian knot holding back Australian climate policy.

Senior policy-makers, including many on the Labor side, have long seen emissions-reduction efforts as a major economic threat — after all, Australia is the world’s largest seaborne exporter of coal and gas. And while industrial manufacturing in Australia is often sub-economic in scale, far from end users and weighed down by relatively high labour costs, it could defend itself using low-cost energy built on plentiful supplies of coal and gas. As a consequence, Australia has not only been reluctant to implement emissions-reduction policies at home, we’ve also tried to sabotage global efforts.

Yet it turns out that aggressive efforts by governments overseas to push down the cost of wind and solar have delivered Australia a potential competitive advantage. For this advantage to be fulfilled, though, two more things need to change. We need other countries to accelerate their efforts to increase the scale and reduce the cost of battery and hydrogen technologies. And we need them to enact tighter emission controls that will increase the cost of using fossil fuels and shift them towards renewable energy.

If these two things happen then renewable energy becomes the dominant fuel for energy and Australia moves into the box seat. What is often forgotten by policy-makers and commentators is that while Australia is the biggest exporter of coal and gas by sea, our exports are small relative to the amounts of coal and gas other countries produce domestically or import via pipeline. China has plenty of coal; India has plenty of coal. Russia and the United States have plenty of coal and gas. Yes, these countries also have plenty of renewable energy resources, but theirs aren’t nearly as rich and plentiful as Australia’s.

Meanwhile, the alliance between fossil fuel producers and industrial manufacturing in Australia has broken down. While manufacturers’ industry associations were busy in Canberra helping fight the Renewable Energy Target and the carbon price, energy companies were planning the price increases that made the impact of the carbon price look like a rounding error. In 2013, when the price was operating, wholesale gas prices were $4 per gigajoule; by 2018, with it long gone, wholesale gas prices had risen to anywhere between $9 and $15. Wholesale electricity prices duly followed, rising from around $55 to around $90 per megawatt-hour.

Manufacturers’ only hope for energy price relief turns out to be the fuel source their lobby groups fought against with the fervour of a Christian evangelist from America’s deep south. Interestingly, mining companies, except if they’re digging up coal, are also looking to cheap wind and solar to improve their competitiveness. Twiggy Forest’s iron ore operation in the Pilbara is about to replace a large chunk of its gas-fired power with a solar farm. Goldmines in Western Australia that have been paying large premiums to truck diesel and gas thousands of kilometres to their mines have noticed that lower-cost energy sources — sun and wind — exist right above them. Australia also hosts some of the richest deposits of the resources required to produce batteries.

The interests of Australia’s big business groups are beginning to split, with the potential to decisively shift the political dynamics. It is becoming apparent that the long-term financial interests of Australia’s industrial manufacturers, and also of some miners, are best served by strong global action to reduce emissions and to progress renewable energy, hydrogen and battery technology.

Morality meets economics

Politics, though, is taking a while to catch up. When the man who abolished the carbon price, Tony Abbott, lost his seat to Zali Steggall, an advocate of climate action, he delivered a message not of contrition but of celebration. What mattered, the former PM said during his concession speech, was that the Coalition as a whole had won government. While it had suffered losses in stronghold seats like Warringah, it was doing well in working-class seats. “Where climate change is a moral issue we Liberals do it tough,” said Abbott. “Where climate change is an economic issue, as the result tonight shows, we do very, very well.”

After preferences, the Coalition had indeed gained significantly in pivotal Queensland marginal seats where mining and industrial manufacturing are important. There, the message to blue-collar voters from the Coalition, as well as from Pauline Hanson’s One Nation, was that Labor’s climate change policies would put them out of work and drive up the cost of living.

The problem for the Coalition is twofold: gas prices are stuck at levels at least twice what they used to be, and financiers aren’t interested in sinking their money into building new coal-fired power stations. Energy prices will consequently remain high, and industrial manufacturing on tenterhooks. While coalmining and gas extraction are fine, they don’t actually support very many jobs once the necessary infrastructure is built.

Until recently the environmental movement and the Labor Party have tended to talk about solutions to climate change in terms of policy settings or broad technological solutions, like renewable energy. When it came to specifics, environment groups usually focused on the Adani coalmine, the Hazelwood power station and the other things they want to shut down.

What many are coming to realise is that they should be talking about specific projects they want to build. For a concreter or electrician in Gladstone or Townsville, an emissions-trading scheme sounds suspiciously like something that makes a Sydney banker rich. Even a Renewable Energy Target or a slogan like 100 per cent renewables is probably too remote from everyday financial worries. And shutting down a mine — well that sounds like it’ll end in the dole queue. But a huge hydro–wind–solar hub in North Queensland with a new transmission line to support mining expansion in Mt Isa sounds like employment and cash for them.

Of course, this is not what economists would recommend. They would say governments should set the overarching emissions target and leave it to the private sector to work out which projects should proceed. They’re right, but strangely it was the party of free enterprise that rejected this advice. Tony Abbott managed to demonise such an approach and good economic theory became a political albatross for Labor.

An opportunity is emerging for a talented politician to sell voters an alternative vision of economic security, one aligned with the need to contain global warming. Sun Cable and the Asian Renewable Energy Hub provide a picture of what’s possible over the long-term. But blue-collar workers need to be offered not just a vision of Australia becoming an energy exporting superpower in a decade’s time, but also shovel-ready projects for the next term of government. As a rich country we also need to demonstrate leadership in the here and now if we want other countries to accelerate a shift away from fossil fuels.

Coalition contradictions

Oddly enough it is the Coalition, not Labor, that has stumbled on half the answer. For all their talk of free enterprise and small government, the Liberals and the Nationals have converted energy policy into something like a showbag. They continue to proclaim that it would be a disaster if we were to shut down a single coal-fired power station — even one like Liddell that’s badly limping and well past retirement age. But whenever things start to get difficult in the energy or climate arena, they pluck out a new, impressive-sounding energy project.

Snowy 2.0 was just the beginning of what has become an array of projects extending all the way from Darwin Airport to Einasleigh, inland from Townsville, then stretching all the way south to Roseberry in Tasmania and plenty of places in between. Most of these projects involve energy storage via pumped hydro or a big battery, or new power transmission lines.

What the feasibility studies for these big-ticket projects show is that they only make economic sense if you plan on shutting down much of Australia’s existing coal-generating fleet and replace it with wind and solar. The Coalition knows it needs to be doing things to replace ageing coal power plants and increase competition in the electricity market, but it also wants to continue using Labor’s climate change policies as an instrument of fear. This half-hearted approach to transforming our energy system leaves it in danger of tangling itself in a net of contradictions.

Those contradictions are set on a collision course in Tasmania. Along with Queensland, the Coalition owes its unlikely election victory in May to two seats in northern Tasmania, Bass and Braddon. Scott Morrison led Tasmanians to believe that his government would deliver a major expansion of the state’s hydroelectricity system through a series of pumped hydro projects — essentially turning Tasmania into what is billed as the Battery of the Nation. This expansion hinges on the construction of a second direct-current transmission interconnector with the mainland — the Marinus Link — which would send excess electricity to Melbourne during peak-demand periods. Morrison claimed that this interconnector could be built as soon as 2025, although this has since shifted to 2027.

The problem facing the federal government is that the Australian Energy Regulator will only sign off on the plan if the new transmission line passes what is known as the regulatory investment test, an economic cost–benefit evaluation. But the feasibility study for the second interconnector made it very clear that the project made no economic sense unless several mainland coal generators closed down. According to the study, the Marinus Link’s benefits are likely to outweigh its costs only when around 7000 MW of the National Energy Market’s present coal-fired generation capacity retires.

To put that 7000MW into perspective, Victoria’s entire coal fleet is equal to 4775MW. After the closure of Liddell, New South Wales’s remaining coal fleet capacity is 8160MW. In other words, the Coalition is incredibly enthusiastic about building the Battery of the Nation yet has a conniption about the shutdown of the Liddell power station (from which we can only count on 1000MW at peak times), claiming they’ll build a brand new coal-fired facility in Queensland and keep Yallourn operating in Victoria.

Something doesn’t compute, and by the time of the next federal election Labor will have an opening to win back these Tasmanian seats. It simply needs to point out that the expansion of the Battery of the Nation, and the extra jobs it brings, hinges on electing a government that will transition Australia out of coal.

Winning over Queensland seats is trickier because there will be losers as well as winners there from the transition (although most of that state’s coalmining jobs are in coking coal, which is not immediately and directly threatened by renewable energy). Yet a power scheme rivalling Battery of the Nation in scope and ambition — the kind of project Joh Bjelke-Petersen would be proud of and Bob Katter is enthusiastically backing — is already on the drawing board. Like Battery of the Nation, it involves a major new transmission line, this one running inland from Townsville to Mt Isa and linking the main national grid with major mines in the North West Minerals Province to provide the mines with much cheaper electricity. It would also open up access to one of the world’s best solar resources. Further transmission lines would be necessary to link the 1000 megawatt Kennedy Wind Farm, pumped hydro plants and other major renewable energy projects with the industrial city of Gladstone.

The end result would be a triangle linking wind, solar and hydro projects with large mining and industrial electricity consumers across central and north Queensland. Power would be provided at a cost that would encourage mining in the northwest to expand, and would retain, or possibly attract, minerals-processing plants along the coast. The potential increase in jobs would dwarf those that might flow from the Adani Coal Mine.

For this to happen, the government needs, at a minimum, to act as underwriter and facilitator of long-term contracts between power suppliers and major mining and industrial customers. This would bring down the risk, allowing low-cost finance from superannuation funds and banks to flow in. The total investment would be significant, but in line with the Snowy 2.0 scheme once you include its supporting transmission.

If Labor were to promise such a scheme, the Coalition would face difficult choices. So far it has had some success by talking favourably about coal projects in the knowledge that Labor would struggle to do the same. But it hasn’t had a hand in seeing anything built. The Queensland electricity system is already oversupplied with coal-fired baseload power stations: more than 8000MW of coal-powered capacity for just 6000MW of average demand. Justifying more coal-fired stations is difficult unless you accept that you have to shut some of the existing ones down. And no credible power companies are lining up to build any new coal power stations.

The LNP’s talk-a-lot-about-coal strategy isn’t likely to win a battle for hearts and minds once it’s pitted against the far larger set of renewable energy and transmission projects already under development, backed by credible power project developers. (Note that the Collinsville coal power plant cited by resources minister Matt Canavan as worthy of government support is proposed by a company that appears never to have financed or built a major power station.)

It might be hard to imagine now, but if Labor promised such a scheme the Coalition would probably not be far behind. Self-preservation has a habit of winning out over ideology. This would represent a watershed moment: the Northern Queensland tail has been wagging the entire country’s energy and climate policy for the past few years.

Making possible the impossible

Sun Cable, Pilbara’s Asian Renewable Energy Hub and the Gupta’s plans for metal manufacturing provide tangible glimpses of an alternative future tied to renewable energy rather than fossil fuels. Lots of hurdles have to be overcome to convert it into a reality.

But some steps have already been taken. Over the space of just five years, between 2016 and 2021, the contribution of renewables to Australia’s electricity supply will have risen from 15 per cent to 30 per cent. A number of major manufacturers and mining companies are signing up to new renewable energy projects in order to lower their energy costs. Research company Green Energy Markets estimates that wind and solar projects already under development could produce more electricity than Australia currently consumes. Partly thanks to Malcolm Turnbull, Scott Morrison and Liberal state energy ministers, the energy storage and transmission projects already under way can take the country well beyond 50 per cent renewables.

While Tony Abbott may have been right about the last election, he could be very wrong about the next one. Who knows, we may even have a bipartisan approach to renewable energy and climate change. Nelson Mandela once said, “It always seems impossible until it’s done.” Thanks to an unlikely alliance of three billionaires — Mike Cannon-Brookes, Twiggy Forrest and Sanjeev Gupta — we can now see how it can be done. The economics are moving in the right direction. Let’s hope the political will is not far behind. •

The post Here comes the sun appeared first on Inside Story.

Outwardly, at least, Gupta himself has adopted some of this casual culture. Speaking in his Sydney office, he wears a white shirt, dark blue trousers, a light blue jacket and R.M. Williams riding boots. Since he bought the failed Whyalla steelworks company Arrium out of administration six months ago, his family has moved to Australia. They live in Sydney’s eastern suburbs, where his children attend private schools. “In a short space of time, it has become home,” he says. “We have had a very accepting reception.”

But Gupta’s business trajectory in Australia has been anything but casual. A month after buying the steelworks through his company GFG Alliance, he acquired a majority stake in Zen Energy, an Australian solar energy and battery storage company, then chaired by the economist Ross Garnaut. Through the renamed company, Simec Zen, Gupta plans to cut the steelworks’ energy costs by installing solar and battery technology that will feed into the national energy grid as well. “The energy investment is a key aspect,” he says.

He is also embarking on a pumped-hydro storage project, to be built in a disused pit in the adjacent Middleback Ranges among iron ore mines that came with the steelworks sale. And less than four months after he acquired Zen, he bought from resources company Glencore a mine in New South Wales producing coking coal, another steelmaking ingredient.

“I’ve seen more time lost in political conflict in Australia than in Britain,” says Gupta.

Integration like this is the name of Gupta’s game. He aims to increase the Whyalla steelworks’ output by about a third over the next couple of years, and to integrate sales with those from other steel businesses he has rescued, including in Britain. “It’s a tall order,” he says. “So far, so good. With the right integration with plants outside Australia, it will stack up.”

The pace of Gupta’s operations is almost matched by those of other foreign companies that have flocked to underwrite renewable energy projects in South Australia over the past year. Last March Jay Weatherill, the Labor premier, launched a plan for South Australia to “take charge” of its own energy strategy. His government backed it with $550 million. The trigger was the statewide blackout in September 2016, after a freak storm separated South Australia from the national electricity grid; more blackouts followed in early 2017.

South Australia closed its last coal-fired power station in 2016. Weatherill’s plan encourages investment instead in solar and wind renewable energy sources, a new government-built gas-fired plant and battery storage to stabilise the power system. The plan drew Elon Musk, a Silicon Valley entrepreneur, to install the world’s biggest lithium-ion battery outside Jamestown, north of Adelaide, through his company Tesla. It came on stream in December. Neoen, a French renewables company, now owns and runs the battery in conjunction with its adjacent ninety-nine-turbine wind farm.

Tesla is also building a “virtual power plant” in South Australia to link 50,000 homes with solar panels and batteries. Solar Reserve, an American company, is embarking on a solar thermal plant at Port Augusta, which purportedly will produce enough energy by 2020 to meet all the SA government’s own needs. And Neoen is planning a solar and wind-powered plant at Crystal Brook to produce hydrogen energy for export.

Already, almost half of South Australia’s electricity comes from wind and solar power, the rest mainly from gas. This puts South Australia closer to countries like Iceland, Sweden, Norway and New Zealand in its use of renewables than to Australia as a whole. During the current state election campaign, Weatherill announced an even higher renewables target: 75 per cent by 2025. The Turnbull government has attacked his renewables strategy, blaming it for high electricity prices and unreliable supplies.

But Weatherill hopes the strategy will play well when South Australians vote this Saturday. A recent Newspoll showed that Weatherill’s renewables commitment made 32 per cent of people “more likely to vote Labor” and 22 per cent less likely. (Thirty-four per cent said it would not influence their vote.) Steven Marshall, the Liberal opposition leader, wants to scrap the renewables target and spend money on more connections linking South Australia to the eastern states within the National Electricity Market, where coal-fired power still dominates. The impact of the vote for Nick Xenophon’s new party, SA-BEST, is hard to predict; it is standing candidates in thirty-six of forty-seven lower house seats. But, after sixteen years in power, Labor faces a tight contest.

Whyalla could be a testing ground. When I visited the city two years ago Arrium, the company that then owned the steelworks, had recently gone into administration. After producing steel for sixty-nine years, Whyalla was facing an uncertain future. South Australia’s car factories were also shedding jobs as the last of them prepared to close in 2017. It seemed as if the state’s old manufacturing industries were tottering before the forces of globalisation.

Gupta’s investment has restored a sense of confidence in Whyalla, at least. He supports more energy interconnectors to the National Electricity Market (“Without more, South Australia has a limited role”). But he’s also a champion of the state’s renewables strategy. He has made renewable and low-carbon energy a focus of his manufacturing businesses globally.

His plan to build pumped-hydro power for the Whyalla steelworks has even captured federal attention. The Australian Renewable Energy Agency, the federal body that invests in renewables projects, has offered $500,000 for a pre-feasibility study on this one. (After Julia Gillard’s Labor government set up the agency, Tony Abbott as Liberal prime minister tried to abolish it. Malcolm Turnbull, Abbott’s successor, has kept it going with a reduced budget.)

“Renewable energy is a given for Australia,” says Gupta. “It’s only a matter of time. The next generation will expect it. The country has abundant natural resources of wind and sun. It’s where the world is heading. I think South Australia can become a hub of energy-intensive industries. That will encourage, in turn, more investment in renewables industries.”

He is equally certain that coal, Australia’s second-biggest export industry after iron ore, is in decline. “It may have a future, but not in the generation of power,” he says. “We’re past the turning point for coal. China can’t continue to grow the way it’s doing. Eventually it will plateau, and when that happens it won’t need iron ore and coal from Australia.

“That’s the problem I have with Australia’s resource export model. You could argue that twenty-six years without a recession in Australia means it must be doing something right. That works as long as resources are needed. But all countries have to work hard to innovate. A good thing about Australia is that there’s a lot of innovation at the base, in universities. But it often doesn’t get the commercial support it needs.”

That leads Gupta to offer his observations on what he thinks is holding Australia back. The egalitarian shorts-and-coffee culture encourages him: “You need industry and government to work together when you want to make things happen.” But the political caterwauling between federal and state governments, of the type that has plagued energy policy for years, dismays him. “It doesn’t work. A lot of time is lost in these conflicts. I’ve seen more time lost in political conflict in Australia than in Britain.”

Gupta speaks positively about the state that is now the focus of his Australian investments. “South Australia has too often felt like a poor cousin. Yet Adelaide has all the attributes to be a great city: universities, beaches, culture and great properties. If we can solve energy in South Australia, the state can lead in bringing down Australia’s energy costs, which will attract more industries to invest.” His own investments in Whyalla do not stop at steel. He wants to redevelop its waterfront with a fairground, restaurants and an upmarket hotel.

Gupta is pleased to be investing in Australia at a time when we are forging closer ties with the country of his birth. India is now Australia’s biggest source of immigrants, driven partly by a rise in the number of students from India. “Too many economic opportunities between Australia and India have been missed,” he says. “For Australia, China is today, India is tomorrow.” ●

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GIVEN the political circumstances – a minority government, fierce political opposition and waning public support – Australia’s climate change package is remarkably sound economic policy. But how far will it go in actually reducing Australia’s emissions, and in encouraging other countries to do likewise?

The opening price of $23 per tonne of carbon dioxide is nowhere near the price that will be needed to achieve deep cuts in emissions here and in other countries. But right now it is as ambitious as it gets, internationally.

Australia’s starting price is below the longer-term average price in the European Union’s emissions trading scheme, but above the current EU price, which stands at $16 after a recent one-quarter drop. The relatively low EU price reflects market expectations that the EU target of reducing emissions by 20 per cent relative to 1990 levels will be easy to achieve. This seems likely given that the combined emissions of the twenty-seven EU countries were already 17 per cent below 1990 levels in 2009, that regulations to cut energy use and subsidies for renewables take the load off the emissions trading scheme, that there are fears of renewed financial crisis and recession in Europe, and that there is a continuing supply of offset credits from developing countries.

What the international price will be when the Australian scheme shifts to a market system in 2015 is unclear. It might be higher if, for example, the European Union shifts to a 30 per cent target, if recession worries subside, or if other countries or states – California and South Korea are among the likely candidates – enter the market. Or it might be lower if the recent EU trend continues or the credit supply from developing countries increases. To complicate matters a bit further, how international prices affect the Australian price will depend on which types of credits will be eligible under the Australian scheme, and which other trading schemes Australia links to.

The Australian market carbon price will have a “collar” around it for three years, with a floor price of $15 and a ceiling price that will be set $20 above the market price on introduction. That provides better predictability, and in particular it gives some reassurance for investors in low-carbon assets that the price will not slump to very low levels.

We will soon see forward-market prices for Australian permits. These expected prices over the medium term will influence the investment decisions that are crucial to Australia’s future carbon footprint. If they are high enough, they will tip the balance in favour of investment in high-efficiency gas power plants and accelerate the shift out of coal-fired electricity, and encourage investment in renewable energy sources looking beyond the 2020 renewable energy target. The carbon price will also drive changes in industrial processes to cut back on fugitive and process emissions, and make energy-saving investments more worthwhile.

BUT the aggregate story is not one of emissions trending down. Rather, a carbon price that starts at $23 and rises to $29 at 2020 would, according to Treasury, see a rise in Australia’s emissions to 12 per cent above year 2000 levels by 2020, compared to a rise of 22 per cent without carbon pricing. The reason is that our economy and population are growing, with strong expansion of the kind of activities that use a lot of energy and produce high greenhouse gas emissions: more mines, more processing and transporting of resources, more people travelling, and more and larger houses.

Before any decreases are achieved, the carbon price first needs to slow down the rate of increase. And with the carbon price rising at a steady annual rate, and the Australian economy otherwise going on its usual track, it could be a long time indeed until any cuts in absolute terms are achieved. Treasury has Australia’s national emissions in 2050 at just 2 per cent below 2000 levels, assuming a carbon price of $131 in today’s money.

To understand this projection, it is important to keep in mind that it assumes Australia’s population will keep growing, so per capita emissions would be much lower in 2050 than they are now. This is coupled with the assumption that Australia remains a significant producer and exporter of minerals and agricultural commodities, both of which have elements of fossil fuel use and direct emissions that are difficult to avoid.

But perhaps Treasury modelling will be shown to be too pessimistic. The experience with market-based schemes for pollution control is that the desired outcome is usually achieved more easily and cheaply than the analysts anticipate. The market tends to uncover all manner of abatement options that are not included in the models and, once kicked off in a certain direction, technological progress often goes much faster than anticipated. Two current examples are electric cars and solar thermal power stations with overnight heat storage, both of which are now much further advanced than was expected just a few years ago.

Still, neither a 5 per cent reduction target by 2020 nor the 80 per cent 2050 reduction target has much prospect of being achieved solely within Australia. The difference will need to be covered through imports of emissions units – or, viewed another way, Australia will be an investor in emissions reductions overseas.

That is just fine in the context of an open international trading system. If Australia produces emissions-intensive commodities for export – and this includes grains and meat – then it is only logical to import emissions permits in return. For industrial production like steel, there is the prospect over the long term for Australia to shift from being a high-carbon (coal-based) producer to near-zero carbon production (and exports) using power from renewable energies. For that to be viable in competitive markets, however, requires a strong global climate-change mitigation regime that applies in all the major countries.

Gaining acceptance for the proposition that Australia will need to invest money overseas to reach its climate target could be the next big challenge after the domestic carbon pricing scheme is in place and it is demonstrated that it does not create economic havoc. The amounts involved – around $3 billion per year by 2020 under Treasury’s core scenario – are sizeable but not overwhelming: they are significantly less than Australia’s overseas aid, and a small fraction of the value of Australia’s commodity exports. Coal exports alone were worth almost $60 billion in 2008–09.

Making some climate-change mitigation investments overseas will also tie in both with Australia’s obligations under the UN agreement to provide climate finance to developing countries and with Australia’s objectives to support development and economic integration in the region. Indonesia’s forests, for example, present huge opportunities to cut back on carbon emissions, by establishing new palm oil plantations on degraded land rather than cutting down prime forest, by protecting peat lands that can otherwise burn, and by better management of logging areas. And the energy sectors of developing countries present even more straightforward investment opportunities. Looking again to Indonesia, there are geothermal power plants waiting to be built, and if they are not built soon then coal-fired plants will take their place, putting out carbon dioxide for decades to come.

All of this will need serious money. The time will come to put some of that money where our mouth is. •

The post Uncertainties and opportunities appeared first on Inside Story.

THE federal government wants to convince us that its new carbon price package creates a “clean energy future” for Australia. If you’re wading through Sunday’s avalanche of announcements in search of a clear policy signal to this effect, though, you won’t find it. The incentives in the package pull the economy in contradictory directions. But searching for policy coherence is a misguided exercise. It’s better to think of the package as the chaotic aftermath of the first real battle in a long war over the future composition of Australia’s economy and environment in a warming world.

I say the first real battle because, although various political parties and social groups have always held visions for our collective future that differ fundamentally from the political mainstream, the negotiations over the carbon package mark the first occasion on which such an alternative vision has been expressed through a political party with sufficient power to influence a major economic and environmental reform, at least at the federal level.

Until the Greens took the balance of power in both the House of Representatives (along with some green-minded independents) and the Senate (in their own right), the battle for Australia’s future was a one-sided bloodbath. Labor, the Coalition and Australia’s business and policy elite have long shared a basic commitment to the rapid and far-reaching expansion of fossil fuel consumption and production – for domestic use and for export – in Australia. During the debate, such as it was, over the Carbon Pollution Reduction Scheme, none of these parties or groups challenged this deep brown vision for Australia’s future. Rather, the issue was whether or not to give it a green-tinged veneer by adopting a weak emissions trading scheme so riddled with loopholes that its only notable effects would have been to entrench the fossil-fuelled status quo, waste more than $20 billion of taxpayers’ money in unjustified handouts to the biggest emitters, and distract from Labor’s commitment to double Australia’s coal exports over the next decade or so.

Unsurprisingly, Labor’s strategic commitment to a brown Australia has not changed in the eighteen months since the demise of Kevin Rudd’s scheme. Before the last election, Prime Minister Gillard ran on a “no carbon tax” platform. She had to be dragged into carbon policy negotiations by the Greens as the price of their support to form government. Since they’ve been at the negotiating table, it is no secret what Labor has fought for: a low carbon price; an early switch to a cap-and-trade scheme with a low emissions reduction target of 5 per cent below 2000 levels by 2020; ludicrously high compensation to the “big polluters” it now pretends to demonise; the exemption of petrol from the scheme; extensive reliance on less-secure land sector credits from the Carbon Farming Initiative; and insubstantial (if any) new complementary measures for renewable energy. Most importantly, Labor has maintained its commitment to allow Australian emitters to “outsource” their emission cuts (to rely on imported carbon credits from abatement activities in other countries, which are expected to be significantly cheaper than Australian carbon permits, to acquit their carbon liabilities) so they can keep polluting here.

The key difference this time is that the Greens were on the battlefield fighting for a different vision: a genuine clean energy future for Australia. They have, accordingly, fought for measures that would spark a structural transformation of the Australian economy: a well-designed carbon price scheme with a higher carbon price during the fixed price phase, as well as scientifically credible emissions targets and stringent caps on outsourcing during the cap-and-trade phase. They have also advocated investing the (necessarily higher) projected revenues from such a scheme into essential complementary measures to develop renewable energy industries, establish twenty-first-century infrastructure, improve our woefully poor energy efficiency record and conserve our natural environment and biodiversity.

In the resulting package, there is no clear winner. The mish-mash of carbon pricing, tax changes, grants schemes, investment bodies, commissions and inquiries reflects gains and losses on both sides.

Labor’s vision is more apparent in the carbon price mechanism itself – with the early switch to cap-and-trade based on the default 5 per cent target that will allow extensive international and land sector offsets – and in the industry compensation package which, at more than $22 billion over the next six years alone (including the “government-only” measures for gassy coal mines) is arguably more wasteful than the Carbon Pollution Reduction Scheme. The Greens’ main mark on the scheme is evident from its governance arrangements – particularly an independent Climate Change Authority, which will recommend emissions targets, and Productivity Commission reviews of industry compensation and fuel tax arrangements. These innovations will both enable, and build political pressure for, deeper cuts and less wasteful compensation in the future.

In the package of complementary measures, however, it is the Greens who have emerged ascendant. With a $10 billion clean energy investment corporation, a new agency to administer $3.2 billion worth of renewable energy grants, funding for a negotiated closure of 2 gigawatts of the dirtiest power plants, and a prohibition on using any of these agreed funds for carbon capture and storage projects, the Greens have peeled back the coal industry’s fig leaf and tipped the balance of low-emissions technology development in favour of renewables.

THE biggest battle, however, is yet to come. Australia now has a target of achieving 80 per cent emissions reductions below 2000 levels by 2050, yet it seems unlikely we will achieve any more than the default 5 per cent target by 2020. This means that around 94 per cent of our emissions reduction burden from now until 2050 will need to be shouldered after 2020. Accordingly, rules that govern how much Australian companies are allowed to outsource their post-2020 emissions liabilities will essentially determine whether the scheme will bring about a clean energy future for Australia or whether we’ll be stuck with fossil fuels and a massive bill for imported offsets.

On this most important of matters, the new carbon price package provides no guidance. While liable emitters will be prevented (thanks to the Greens) from acquitting more than 50 per cent of their carbon liability with international offsets, this restriction only applies until 2020. From then on, the policy papers simply say that the 50 per cent quota “will be reviewed” by the Climate Change Authority in 2016. This fudge is telling: it shows that neither Labor nor the Greens were willing to compromise on their respective visions for Australia’s future.

Treasury’s modelling, released as part of Sunday’s package, gives a sense of what is at stake. Treasury projects that Australia’s emissions will exceed one billion tonnes of carbon dioxide equivalent by 2050 – a staggering 80 per cent higher than Australia’s emissions in 2000 – under a “business as usual” scenario (that is, without a carbon price). To achieve the agreed target of 80 per cent below 2000 levels by 2050, Australia will, on Treasury’s models, need to cut emissions by 897 million tonnes below the business as usual figure. Treasury projects that, by that time, 434 million of those tonnes per year (nearly half of the required abatement) will be outsourced to other countries under an Australian carbon pricing scheme in which there are no restrictions on the importation of international offsets, leaving Australia’s actual emissions in 2050 almost exactly where they were in 2000, at around 550 million tonnes. Some “clean energy future” that would be!

The Treasury modelling does not take account of some of the final details agreed to by the Multi-Party Climate Change Committee, including the 50 per cent quota limit on outsourcing that will apply until 2020. Treasury will therefore be producing updated modelling to reflect the final agreed package.

Given the fundamental importance of the outsourcing restrictions beyond 2020, and the fact that this issue is now deeply politically contested, it is no longer appropriate for Treasury to take a normative stance on the desirability of outsourcing – let alone without a quota. For example, in Chapter 5.2.2 of its modelling, Treasury claims that “while pricing carbon cuts domestic emissions, it is inefficient to meet the whole abatement task through domestic abatement.” But this comment presupposes the very question that is now at issue: the nature and content of the “abatement task.” If the task is to finance 900 million tonnes of abatement wherever in the world it may be cheapest then, yes, outsourcing is obviously an “efficient” way to do that. If the task is a clean energy future for Australia and an 80 per cent reduction in Australia’s emissions, then outsourcing is not an option, let alone an efficient one.

Treasury should, in its next attempt, model scenarios across the full range of “outsourcing” assumptions: for example, one with “no outsourcing allowed,” one with “no restrictions on outsourcing” and one with a “50 per cent outsourcing restriction.” This way, Australians can openly debate the merits of these competing visions for our economic future (though preferably with a little less hypocrisy than the opposition and a little less expediency than the government).

Some will retort that cutting that much carbon pollution entirely in Australia would be too costly or that it is some kind of green fantasy. Intelligent Australians should resist the temptation to accept this nonsense. For example, Professor Warwick McKibbin – a Reserve Bank board member and formerly John Howard’s emissions trading adviser – has long argued against allowing any outsourcing in an Australian carbon pricing scheme. Writing in Monday’s Age, McKibbin argues that relying on international offsets for even half of Australia’s abatement “has both an environmental risk… and an economic risk.” These risks are well known and have been amply discussed elsewhere.

Moreover, a well-designed domestic scheme that clearly required the 80 per cent reduction target to be met from domestic cuts, along with appropriate complementary measures, is likely to be achievable at a quite reasonable cost and would also send a clear signal to invest in renewable energy and give Australia a competitive advantage in the low-carbon global economy. As McKibbin notes, the lack of clarity about future outsourcing rules means the government’s new scheme sends no such clear signal, making investments in clean technologies more risky (and therefore more expensive) than need be the case.

Those who support the vision of a real clean energy future for Australia would do well to target this issue. One the first priorities for environmental groups after the new scheme is enacted should be to develop a long-term campaign strategy for securing a prohibition on post-2020 international outsourcing in the carbon pricing scheme. Urging Treasury to model a range of “outsourcing” scenarios, as discussed above, would be a good start.

More broadly, drawing public attention to this obscure but fundamental issue of outsourcing would help to alert Australians to the reality that the new scheme, on its current settings, will not necessarily produce a “clean energy future” at home – and it certainly won’t do so if Labor has its way. What matters is that at least this scheme has enough green armoury in it to give that vision a fighting chance. For that reason alone, intelligent and green-minded Australians should support it – but they shouldn’t down their weapons just yet. •

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WHEN the resources and industry minister, Martin Ferguson, announced $235 million in funding for renewable energy projects last month his remarks seemed to signal a change in the federal government’s thinking. As the Sydney Morning Herald’s Tom Arup reported, “Mr Ferguson said he placed the same level of importance on the commercial development of geothermal as carbon capture and storage technologies.”

This is a significant shift since the days, not long ago, when the federal government began promoting “clean coal” – a concept that has generated enormous scepticism – as the central element of its strategy for controlling emissions from electricity generation. Backed by a half a billion dollar fund to promote carbon capture and storage, the scheme looked like locking the government into a single way of dealing with the enormous greenhouse impact of Australia’s electricity industry, and especially the power generated in Victoria using the Latrobe Valley’s cheap, plentiful and very dirty brown coal.

Martin Ferguson’s announcement included $152 million for two South Australian geothermal projects, a measure of the growing interest that this renewable source is attracting. The momentum has increased now that geothermal’s main economic constraint – the fact that “hot rocks” and major concentrations of population and industry are a long way from each other – might not be such a problem. The hot rocks are still out there, but the case for funding the necessary transmission lines seems likely to improve as existing research, development and testing establishes the long-term viability of those locations. And new sources of geothermal energy, much closer to population centres, look increasingly likely to be viable.

This is where coal comes into the picture in an unexpected way. Preliminary analyses of existing drill holes in the Latrobe Valley suggest that brown coal is acting as an insulator, producing higher subterranean temperatures than in most parts of Australia. The region’s proximity to Melbourne, its existing electricity transmission infrastructure and its skilled workforce make this new location a tantalising prospect.

Leading the project at Melbourne University’s Energy Research Institute are Rachel Webster, professor of physics, and Edwin van Leeuwen, former head of BHP’s Global Technology Group. Van Leeuwen’s involvement came about as a result of a chance encounter at Singapore Airport not long after Webster, who has a longstanding interest in climate change, began to wonder why geothermal wasn’t being taken more seriously. She’d been looking through the options for cleaner energy production and was struck by the lack of government support for what seemed like a cheap, viable alternative.

The Latrobe Valley’s brown coal – a layer around 400 metres thick – is close to the surface, abundant and relatively easy to extract, generating over half of Victoria’s greenhouse gas emissions. At current rates, the known reserves would last for around 500 years, but because there’s an increasingly chance that coal won’t be mined in fifty years time, let alone in 2500, the industry is fighting a strong defensive battle. For the first time, exports are a possibility, with a joint venture company, Exergen, pressuring the state government for the go-ahead. The company’s “continuous hydrothermal de-watering” technology, which it says also reduces greenhouse emissions by 40 per cent, has made exporting brown coal a practical proposition. It’s hard to see John Brumby’s government resisting the temptation to give them the go-ahead, adding further to the environmental impact of the Latrobe Valley’s best-known product.

What captured the interest of Webster and van Leeuwen is the real possibility that temperatures are high enough between four and five kilometres below the valley surface to make geothermal power generation viable. If that’s the case then it runs strongly counter to the conventional image of geothermal energy as a resource that can only be captured in hot, remote parts of Australia.

Their project, the Victorian Geothermal Assessment Report, aims to map the state’s geothermal potential and demonstrate that generating power from the resource is technically feasible and cost-effective (and could incidentally pick up potential sires for other uses, including CO2 storage). It will then be up to companies or government, or both, to take up the opportunities. Developing a research facility in the Latrobe Valley, or one of the many other prospective geothermal sites across southern Victoria, will give Webster, van Leeuwen and their colleagues the chance to test their initial findings to the point at which a commercial operation could adopt and extend the technology.

If the temperatures are right in the Latrobe Valley or elsewhere in Victoria then producing the power is conceptually straightforward: a fluid is injected into the subterranean rock, heated to a temperature sufficient to drive a turbine and brought to the surface. The electricity is generated by a turbine, similar to the plants that produce power by burning coal. The resource itself is virtually limitless.

But there’s some way to go before the plan is “de-risked,” Webster and van Leeuwen told me. The first step is to identify the most promising locations, using gravity gradiometer technology developed by van Leeuwen at BHP. Once those spots are found – the surveys could be completed by as early as February next year, says van Leeuwen – the researchers will drill a series of slimline wells to a depth of between four and five kilometres (at a cost of around $5 million each), where the temperature, porosity, permeability and other characteristics of the rock can be tested. Readings so far, using existing, shallower boreholes, are very promising – at depths of around 700 metres, temperatures in parts of the Latrobe Valley “are amongst the hottest measured in the country,” according to Webster.

If the evidence from the four to five kilometre mark is positive, the project will move to the development stage. The fluid pumped down the boreholes needs to make its way through the rock, increasing in temperature, before it returns to the surface via a second set of boreholes. To make this happen, the project will need to break up the rock (using water pumped at high pressure) to create the reservoir through which the fluid will pass. The researchers will also be assessing the optimal trade-off between depth and temperature: with the cost of drilling so high, it might prove more cost-effective to heat the fluid to a lower temperature and run a less “efficient” generator above the ground – especially given the abundance of the heat resource. “It might come down to a question of twenty degrees versus an extra kilometre,” says Webster.

Alongside that process, the project will be drawing on international experience to design a geoathermal research facility that captures enough fluid to drive a five megawatt–equivalent power station above ground. To be developed in partnership with research organisations including the CSIRO, Monash University, Geoscience Victoria, together with a consortium of companies, this facility will cost somewhere in the order of $30m. It will become “a laboratory,” according to van Leeuwen, in which researchers can assess the viability of a series of larger power stations.

By that stage the project will have cost somewhere near $100 million. The test facility will help refine important aspects of the project, including the question of which fluid to pump into the boreholes. Usually the fluid is water, but one option is to use CO2, which (as a gas) is easier to pump. Once it’s heated and returned to the surface, the heat from the CO2 would be transferred to a suitable fluid to drive the turbines. In the United States, the Department of Energy’s recent announcement of $338 million in funds for geothermal energy research includes some $16 million for researching a role for CO2 in the geothermal process.

Apart from drawing on a cheap and abundant resource, geothermal energy has another very attractive attribute. Unlike solar and wind, it can provide a constant flow of power regardless of above-ground conditions. According to Webster, geothermal “not only provides baseload power but its output can easily be varied in response to changes in demand.” Analyses by McLennan Magasanik & Associates and HSBC both show geothermal fairly quickly becoming cost-competitive with coal.

The Melbourne University team is not the first to pick up the link between coal and accessible geothermal energy. Greenearth Energy Limited, a Melbourne based company, holds exploration licences in the Latrobe Valley, but its efforts have been concentrated on establishing a 10.7 megawatt facility in a coal-rich area near Anglesea, south-west of Melbourne.

This growing interest in geothermal is reflected Australia-wide. While the industry has moved into the development stage in South Australia, the search for promising sites is intensifying in most other states; all up, nearly fifty companies are carrying out exploration. The South Australian government has invested $1.6 million in a new South Australian Centre for Geothermal Energy Research, based at the University of Adelaide, and the Western Australian government has put funds into the Western Australia Geothermal Centre of Excellence, a collaboration between the CSIRO, the University of Western Australia and Curtin University of Technology. In Queensland, the state government has its own scientists mapping potential sites.

Developing a Victoria geothermal research facility is part of a process that could take twenty years to unfold, and will require significant investment by private companies and from government. “Remember,” says Webster, “all the existing generation facilities in the Latrobe Valley were built by the state government.” She agrees that government attitudes have changed over the past few months, and both she and van Leeuwen are hopeful that the funds will be found to get the five megawatt–equivalent facility up and running.

“If geothermal is going to make a significant difference to Victorian baseload electricity it has to work across a broader range of locations than just the Latrobe Valley,” says Webster. But the potential of the Latrobe Valley to produce a different kind of energy highlights the distance the debate about renewable energy has travelled in a relatively short time – and also the distance it still has to go. •

The post The new geography of geothermal energy appeared first on Inside Story.

FOR YEARS, some environmentalists have been campaigning to tackle global warming by establishing a market for carbon. It sounded much more respectable to opt for a “pro-market” solution than for heavy-handed government regulation. And relying on real world markets to optimise the supply of goods and services certainly has lot going for it. But this is not what the environmentalists got in Europe, and are in danger of getting in the United States and Australia. Instead, they have to confront a market for a new financial product – a right to emit greenhouse gases such as carbon dioxide – and any cuts to emissions that accompany the operation of these artificial markets will be due solely to the old fashioned government regulation that they claimed to eschew.

The distinction between markets for real goods and services and markets for synthetic financial products is not trivial. The non-metallic element, carbon, has been traded in traditional markets for thousands of years. Markets for trading artificial financial products, such as a right to emit a harmful gas, are a more recent invention. Replete with derivatives, these tradable property rights are similar to the products that helped trigger the global financial crisis. Investment banks are now busy bundling up and selling carbon credits and offsets – often with dubious links to emissions cuts – in much the same way as they sold the collateralised debt obligations and other exotic products that have done tremendous damage.

Despite the repeated claims of the climate change minister, Penny Wong, that an emissions trading scheme will give business certainty, it will do will do no such thing. Since the European trading scheme began in 2005, the price for an emissions permit has swung wildly from a few euro cents to over 30 euros. The outgoing chair of BHP Billiton, Don Argus, has noted that this type of financial product suffers from an inherent price instability that only makes it harder to make decisions to invest in new production facilities. Argus argues that a simple emissions tax would provide price certainty for many years ahead and be much less administratively complex. Brad Orgill, the former head of the Australian branch of the Swiss investment bank UBS, made similar points in recent article he wrote for the Australian Financial Review, in which he also advocated that more emphasis be placed on encouraging new engineering solutions.

Supporters of emissions trading claim that the extreme volatility exhibited by the European scheme is an aberration and won’t be repeated in future. This would only be true if the efficient markets hypothesis were valid. But the EMH was always nonsensical. It assumes that all market players are endowed with perfect foresight about price movements far into the future. A slightly more sophisticated version makes the equally implausible assumption that any errors will always neatly cancel each other out along either side of a bell-shaped probability distribution curve. Oddly, Kevin Rudd wrote an essay earlier this year in which he was highly critical of the “neo-liberal” philosophy that underpins the creation of these destructive financial instruments. But he proceeded to create a similar neo-liberal market of his own to conduct emissions trading in Australia, provided parliament ultimately concurs.

Price volatility is already besetting another exotic financial product that Rudd is relying on to meet his target for 20 per cent of Australia’s electricity to come from renewable sources by 2020. The price of this instrument – a renewable energy certificate – has fallen so low recently that it is delaying the deployment of wind and other renewable sources of power. Political expediency has left the scheme so badly designed that tradable certificates are given to technologies that either don’t produce any electricity or produce it in nothing like the quantity claimed. It would have been much simpler, and effective, to leave electricity wholesalers to buy the required renewable output in the normal marketplace.

A key feature of Rudd’s proposed ETS will add to price uncertainty by allowing local polluters to buy emissions permits and credits from overseas to meet their obligations. If overseas permits are cheaper, as is widely expected, this will put downward pressure on the price of an Australian emissions permit. One consequence will be that the local price is likely to be well below what’s needed to give big polluters an incentive to switch to the low or zero emissions technologies essential for an efficient transition to a less emissions-intensive economy.

Although you would never guess it to listen to those environmentalists who have gone into the emissions trading business themselves, “putting a price on carbon” will do nothing to cut emissions in Australia’s proposed ETS. The cuts are totally dependent on government regulation to impose an emissions cap that reduces each year. Apart from a recent minor change to accommodate voluntary cuts, the cap acts as both a ceiling and a floor on emissions. No matter how high the price rises for a permit, emissions can’t fall below the floor set by the cap.

The emissions trading market was supposed to complement the cap by making the process of cutting emissions more efficient by sending a “price signal” that encourages a move to low emissions products and processes. But massive government intervention will distort the market so badly that the “price signals” can’t work as intended.

The government will give every cent raised by the ETS to big polluters and households to compensate them for the price impact of the scheme. In the most extreme example, the compensation will more than fully offset the price impact on petrol and diesel, thus removing any incentive to cut emissions from fuels that account for about 16 per cent of the Australian total. The rest of the estimated $116 billion in compensation due to be paid between 2011 and 2020 will severely muffle the much-trumpeted signal supposedly sent by putting a “price on carbon.” Why would a “trade exposed” industry that has 95 per cent of its increased costs covered by compensation bother to take any action to cut its emissions? It won’t, until the compensation is much lower.

Much of this compensation is based in the false premise that these trade exposed industries are competing against companies that move to “dirty” third world countries to take advantage of their supposedly lax emissions standards. In fact, global companies normally use the latest technology wherever they locate, because it is more efficient than earlier versions and thus has lower emissions. BHP Billiton, for example, established aluminum smelters in southern Africa a few years ago that use the latest equipment. The smelters built thirty years ago in Australia are much dirtier; their emissions of particularly potent greenhouse gases (perfluorocarbons) are almost 75 per cent higher than the new smelters in southern Africa.

Amazingly, the Rudd government plans to give $7.3 billion to the worst polluters – the electricity generators that burn brown coal. The only condition is that they must not close down. The opposite condition – that they agree to a phased shut down – would make much more sense. Nor is there any requirement that the money be used to invest in low emissions technologies. Instead, in an unprecedented twist to Australian public policy, it is meant to compensate for a loss in capital value. All the generators have to do is keep pumping out huge quantities of CO2 – about 11 per cent of the nation’s total emissions.

SOME commentators argue that it doesn’t really matter if the government wastes $7.3 billion that could otherwise be spent on helping to deploy clean generating capacity, because the cap can still deliver any nominated target for cuts to emissions. But this is a highly inefficient way to deliver the cuts. Relatively clean industries will be squeezed to make up for the cuts avoided by the dirtiest generators. If cap is really the driving force behind the cuts, why go to all the trouble and expense of setting up an artificial market to generate an impotent price signal? After all, nothing is gained by establishing an artificial market to enrich bankers, brokers and traders, including the new breed of environmental entrepreneurs who confuse a high turnover for new financial product with a serious response to global warming.

Even if the government did not distort its ETS by paying polluters to keep polluting, not much faith should be placed in price signals to cut emissions. Small consumers of electricity, for example, will not bother to change their behaviour in response to relatively low price rises. As should be clear by now, politicians will never let prices rise to the level where they hurt enough to induce a change in the desired direction. This is one reason why International Energy Agency officials suggest that mandatory improvement in energy efficiency for household appliances would produce a better result. Similar arguments have convinced several leaders to apply mandatory emissions standards for cars. Rudd refuses to do so, even though his ETS does nothing to reduce vehicle emissions.

It is a different story for the handful of industrial plants that consume large amounts of electricity generated by coal. The size of their electricity bills has long made most of them pay a lot of attention to energy efficiency. The best policy in these circumstances is to encourage the deployment of much cleaner generating technology.

Another problem with emissions trading is that it assumes – in line with neoclassical economic theory – that a wide range of competing technologies are sitting on the showroom floor waiting to be put to use once the dirtier versions become a little dearer. If suitable clean technologies don’t exist, a price signal from the ETS is assumed to call them into existence. Apart from the way the price signals are muffled, or full negated, by the huge offsetting payments, the ETS ignores the private sector’s reluctance to invest large amounts in the necessary R&D because of the risk that they won’t obtain a big enough return.

This is one of the reasons the Garnaut report recommended that at least $3 billion should be allocated from the ETS each year for this purpose. Rudd has decided, however, that not a cent of that revenue will go to helping commercialise the clean technology crucial to efficient cuts in emissions. Instead, all money has to come from the general budget. But spending clamps mean there will be almost no increase in existing funding, which averages about one-tenth of the amount Garnaut recommended should be spent over the next few years.

This is one reason for replacing the heavily compromised ETS with a simple, low-priced tax or levy. The key to success is to avoid relying on the price of the levy do all the work of cutting emissions. Some ETS supporters accept that a levy would deliver price stability but say that it couldn’t meet targets for emissions cuts. Just as with the ETS, however, any target can be met by covering a shortfall with carbon credits from overseas. Because the government would do the buying, the difference is that there would be a better chance that the credits are based on genuine abatement measures.

One suggestion is for a levy to start at around $10 a tonne of CO2 – instead of the estimated $26 for a pollution permit under the earlier ETS auction. The price could increase annually by $2 until 2020. The low initial price would remove the justification for compensation, with pensioners automatically covered by indexation to average earnings. Even at $10, a levy would raise about $5 billion, enough to fund the $3 billion a year Garnaut recommended for developing low emissions technologies. The rest could be used to promote energy efficiency, fund adjustment assistance for displaced workers and buy abatement credits that include those generated from storing emissions in soil and vegetation.

After initial research grants have been allocated in the standard fashion, governments should give potential operators a bigger role in determining what type of demonstration plants get subsidised. Although it has only budgeted a total of $1.3 billion over the next four years for its Clean Energy Initiative, the government has allocated the bulk of the money to carbon capture and storage projects for coal-fired generators. Solar energy also gets a disproportionate amount of the available funding, leaving almost nothing to be split between promising alternative sources of power such as geothermal and wave, let alone carbon capture and storage options involving biochar and algae.

At present, secretive governments panels decide which projects are funded. It would be better to rely on a more market-oriented approach by pooling this money and dividing it up in proportion to how much capital the applicants raise in the private sector. A similar process could still apply to the $7.3 billion announced for the generators, by splitting it between all firms with a financial commitment to deploying low or zero emissions technologies. The Australia Institute’s Richard Denniss has suggested another option: the government could call for bids to share $10 billion and allocate it to those who show they can produce the biggest cuts to emissions per dollar.

Environmentalists who focus on exotic financial products to cut emissions should shoulder some of the responsibly when the ETS proves a severe disappointment. There is no need for financial engineers to get a look in when so much work has to be done by real engineers to address the problem. •

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THERE IS A SIMPLE test of just how seriously Kevin Rudd takes his repeated claim that global warming presents the “greatest moral challenge of our generation.” All that’s required is to contrast his spending priorities. The federal government is now likely to give over $25 billion to big polluters to help them keep on emitting during the first five years of the Carbon Pollution Reduction Scheme, or CPRS. Well over $30 billion will be paid to households as compensation for the relatively minor impact of the scheme. This dwarfs the funding announced in the May budget for the clean technologies that are essential to reducing, rather than subsidising, the production of greenhouse gas emissions. The budget’s Clean Energy Initiative allocated $2 billion for carbon capture and storage projects over nine years, $1.5 billion for solar energy over six years and $465 million for all other renewables over four years.

The comparison is even less favourable when it becomes clear that the clean energy funding includes $1 billion left over from existing programs and $2.5 billion snatched from the Education Investment Fund. Nor, with the government committed to imposing a strict 2 per cent cap on the overall increase in government spending to help restore the budget to surplus, is there any realistic chance that this funding will be increased in future budgets. The cap is expected to start in next year’s budget, or in 2011–12 at the latest.

Given that the government has exempted many areas of spending from the cap, including defence, CPRS compensation and welfare, there is almost no way any new funding will be given to renewables. More could have been spent before the cap starts to apply if the government had used part of its anti-recessionary stimulus package to help fund alternative energy projects that were ready to go. Although South Korea devoted almost 80 per cent of its stimulus spending to this purpose, the Australian government chose not to outlay an extra cent on the sector. Instead, it spent over $16 billion to help the building industry via a frenzied rush to construct new school gyms, assembly halls and standardised classrooms.

Barely any genuine educational gains would have been sacrificed if the government had diverted $3 billion to low-emissions technologies in line with the recommendation of its independent adviser on climate change, Ross Garnaut. A highly regarded mainstream economist, Garnaut advised that at least $3 billion should be spent each year to overcome market failure in the development and commercialisation of new technologies to tackle global warming. Apart from energy efficiency measures, clean technology is crucial to cutting emissions; otherwise, most of the downward pressure on emissions will have to come from the old-fashioned government regulation that lies at the heart of the CPRS.

Some environmentalists like to demonstrate their faith in markets by saying that the CPRS will cut emissions by “putting a price on carbon.” In fact, bad policy decisions mean that the cuts will be driven mainly by government regulations imposing a tighter cap on the level of emissions allowed each year. The price of a pollution permit issued under the CPRS could play a peripheral role in creating an incentive to switch to less emissions-intensive consumer behaviour or production processes, but this effect will be greatly diminished by the compensation the government will give to industry and households. Any incentive to switch from petrol and diesel, for example, has been completely obliterated by the government’s decision to offset the cost of a pollution permit for these products with an equivalent cut in the fuel excise.

The government will give over $15 billion to trade-exposed industries during the next five years as compensation for the impact of the CPRS. Because big polluters, such as smelters, steel mills, and cement factories, will receive 95 per cent of the extra cost of the scheme, they will have almost no incentive to change to lower-emissions production processes. In many cases, the existing processes generate waste heat that could be used to produce electricity. But why should these firms bother to install the necessary equipment when the government is basically paying them to keep polluting?

A second category of polluters, including the booming natural gas industry, will receive compensation equal to 65 per cent of the cost of buying a pollution permit. Although natural gas promotes itself as a “clean green” energy source, Rudd surrendered to an outrageous lobbying campaign for compensation based on the implicit premise that it is really a dirty fuel. One consequence is that this compensation severely limits the attraction of using small renewable energy plants as a source of onsite heat for industrial processes.

The government is already committed to giving $4 billion over the next five years to the dirtiest electricity generators, mainly those burning brown coal. There are reputable reports that this figure is about to be lifted to $10 billion. Because these companies aren’t trade-exposed, this huge payment is justified on the grounds that the CPRS will cause the capital value of the power stations to fall. Several observers have noted that governments don’t compensate tobacco companies or casinos for the impact of polices designed to reduce the harm their products do.

One objection to these payments is that the money is not available if a company agrees to create a big cut in emissions by closing down, after allowing a reasonable time for much cleaner plants to come on-stream. Another is that billions will be paid with no requirement to switch to low-emissions technologies. This policy turns the “polluter pays” principle on its head by encouraging a business-as-usual approach. Coal miners are also demanding billions in extra compensation, and are expected to get enough to push the overall level of compensation for industry well past $25 billion over the next five years.

The compensation for households, costing at least $30 billion, is even harder to justify. When fully operational, the CPRS is expected to add about 1.1 per cent to consumer prices when inflation is low. (The GST added over 4 per cent.) This compensation could be halved with barely any impact on household budgets, particularly as various efficiency measures can cut energy bills.

Given that energy plays a highly useful role in society, the aim should be to improve efficiency on the consumption side and switch to lower emissions production technologies. But the excessive compensation, which creates such disincentives to changes in behaviour, and the trivial levels of funding for new technology, work in the opposite direction. This means that the CPRS can only achieve its emissions targets by large cuts in energy use, unrelated to efficiency gains. Although the government loves to talk about how the CPRS will give business “certainty,” it never mentions that an unnecessarily large squeeze on energy consumption will be a near certain outcome.

Garnaut wanted his recommended funding of a minimum of $3 billion a year for low-emissions technology to come from the $13 billion worth of pollution permits expected to be issued in 2012–13, the first year the CPRS is due to be fully operational. But the government has refused to allocate a cent of this revenue for this purpose. Instead, it boasts that all revenue will go to compensate polluters and households.

THIS LEAVES general revenue as the only source of funding for new technology. Because of the 2 per cent cap on outlays, though, no new spending on clean technology will be possible. The compensation paid for the CPRS will force particularly big cuts in areas like education that aren’t exempted from the cap. The spending squeeze would be even tighter if the government were not giving most of its handouts in the form of free pollution permits for industry and a mix of cash and tax cuts for households. The permits and tax cuts have the same adverse impact on the deficit as cash payments, but don’t breach the spending cap.

Almost no new research spending will occur beyond the modest commitment to the Clean Energy Initiative and the small amounts already announced for other programs. Some of this funding is miniscule. The energy minister, Martin Ferguson, has only given $4 million for research into converting algae into biofuels, even though this process has great potential to sequester a significant proportion of the emissions from coal- and gas-fired power stations. A mere $1.4 million has been announced for research into biochar, despite its ability not only to generate renewable fuel from waste vegetation and manures but also to store emissions in a form that can improve Australia’s degraded soils.

If the experience to date is any guide then the available funding for renewables will be dribbled out at a leisurely pace, or not renewed if it is a legacy of the Howard government. Labor inherited a $328 million program to help solar energy replace diesel in remote and regional Australia, but stripped out $42 million and then scrapped the scheme when the remainder of the money ran out. Before the election, Kevin Rudd promised to spend $500 million on a fresh renewable energy program; nothing has been spent to date. Although geothermal energy could provide vast quantities of zero-emissions baseload power at a relatively low cost, only $20 million has been spent on this option – and even this minor amount was diverted from the Energy Innovation Fund, which was supposed to be used for research on photovoltaic and hydrogen energy.

The government defends the paucity of its funding for clean energy technologies by pointing to its Renewable Energy Target, which requires that 20 per cent of electricity will come from renewables by 2020 – up from the 15 per cent mandated by a Howard government initiative. But a mature technology – wind power – is expected to meet most of the target. The rest will probably come from the strange decision to include solar hot water, even though it does not produce electricity.

There would be no problem finding $3 billion a year from the CPRS revenue for new technology if the government had accepted advice to set a limit on the amount of compensation and then let an independent panel distribute it. But Rudd insisted he is good at negotiating with business in what he calls a game of “argy bargy.” He’s not. He always loses. Which mightn't matter, except that the effort to meet the moral challenge of global warming loses out in the process. •

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THE SOUTH AUSTRALIAN PREMIER, Mike Rann, says he is “confident” that General Motors will agree to manufacture an electric car at the Holden plant in Elizabeth. Following his discussions in Detroit with GM’s chief executive Fritz Henderson, Rann said the prototype battery-powered Volt could be built on an existing production line in Elizabeth. Sounds good. Perhaps Kevin Rudd or the industry minister, Kim Carr, should have taken themselves off to Detroit for similar discussions with Henderson before announcing the government’s $500 million Green Car fund to build low emission vehicles in Australia.

The government is showering money on the Australian car industry, the latest example being a $200 million line of credit to Holden. This is making no discernable difference to the business-as-usual mindset at Holden, which has announced it will continue to produce the Commodore with a V6 engine. Although it will be 13 per cent more fuel-efficient, it will not qualify for green car funds. The Commodore will produce 221 grams of greenhouse gases per kilometre, as against the 130 grams fleet average the Europeans will move to by 2012. (Reports suggest that this is also the target set in China.) Meanwhile, Holden is sticking with petrol, despite having access to $150 million of the Green Car fund for its small cars. In the Australian Philip King reports that $200 million of the scheme will be used to import GMH’s small car engines, developed by foreign technology.

While the government insists the money it is handing out is essential for the car industry, it lacks any clear vision of the future. Sooner or later, petrol will no longer be used in cars. The world is starting to focus on electric, where the most recent developments are promising. Under the Better Place battery-swap concept, for example, a $500,000 machine at a service station will allow car owners to swap fresh, fully charged, batteries faster than filling up the tank. With bigger production runs the capital cost will come down, and the technology will improve as battery technology – being feverishly worked on overseas but not commercially in Australia – increases the power and life of batteries. Better Place also envisages charge spots at homes, shopping centres and workplace car parks.

Hamilton Island, the centre of the Whitsundays tourist industry, provides a glimpse into the future. Hamilton is about as big as a small suburb or a medium-sized country town and the locals all use electric buggies, rather than cars, to get around. Anyone who has driven an electric golf buggy knows they are much simpler and lighter than a car – no clutch, gears, cooling system, oil filters etc. The lack of traffic noise is striking.

Electric cars of the future will not be much different from today’s golf buggy, although they will have a car body shell, more comfortable seating, a boot and a much more powerful electric motor. Simply avoiding the production of bulky petrol or diesel engines and complex automatic gearboxes, wherever they are made, would make a major contribution to emission reductions. Electric cars will be so relatively simple to manufacture that existing car manufacturers could find themselves competing with new players. The production of efficient electric cars would inevitably lead to the development of electric trucks and buses, the latter making a big contribution to urban public transport and reduction, not only of carbon dioxide but also of city smog. The federal government should be applying pressure to get real value out of its Green Car fund.

True, a battery car is not emission free, since recharging the batteries uses the product of coal powered generators. Yet even with brown electricity, the contribution of battery cars to greenhouse gases is far lower than that of petrol or diesel vehicles. But coal power generation will continue only if geosequestration is a goer. If it fails, power stations will be run by gas, in the medium term, on the way to 100 per cent power production by renewables. In New South Wales, where the Hunter is the centre of coal power generation, geological conditions are not suitable for holding liquid CO2 underground; nor is the outlook good for injecting CO2 into safe storage underground in all of New South Wales and Queensland. The Nationals would be wise to re-think their present policy of mandating a 10 per cent ethanol–petrol mix. Like petrol, ethanol has a limited future. Further, with the world approaching a food shortage crisis, grain is being used in Australia to produce ethanol.

National MPs, almost to a man and perhaps a woman, are climate change deniers or sceptics, Barnaby Joyce being the most vocal. Perversely, although Joyce and others ignorantly claim that the government’s emission trading scheme will wreck the Australian economy, the National Party Federal Council this month voted narrowly in favour of gross feed-in tariffs for small-scale renewable energy systems. Joyce and Nats dinosaur Ron Boswell opposed the policy and lost the vote. Boswell’s astonishing reaction to this was to declare he would work to ensure that feed-in does not become the party’s policy at the next election. He said, accurately, that the feed-in policy was more like a Greens policy than a Nats policy, which is hardly a sound basis for its rejection; it’s either good policy or bad, irrespective of which party proposes it.

So not only are the Liberals split on climate change, but so are the Nats. Nevertheless, their highest policy body has now conceded that climate change is real and that it is, at least in part, caused by human activity. The council also called on the federal government to work with the states to introduce feed-in arrangements. If feed-in policies operate, then sunny Queensland, represented in the Senate by Joyce and Boswell, would be ideally placed. Householders could provide all their energy needs from rooftop photovoltaic panels, with any excess power sold into the grid to help pay off the capital cost of the rooftop investment. And such households would have cheap plug-in facilities for their electric cars. •

The post Kicking the petrol habit appeared first on Inside Story.

IT IS DIFFICULT to know what Kevin Rudd really believes. Before the election, he told voters that global warming is the “greatest moral challenge facing the nation.” Now, for no better reason than to stir trouble in the ranks of the Coalition parties, he is obstructing the passage of his own legislation to introduce a renewable energy target. He writes long essays pinning the blame for the global financial crisis on the failings of neo-liberal economics, yet promotes a neo-liberal version of an artificial emissions trading market to buy and sell synthetic financial products called carbon pollution permits and their associated derivatives. He constantly assures voters that he wants to invest in education, health and productive new infrastructure, yet he’ll run short of money because he’s already committed to billions of dollars in handouts to big polluters in clear violation of the polluter pays principle.

It would have been easy to draft legislation to implement Labor’s election promise to expand the Howard government’s mandated renewable energy target. All that was needed were simple changes to Howard’s legislation such as inserting the new target (20 per cent) for the renewables share of electricity production and the new date (2020) for meeting the target. Because the Coalition supports the necessary legislation, it could have been passed without any fuss last year. This would have given investors the legal certainty to start constructing zero-emissions generating plants that will create tens of thousands of new jobs at no cost to the federal budget.

Although the first step towards meeting the target is supposed to take place on 1 January next year, parliament has still to pass the new law. The only reason for the delay is that Rudd’s Machiavellian instincts triumphed over any desire to address the “greatest moral challenge” facing the nation. Instead of grabbing the chance to meet the challenge, he made a completely unnecessary link between the renewable energy legislation and the legislation to implement the government’s Carbon Pollution Reduction Scheme, or CPRS.

Originally there was no intention to provide any compensation to big polluters for the impact of the renewables target, not least because the government’s own modelling shows that it will have almost no cost to the economy. But Rudd announced in May that heavy polluters, including aluminium smelters, cement makers and steel mills, would be compensated, despite being guaranteed big payments under the CPRS.

Rudd knew that the Coalition would not want to be held responsible for denying these extra handouts to businesses. So he made the compensation for the minor cost of the renewables target conditional on the passage of the CPRS, even though there is no reason to link the two bills in this fashion. The upshot is that the renewables bill can’t pass unless the Coalition first passes the CPRS bill. In effect, Labor has chosen to block its own bill to introduce the renewables target, yet the Coalition is copping all the criticism for refusing to “take action” on global warming.

Despite impressions to the contrary, an emissions trading market will not cut a single gram of emissions. That job will be done by a classic piece of government regulation: imposing a cap on greenhouse gas emissions by 2020. Only enough carbon pollution permits will be issued by the CPRS to meet the cap. Once the scheme is due to get under way in 2011–12, substantial emitters (other than those in the agriculture sector) will be required to hold carbon pollution permits. Most permits will be auctioned from 2012–13, with the rest being issued for free to big polluters.

Although the cap is a standard regulatory device, the Rudd government has added a neo-liberal twist by giving the carbon pollution permits the legal status of a property right so they can be traded in a new financial market. Unfortunately, the behaviour of the European trading market shows that prices could be volatile, thus undermining the certainty that government claims is one of the scheme’s pluses for business.

There is plenty of room to debate whether tacking a trading scheme onto a regulatory cap provides a lower-cost means of cutting emissions than simpler alternatives such as combining a levy or tax with mandated emissions standards and other measures. A tax or a levy would give certainty about the price on emissions until 2020, but couldn’t meet a specific cap on their own. Any desired target, however, can be met following the government’s decision to buy emissions offsets from overseas and let them count towards Australia’s target. This escape clause has been included to cover unexpected increases in emissions while the CPRS is operating.

A relatively low-priced levy, offset only by minor compensation, would help fund energy efficiency measures and investment in the research, development and deployment of low-emissions technologies that are crucial to tackling global warming. Ross Garnaut supports a trading system, but argues that “market failure” will prevent the private sector spending enough money on the development of low emissions technologies. This is why he recommended that $3 billion a year be allocated from the CPRS revenue to remedy this deficiency. But the government will not allocate a cent from the CPRS for this purpose. Instead, it will spend the entire proceeds – plus extra from general revenue – to compensate polluters and households for the impact of the scheme.

Garnaut also warns that excessive compensation undermines the claim that the CPRS is a least-cost solution. One of the goals of putting a price on emissions is to send a “signal” to consumers to reduce their use of emissions-intensive products such as petrol. But Rudd has decided to offset the impact of the CPRS on petrol prices fully by cutting the rate of excise. As a result, the CPRS will give motorists no incentive whatsoever to use less petrol. One perverse consequence is that petrol refiners will struggle to reduce emissions, unless other factors such as rising international oil prices help cut consumption. Because there is not a lot refiners can do to reduce emissions from any particular grade of petrol, they will probably be forced to buy extra permits.

Because there is more scope to reduce emissions by improving car engines, governments in Europe, North America and north Asia are imposing mandatory standards for fuel efficiency and emissions on their car industries. The Rudd government is yet to do so, partly because many of its public service advisers have a neo-liberal aversion to regulatory interference in the market place (other than through the CPRS). Relying on the CPRS to reduce emissions from petrol – while completely negating any price signal to do so – won’t produce the least-cost solution to reducing transport’s contribution to global warming.

Because most of the compensation to industry will be in the form of free permits, cash receipts and outlays will be lower than the $13 billion worth of pollution permits the government expects to issue in 2012–13. Cash outlays are projected to be about $9 billion, including $6 billion for households and $2 billion for cutting the fuel excise. This compensation is extremely hard to justify – after all, when governments try to reduce the damage tobacco causes by increasing the excise, they don’t nullify the impact by compensating smokers and tobacco companies. In any event, the costs of the CPRS for households will be modest – about $4 a week for electricity and $2 for gas. Treasury estimates that the impact on the CPI will be highest, at about 0.6 per cent, in 2012–13, followed by barely noticeable annual rises of 0.1 per cent.

At the same time as Rudd surrendered so weakly to demands for compensation for the CPRS, he decided to play the tough guy by applying a 2 per cent cap on the increase in overall government spending in order to bring the budget back into surplus. Every time something busts the cap – and the CPRS compensation busts it spectacularly – something else has to be squeezed below the 2 per cent figure, which is due to start in 2011–12. Because defence and most welfare spending will also be allowed to grow by more than 2 per cent, the cap will disproportionately squash other outlays.

Although it is now only dawning on senior ministers, the decision to bust the cap by splurging billions on compensation for the CPRS will mean that non-exempt sectors such as education, health, transport infrastructure and low-emissions technologies will be hit hard. Yet increased outlays in these areas would benefit households far more than ill-conceived compensation that makes it harder to cut emissions in the least-cost manner. •

The post Ducking the challenge appeared first on Inside Story.

THE DEBATE over emissions trading versus carbon taxes continues apace. Arguments for one or the other have focused on whether it is better to fix emission levels or fix prices, which approach is the simpler administratively, and how they affect voluntary actions to reduce emissions. All of this discussion, however, risks missing the point: governments around the world have generally proved incapable of delivering either effective emissions trading schemes or effective carbon taxes. But failure cannot be an option, so we need to establish a political environment that is equal to the climate challenge and a robust policy framework that doesn’t rely on any single measure – emissions trading or carbon tax – for success.

First, policies require an objective. And it must be said that the federal government’s announced 2020 target of emission reductions of between 5 per cent and 15 per cent from 2000 levels is an entirely inadequate contribution to effective global action. Over a year ago the Bali meeting of the UN Framework Convention on Climate Change highlighted the need for developed countries to commit to reductions of at least 25 per cent by 2020. Our government has responded by arguing that per capita emissions are a more appropriate measure of effort and that our high population growth should be factored in.

They have it half right. It’s likely that the only basis for agreed global action will be per capita emissions. The problem is that it is absolute per capita emissions that are relevant, not reductions, and Australia’s per capita emissions are among the highest in the world. Despite the fact that Australia generates over twice the per capita emissions, our proposed targets represent less than half the emission reduction commitments of the EU. Just as importantly, other key countries many not agree that continuing population growth is an argument for lower national emission reduction targets. China, for example, considers its population control measures to have been a particularly effective contribution to their emissions reductions.

Of course, many developed countries haven’t yet committed to 2020 targets at all, so Australia’s position might therefore be considered progress. Unfortunately, we’ve merely committed to not delivering our fair share of global emission reductions up to 2020. And we’ve made the ambit claim that we are entitled to higher per capita emissions than anyone else in the world for the foreseeable future. This is hardly the right starting point for policy development at home or abroad.

Australia’s primary policy instrument for achieving these national targets is intended to be the emissions trading system embodied in the federal government’s Carbon Pollution Reduction Scheme, or CPRS. It’s important to remember that emissions trading is still experimental. The most significant scheme to date is the European Union scheme, introduced after failed efforts to introduce a carbon tax. Its performance during its first phase, 2005-07, was underwhelming. Because national governments set very weak caps and handed out virtually all permits to large polluters for free, the scheme had only a limited impact on emissions. The initially high prices for traded permits were mostly passed on to customers by large emitters, who collected tens of billions of euros in windfall profits. Eventually the permit price for the first phase collapsed to near zero. It is hard to imagine a more perverse outcome – a “polluter gets paid” scheme.

The EU now has significant 2020 emission reduction targets and is working hard to improve the scheme for its third phase, starting in 2013. Even so, the carbon price there has fallen dramatically as stressed companies hold firesales of the allowances they were given for free by governments. This hardly creates the long term carbon price signal required for emissions trading to work effectively. Fortunately the EU has other policies, particularly for renewable energy, that are delivering major emissions reductions. And it intends to do far more, particularly by improving energy efficiency.

The proposed Australian CPRS incorporates some lessons from the initial EU debacle. But unfortunately it looks like a backward step from the EU scheme in key regards. The CPRS includes the creation of formal property rights to emissions, borrowing provisions, an initial price cap, large subsidies to major emitters, unlimited use of increasingly questionable international emission reduction credits from the Clean Development Mechanism, the effective exclusion of some key sectors (such as petrol) from carbon prices over an initial period and a voluntary forestry opt-in.

Given the possible effects of the global downturn on Australian emissions and the impact of other policies such as Australia’s 20 per cent renewable energy target it’s unclear whether the CPRS will drive any significant change in Australia’s energy sector before 2020. And given that possibility, emissions trading is likely to be the wrong policy.

It is difficult to ensure a scheme’s effectiveness if the target is only a small reduction from what is an inherently uncertain large number – namely, yearly Australian emissions. Emissions over the next several years are, of course, even more uncertain than usual given the global financial crisis. Weak targets will pull down carbon prices and increase their volatility, and this will adversely affect investors’ willingness to back low emission projects. More demanding targets can ensure a shortage of permits and provide the sort of investment certainty that will be required to transform the economy.

Another key issue for investors is whether they – or worse, their competitors – might somehow manage to extract a sweetheart deal from the government that means they don’t have to pay for their emissions. It’s a valid concern. The proposed CPRS will also provide significant subsidies to large energy-intensive, trade-exposed emitters through free permits – up to perhaps 45 per cent of permits in 2020. This is perverse: emissions intensive companies will be subsidised to remain, or even establish themselves, in Australia, even if that increases global emissions.

Australia’s aluminium smelters, for example, are supplied by an emissions-intensive electricity industry dominated by coal-fired generation. An effective, efficient and equitable global response to climate change would almost certainly see such smelters located in countries with lower emission electricity industries using renewable, nuclear or gas-fired power. The proposed Australian subsidies for these smelters therefore work against effective international action. To make matters worse, some of Australia’s most polluting coal-fired power stations will be given some 6 per cent of the total permits over the first five years of the scheme. All these free permits mean that there will be two types of carbon prices – subsidised “low” prices for favoured large emitters (they may even profit from the scheme) and a higher price for everyone else.

Finally, emissions trading also involves very significant participation costs, given the monitoring, reporting, verification and trading requirements within the scheme. Is it worth imposing such costs if you might not be asking these market participants to do anything significant about their emissions for at least the next ten years? And will the cashflow generated by the scheme do anything truly useful to ensure the transition of the Australian economy, or merely see energy consumers paying more for business as usual?

The weak proposed Australian targets for 2020 undermine the case for the CPRS and the flawed proposed design absolutely argues against implementing it. There are other policy options that don’t involve such significant compliance burdens, can direct cashflow to activities that reduce emissions and don’t lock in subsidies to large emitters.

IT MIGHT BE ARGUED that emissions trading with a soft start can still provide a framework for stronger efforts later. Perhaps. But the history of these types of policies is that poor initial design choices can prove very hard to get rid of, and “transitional arrangements” can create a sense of entitlement that is hard to remove. The fact that the government’s flawed design only got worse between the green and white papers doesn’t inspire much confidence in this regard. And bad policies risk taking us backwards. What could be worse than business as usual for the climate? Business as usual with a government guarantee, for one thing.

Transforming the Australian economy for a carbon-constrained world will almost certainly require a price on carbon, among many other policy interventions. Emissions trading or carbon taxes are key options, each with strengths and weaknesses. But weak targets and emissions trading are almost certainly a poor mix. To the extent that the government’s inappropriate national targets and flawed CPRS design reflect current political realities, a comprehensive set of targeted policies might therefore be a more effective policy response for now.

Such policies would certainly include stronger regulations to improve the energy performance of appliances, equipment and buildings. Targeted financial support would encourage energy efficiency and low-emission energy investments; the recently announced subsidies for home insulation and solar hot water are an example of what might be done. Our renewable energy targets could be expanded and targets established for other lower-emission energy supplies such as co-generation and gas-fired electricity. Conversely, targeted emissions-based levies or taxes – call them what you will – could be imposed on particular industry sectors. And while we were at it we could also tackle the many existing policies that actually subsidise emissions, such as the fringe benefits concessions for vehicles.

Note that the Coalition’s proposal for a number of targeted policies instead of emissions trading doesn’t provide anything close to such a framework. There appear to be no serious targets or timelines, no regulation of large emitters and a high risk reliance on promising but still unproven technologies including carbon capture and biochar. Much more is required.

Still, the Coalition proposals suggest a way forward. Regardless of whether the CPRS or a broad-based carbon tax is introduced, a suite of policies will be required. It will be an essential part of managing the risk that particular policies might fail. And there are many obvious policy opportunities that can be seized now.

Such an approach is far from ideal. A serious carbon price across the Australian economy would make a very vital contribution to Australia’s climate and energy policy framework. Unfortunately, we don’t yet appear to have the good governance in place to either establish appropriate national emissions targets, or implement an effective economy-wide CPRS or carbon tax. •

The post Broadening Australia’s response to climate change appeared first on Inside Story.

ROOFTOP SOLAR POWER should have been an easy way for federal Labor to boost its green credentials. Instead, the Rudd government has badly bungled the politics and the policy making.

The pain could have been avoided by leaving the Howard government’s Solar Homes and Communities Plan unchanged. The $8000 rebate for residential photovoltaic, or PV, systems had been taken up with enthusiasm by householders keen to do their bit to help shrink Australia’s carbon footprint and at least gave the impression of government doing something constructive about climate change. Instead, Labor imposed a $100,000 per household means test on the rebate. When the industry screamed about cancelled orders, environment minister Peter Garrett inflamed the situation by declaring that the solar industry was in danger of “overheating.” (More than one disgruntled environmentalist was heard to quip that Garrett should be more worried about the planet overheating.)

In fact the means test may have done little to cool Australia’s solar industry. Despite continuing industry complaints, the government says applications for the $8000 rebate have actually increased sharply since the income test was introduced in the May budget (up from about 350 applications per week to about 750 per week). But politically the means test was an own goal. With a dash more vision, Labor could have dramatically improved on Howard’s solar scheme and won the praise of environmentalists, renewable energy enthusiasts and almost anyone concerned about climate change.

The Solar Homes and Communities Plan has been through several incarnations since it was first introduced in 1999. Initially it offered a rebate of $8250 for residential solar PV systems of up to 1.5kW in size. The following year the rebate was cut to $7500, and in 2003 it was reduced further to $4000. At the same time the maximum size of eligible systems was brought down from 1.5kW to 1kW. In 2007 the Howard government doubled the rebate, lifting it back up to $8000, but kept the 1kW size limit (which has had the predictable but undesirable effect of reducing the average size of installed systems from 1.6kW to 1.2kW over the life of the program).

Constant tinkering with the rebate creates uncertainty for industry and consumers. Instead of fiddling further by introducing a means test, Labor could have scrapped the rebate altogether and replaced it with a German style feed-in tariff. Despite some opposition from energy retailers and power generators, there was very little political downside to such a move. It would have offered substantial long term support to the industry and cut government budget outlays at the same time.

A feed-in tariff pays a premium for electricity supplied to the grid from rooftop solar panels (and potentially from other sources of renewable energy too). The costs are not paid by government but defrayed through a general increase in retail electricity prices. Since its introduction in 2000, a feed-in tariff has given cloudy Germany the fastest growing photovoltaic solar power industry in the world. Germany installed more than 1000 megawatts of solar capacity in 2007, compared to just 12 MW installed in sunny Australia in the same year. The German industry now employs 42,600 people (Australia employs 1660) and rapid growth in PV solar power is evident in countries like Spain and Italy that have adopted the feed-in model.

A feed-in tariff has four main advantages over cash rebates. It doesn’t give suppliers the opportunity to increase the price in order to capture the rebate. It pays the biggest return to high-quality PV panels that will generate power over the long term, and discourages the installation of cheaper short-lived panels that might stop working efficiently soon after the rebate is paid. It increases the incentive to ensure that panels are optimally installed to maximise electricity generation and increase the return to householders from “sales” of electricity to the grid. And, most importantly, a feed-in tariff provides predictability. On the basis of the tariff offered, householders considering rooftop PV can calculate their annual return on investment with a high degree of accuracy and the solar industry can rely on a system of support that is not subject to the whims of politicians or the dictates of the budget cycle. This does not mean permanent subsidies for solar. A feed-in tariff is designed to reduce over time. The German tariff is set to reduce by 9 per cent in 2009 and 8 per cent in 2010. This acts as a spur to industry to pursue technological innovation, cost reductions and efficiency gains.

The economies of scale that result will also bring down prices. At an average of US$4 per watt, the price of installing photovoltaic cells in Germany is already significantly lower than it is in Australia (US$5.80). Although silicon is the second most abundant element in the earth’s crust, it accounts for roughly 45 per cent of the production costs of photovoltaic cells. The price has spiked because the highly skilled process of manufacturing the hyper-purified silicon for solar cells has not kept up with rapidly growing demand from industry, but as more silicon production comes on stream, supply should catch up with demand and prices should fall significantly.

In their respective reports on climate change for the Australian and British governments, Professor Ross Garnaut and Sir Nicholas Stern both recognised the superiority of feed-in tariffs over trading in carbon credits as a mechanism for encouraging the wide deployment of renewable energy at the lowest possible cost. These conclusions were confirmed in recent research by Ernst and Young which found that Germany’s feed-in tariff was delivering renewable energy at a lower cost per kilowatt hour than the UK’s system of tradable certificates. (The British government is now considering implementing its own feed-in tariff.)

Australian states and territories have also recognised the logic, and feed-in schemes have been introduced in South Australia, Victoria, Queensland and the Australian Capital Territory. Prior to the recent state election, both sides of politics in Western Australia also promised to a feed-in tariff, and New South Wales has just announced that it is moving ahead with a scheme. With the exception of the ACT, these schemes are deeply flawed.

The first problem is that the feed-in tariff is restricted to very small systems. Victoria’s scheme offers householders 60 cents per kilowatt hour of electricity fed into the grid, which is approximately four times the average retail price for electricity, but the feed-in tariff is limited to systems of 2 kilowatts or smaller. Roslyn Wright, who lives in Melbourne’s inner west, installed a 3kw system on her roof, so she receives nothing under the scheme and finds herself inadvertently subsidising the profits of Victoria’s private power providers. “What happens to the power we generate into the grid?” she asks. “The power companies are… selling-on the power we generate to other users.” Size limits also apply in Queensland and South Australia and the effect is to render PV solar power generation unattractive for many potential sites such as the roofs of commercial premises, educational institutions, offices, shopping centres and local government facilities. One justification for limiting the tariff to small schemes is that it will ensure that commercial generators do not double dip, claiming the tariff for large scale renewable energy plants that would have been built anyway in order to meet the federal government’s mandatory renewable energy target of 20 per cent renewable energy by 2020. The ACT scheme gets around this problem by offering a feed-in tariff that reduces in inverse proportion to the size of an installation. (A commercial wind farm in the ACT would receive a zero tariff for electricity generated.)

The second flaw in the state schemes is that they only offer a feed-in tariff to photovoltaic solar power. A more broadly based scheme would provide encouragement for a wide range of potential power sources (such as small scale wind generators, solar thermal plants or co-generation using methane from animal waste, agricultural by-products or household rubbish).

The third and most serious flaw in the schemes (again with the exception of the ACT) is that unlike almost all the other schemes around the world, they pay for the net rather than the gross production of electricity. In a net scheme households are only paid for excess power generated (that is, total production minus household consumption). Under a gross scheme households are paid a premium for all the electricity generated by rooftop panels (including power immediately used in the home) and pay the standard retail price for all the electricity consumed (including the power generated from their own roofs). A gross scheme offers higher and more predictable returns to households

The objection to a gross scheme is that it is more expensive, and the added cost will be borne by other electricity users as higher average prices are charged to all grid connected homes. This is true. But Germany’s gross feed-in tariff is estimated to have added just 2.2 euros to the average monthly cost of household power bills. At the same time, it has mobilised large amounts of private capital (the investment made by householders in installing the rooftop panels in the first place) for a public good (reducing greenhouse gas emissions) at minimal cost to government and the budget. Deploying widely dispersed, small scale rooftop generators also has other system-wide benefits: it reduces electricity wastage through transmission losses (because generation and consumption are closer together) and allows generators to delay or cancel planned investment in new large scale power plants. This last point is particularly relevant to Australia, where new installed capacity is often required to meet the peak loads that occur on hot summer afternoons as airconditioners are switched on. The output from rooftop cells peaks at the very time when additional power is most urgently needed in the grid. When the demand for power surges on hot afternoons, the spot cost of electricity in the national energy market also soars. (This provides further justification for paying a premium for the electricity generated from suburban rooftops and suggests that the subsidy under a gross feed-in tariff is lower than a comparison with average electricity prices would suggest.)

There is also an equity issue here. Rooftop solar power is most likely to be installed by relatively affluent homeowners who can afford the required upfront investment, whereas the dispersed costs of the scheme will be felt most keenly by renters on low incomes in the form of increased power bills. But this problem is not unique to feed-in tariffs. At the core of most greenhouse gas reduction schemes are price signals designed to encourage consumers to change their habits. The inequities that result are best dealt with through the tax system or through other forms of compensation (such as weather-proofing rental and low-income housing stock to reduce energy bills).

And as with the German scheme, the general increase in electricity prices resulting from a feed-in tariff will be small. In a report prepared for the Clean Energy Council, Access Economics has estimated that a national feed-in tariff could see the installation of 3000MW of rooftop solar capacity in Australia in twenty years for a total investment of $15–$16 billion. The resulting increase in electricity bills would be in the range of $22–$23 per year for a typical household. Access Economics estimates additional system wide benefits: the deferral of 500MW in new generating capacity at a capital cost saving of approximately $610 million, savings of $149 million through reduced transmission losses and a reduction in Australia’s greenhouse gas emissions equivalent to 92 million tonnes of carbon dioxide (worth between $0.9 and $1.6 billion depending on the price of carbon).

Since its election, the Rudd government has moved to take Commonwealth control of greenhouse policy, rather than allow a hodge-podge of competing state-based schemes and incentives to proliferate. The national mandatory renewable energy target, MRET, is intended to harmonise various state-based targets; the Commonwealth’s soon-to-be revealed emissions trading scheme was an election promise designed to prevent the states from going it alone on pricing on carbon, and there is a federal program to create national minimum energy efficiency standards for household appliances.

It seems common sense that a feed-in tariff should also be coordinated by the Commonwealth. Indeed, earlier this month, noting the “strong industry, consumer and government support” for a feed-in tariff, politicians of all stripes on the Senate environment, communications and arts committee agreed that “a nationally uniform and consistent” feed-in scheme should be implemented “as soon as practicable.” Yet in the same report, the majority recommended against supporting a bill drafted by the Greens senator, Christine Milne, to create just such a scheme at the national level. Instead, the committee referred the matter to COAG, the Council of Australian Governments. Here the record is not good. Feed-in tariffs have been on COAG’s agenda since March, and in speech in August the environment minister, Peter Garrett, promised that the October COAG meeting would “work towards a harmonised approach to renewable energy feed-in tariff.” The October meeting came and went without feed-in tariffs rating a mention. There was a little more progress on the issue at the November COAG meeting. Feed-in tariffs rated this brief mention in the official communiqué from a meeting that was, understandably, more concerned with dividing up hospital funding: “COAG agreed to a set of national principles to apply to new Feed-in Tariff schemes and to inform the reviews of existing schemes. These principles will promote national consistency of schemes across Australia.”

The agreed “national principles” are outlined in an attachment to the communiqué. Although the language is opaque, it seems clear that the priciples fall well short of providing a blueprint for the “nationally uniform and consistent” scheme that the Senate Committee recommended. For a start, the principles refer indiscriminately to "renewable” and "PV" as if the terms were interchangeable, making it unclear whether a harmonised system under COAG would restrict a feed-in tariff to rooftop PV systems or whether it would pay a premium for other forms of renewable energy. The principles also refer only to "residential and small business consumers" as potential electricity generators. This appears to exclude a large range of potential contributors to the grid from larger players in the commercial and public sectors (office parks, warehouses, shopping centres, car parks, educational institutions and libraries, for example). The principles also state that the “premium rate” paid for power fed into the grid under the scheme should be “jurisdictionally determined…" In short, states will continue to set their own feed-in tariffs rather than establishing a standard premium nationwide. This leaves a major question unresolved – would this supposedly “national” scheme offer a gross or a net feed in tariff? On the basis of the communiqué, it appears either would be possible and that the new feed-in tariffs promised for New South Wales and Western Australia will only add to the complexity of existing arrangements. (NSW is proposing net payments while WA is proposing a gross scheme.)

Such regulatory diversity is completely at odds with the prime minister’s core COAG agenda of achieving “a seamless national economy” and strengthens the argument for a single national system, established through federal legislation, as suggested by Senator Milne. There is little in the principles to dispel her fears that even if COAG eventually reaches agreement on a nationally coordinated scheme, this is likely to produce a lowest common denominator outcome that perpetuates the weaknesses of the existing state systems. In the meantime, Senator Milne’s bill for a national feed-in tariff is likely to go the way of most private members bills; it will be ignored until the next election is called, the house is prorogued and the bill expires.

A feed-in tariff is not the silver bullet for reducing greenhouse gas emissions. Despite the success of Germany’s scheme, the 1282 gigawatt hours of electricity produced by solar cells in 2005 accounted for just 0.02 per cent of Germany’s total electricity generation. According to International Energy Agency statistics, wind energy produced twenty times more clean energy (27229 gigawatt hours) for Germany in 2005 than solar PV. The rapid growth in PV power between 2005 and 2008 has no doubt increased the relative share of solar power in the German market, but even with a generous feed in tariff it will take a long time for rooftop panels to make a significant impact in Australia. The Access Economics scenario – 3000 MW of solar PV capacity installed over twenty years – would result in just 1.4 per cent of Australia’s electricity coming from PV systems in 2028. In terms of reducing greenhouse gas emissions, investments in wind farms will cut more carbon per dollar. This is another reason for implementing a broad feed-in tariff that is not restricted to residential solar panels but offers a premium to encourage all forms of renewable energy. And as the Germans would say, auch kleine Viecher machen Mist (even small creatures make manure). When it comes to carbon reduction, every little bit helps.

In any case, as BP Solar told the Senate committee, the aim of a feed-in tariff is not just “least cost carbon saving.” It is designed to compensate for the market failure that has hindered the development of renewable energy technologies like solar PV. A feed-in tariff provides price support that helps the industry to grow, “proves up the technology, drives down costs, diffuses the technology and makes it accepted.”

BP Solar’s recent decision to shut down Australia’s only manufacturing plant for PV cells suggests the company sees little prospect of effective federal government intervention to foster a sunny future for rooftop solar power in the near future. •

Updated 3 December 2008

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WARNING BELLS HAVE been ringing since the 1990s about the global environment. The Millennium Assessment reinforced the warnings and added concern about social trends. Still world leaders did nothing. Now, with an economic crisis on top of the social and environmental problems, decision-makers have finally woken up. In a flurry of summit meetings, leaders have gathered to talk about their principal concern, short-term economics. But they really need to be looking at the broader picture and the evidence of serious underlying problems.

That was the main message of the World Economic Forum’s Summit on the Global Agenda last weekend in Dubai. Formed in 1971 in Switzerland, the Forum aims to bring world leaders together to develop partnerships that could improve the state of the world. Its famous annual meetings in Davos have usually concentrated on economic issues. The meeting last weekend was radically different.

I was one of ten Australians among 700 participants in “the biggest ever brainstorm on the global future.” Opening the gathering, WEF director Klaus Schwab reminded delegates that the financial crisis comes on top of other complex and urgent linked problems: climate change, water security, food security and energy security. He urged us to think broadly about an integrated approach to the situation. The meeting was planned long before the global financial crisis, but that event has sharpened the minds of all but the most blinkered economists and politicians.

Most of the work of the summit was in nearly seventy groups of about ten people, concentrating on a particular issue or geographical region. The panels dealing with economic and financial issues were all doom and gloom, saying that the outlook is worse than at any time in living memory. The conclusions from the groups dealing with social and environmental issues were not much brighter: biodiversity in crisis, no coherent plan to tackle climate change, poverty and disadvantage worsening. That is the bad news. The good news is that business-as-usual is not an option. The situation demands new approaches, new technologies and new institutional arrangements.

Like Kevin Rudd’s 2020 Summit, this global meeting brought together a diverse group, although I would like it to have been more diverse. The gender balance was poor. Africa, Asia and Latin America were conspicuously under-represented. The usual suspects, men from the United States well past the first flush of youth, were prominent. And the conclusions from most of the groups did not disturb the world view of the dinosaurs, who were still urging us to close our minds and trust the market to deliver a better world.

I was in a group thinking about the future of Australia. While we could have discussed that topic without leaving home, we would not have been working in the broader context of the global gathering and our thoughts would not have been informing the other groups. We reinforced the message that current global institutions are inadequate for the challenges we now face. The best hope for the future, we said, lies in a process of social learning to develop a “green economy.”

Our views were consistent with most of the contributions in the final plenary session. We were urged to “let go of the old ways” by a speaker who specifically included among those old ways coal, nuclear power, religions and seeing GDP growth as a measure of progress. We need to identify the critical limits of natural systems and ensure our development is within those limits. “It’s the climate, stupid!” said one contributor, reinforcing the repeated observation that the challenge of climate change is much more important than the financial crisis. Another speaker urged us to recognise that “the crises are inter-connected”. “Fundamental change is long overdue,” said yet another. We were urged to democratise decision-making, empowering the disadvantaged to allow “bottom-up” responses rather than assuming the world can be controlled by existing elites. The need for a global approach demands that individual nations will have to sacrifice some of their sovereignty for the common good. The panel dealing with global governance said explicitly that the existing institutions are inadequate, while the health groups warned that we are not prepared for the inevitable future pandemic.

As part of the process in Dubai, we each spent a couple of hours sharing ideas with other panels. I was particularly interested in the conclusions of the groups that considered climate change, alternative energy and “ecosystems and biodiversity.” The climate change group stressed the urgency of a global approach to the problem. There was heartening talk of a possible summit meeting between Barack Obama and the leaders of China to discuss climate change; unlike trade, where there is conflict between the United States and China, they share an interest in finding a way forward on climate change. Obama mentioned “a planet in peril” as one of the four big issues facing him. Kevin Rudd and the British PM Gordon Brown have acknowledged that the financial crisis has not removed the need to slow down climate change.

It is a timely reminder. The 2020 Summit endorsed a comprehensive approach to climate change and the Garnaut Report reminded the government of the urgency of the task, but their recent Green Paper is disappointingly limp. The government seems spooked by the concerted campaign run by big polluters, suggesting dire consequences if we don’t continue their generous treatment. The response to climate change should not ignore the economic impacts of change, but it would be silly to assume that present arrangements must be maintained at any cost.

I was encouraged by the systemic view of the alternative energy group at the summit. Rather than confining their attention to new supply technologies, they considered the broader issue of delivering energy-related services. Improving the efficiency of turning energy into lighting, heating, cooking, buildings and transport is much easier and less expensive than new clean supply options. Even the struggling US car industry seems to be finally getting the message that there is no future in building dinosaur vehicles, with GM and Ford losing billions and the survival of Chrysler in serious doubt.

The recommendations of the panel concerned with ecosystems and biodiversity reminded me that we are actually doing quite well in Australia. There needs to be a systems approach to our scientific assessment, moving beyond the traditional silos of disciplines to explore interactions and develop integrated solutions. We have already moved in that direction with our state of environment reporting. I was involved in preparing the first national report twelve years ago; it included a final chapter summarising the factors impeding progress toward our stated goal of a sustainable future. Secondly, the group said, there is a critical need for better metrics, indicators of the state of natural systems or our demands on them. There is real interest in Canberra in the idea of developing a system of natural resource accounts so that we understand the state of those assets. And ideas like the ecological footprint convey clearly the scale of our impact, demonstrating that we are using much more than the sustainable productivity of natural systems.

The panel’s third recommendation was to develop a range of tools to change behaviour: reform of existing subsidies, enabling payment for delivery of ecosystem services, appropriate pricing of assets like water or burdens like carbon dioxide releases, targets for renewable energy supply and certification of natural products to influence consumer demand. Again, this principle has been accepted in Australia, where we have targets for renewable energy and are introducing pricing schemes. The biggest problem in this area is reform of subsidies, a change that demands political will because those who benefit will always resist being weaned from the public teat.

Finally, governance must be improved. For all the limitations of the climate change treaty and the Kyoto protocol, it was seen as being much more effective than the Convention on Biological Diversity. The expert panel saw the climate treaty as a model for the approach needed: “a new governance structure with stronger links to the long-term economic and financial implications of the loss of natural capital”. That group’s conclusions reinforced my feeling that the rest of the world has at least as much to learn from Australia as we do from them. We panelists on the future of Australia risked antagonising the northern hemisphere heavyweights by pointing that out in our report!

While the summit produced a mountain of good ideas, the real problem is implementation. We should be familiar with this issue because of the tortoise-like pace of implementing the ideas of our 2020 Summit. At least Kevin Rudd and his ministers were at the local summit and heard the discussion. In the case of the World Economic Forum, it can only bring ideas to the attention of world leaders when they meet at Davos in January. Still, I left Dubai feeling the WEF now understands the need to evolve beyond the recent obsession with markets and economic growth. If they can convey that message to the business heavies and world leaders who will brave the snows of Davos in two months time, that will be the enduring benefit of their summit. •

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WITH BARACK OBAMA headed for the White House, the race is on to bring the United States back into the international community fighting climate change. Much will hang on negotiations between governments to find a successor to the Kyoto Protocol. But the real business in the next few months will be to find a blueprint for domestic action. And legislators say they need look no further than what is going on right now in California.

California, the US’s most populous state, has always been the pioneer of American action on air pollution. At the offices of the California Air Resources Board in the state capital Sacramento they talk proudly of their long efforts, started in 1968, to curb Los Angeles smogs. This is where they dreamed up emissions standards for lawn mowers and solvents, as well as pioneering cleaner tailpipes. And now they believe they are set to pioneer what will become national standards aimed at cutting carbon dioxide emissions.

“We are doing what we want the federal government to do,” Eileen Tutt, deputy secretary of the California Environmental Protection Agency told me before the election. “We want the new administration to have a working model in front of them when they arrive at the White House. We are creating the biggest plan to fight climate change in North America. We are the biggest game in town.”

The California blueprint is already set to be adopted – in outline at least – by much of the rest of the American west, the seven US states and four Canadian provinces that make up the Western Climate Initiative.

The state’s Republican governor Arnold Schwarzenegger may be an unexpected convert to the cause of environmentalism. But he is said to be partly inspired to pollution busting by his son’s affliction with asthma. And many other Californians realise that, living in a desert and dependent on snowpacks for water, they are in the front line on climate change.

Schwarzenegger set out his strategy in the California Global Warming Solutions Act of 2006, known internally as the AB32. A full “scoping plan” on how the state plans to implement the Act was published in June this year, and it is expected to go before the Air Resources Board for a final vote in early December.

Till now, battling for state law on carbon dioxide emissions has been an uphill task. Even before the passage of AB32, California has been fighting a legal battle with the Bush Environmental Protection Agency to establish the principal that states can introduce laws on tailpipe emissions of carbon dioxide, under the California Clean Car Law passed in 2002. Sacramento wants to impose a 30 per cent cut in emissions per kilometre travelled by 2016. But the Bush EPA has insisted that there are no special effects of carbon dioxide particular to California, so it has no jurisdiction. That veto should fall with the Bush administration.

But the new plan goes beyond tailpipe emissions standards, laying out a broad range of measures aimed at cutting overall state CO2 emissions by 15 per cent by 2020. That is the equivalent of a 30 per cent cut from business as usual, or a return to 1990 levels. It is a task made more daunting by the fact that the state’s population in 2020, swelled by migrants, is expected to rise from 27 million in 1990 to 45 million by 2020, an increase of two-thirds.

The steps to be taken are far-ranging. The centrepiece is a state system for trading in permits to pollute – a so-called cap-and-trade system – that should be operational by 2012. It is aimed first at power generators and heavy industry, but will later by extended to include transport emissions, which make up 40 per cent of California’s total. If all goes to plan California could cover 85 per cent of total state emissions with cap-and-trade, which would take it ahead of the European system, which is currently the world leader.

In addition there are the tailpipe emissions standards, plus new fuel standards aimed at cutting the carbon emissions for every gallon of petrol burned by 10 per cent. This last will mostly be achieved through biofuel additives.

But attacks on vehicle emissions alone will not be enough, the state has concluded. They have to act directly against the state’s car culture as well. In the past decade, the number of vehicle miles travelled in California has risen by 3 per cent a year, more even than the 2 per cent annual rise in population. “People are driving more and that has to be stopped,” says state climate change PR man Stanley Young.

That means changes to land use planning, a function held by individual cities. State attorney general Gerry Brown has introduced a series of cash inducements aimed at bullying local planning authorities into cutting out urban sprawl and siting new housing close to mass transit systems. The moves have the backing of both environmentalists and housebuilders. The model is Portland, which has imposed a green belt to prevent sprawl and encouraged higher-density development in core areas.

The state is also planning new initiatives in public transportation, including spending $10 billion on a high-speed rail link from Los Angeles to San Francisco, eventually extending south to San Diego and north to Sacramento. There are also plans for a million “solar roofs” across the state and regulations covering emissions from trucks on the state’s highways and ships docked in state ports.

California does not burn much coal, but it does buy in a lot of electricity from out of state that is generated by burning coal. The cap and trade system, penalising the big carbon emitters, is aimed primarily to tackle that by providing the right incentives to have a third of the state’s electricity generated from renewable by 2020.

The state will use its buying power too. The biggest single purchaser of power in California, using more than 3 per cent of electricity, is the state program to pump water to Central Valley irrigators. “Currently that is coal fired, mostly from out-of-state. From 2012, when that contract ends, it will be from renewables,” says Mike Scheible, deputy executive officer at the ARB and, at 23 years, its longest-serving staff member. But such changes won’t always be easy, he says. The Los Angeles water and power department has a contract for coal-fired electricity from Utah that runs until 2027.

State legislators believe that the new rules will make California the largest market in the world for renewable sources of electricity like solar and wind power. They estimate it will stimulate the purchase of some 17,000 megawatts of renewable generating capacity by 2020 and provide tens of thousands of “green collar” jobs.

And a new breed of green industrialists is lining up to take advantage. Many of them are funded by billionaires who made their fortune in Silicon Valley. In Palo Alto, I met solar power entrepreneur David Mills, who spent more than a decade at the University of Sydney developing his ideas on generating electricity by heating water with the power of the sun. Two years ago, frustrated by government indifference, he shipped out to California. “It has a state plan for renewables; it has the technologists to deliver and it has the venture capital,” he says.

His backers in Silicon Valley have pumped tens of millions of dollars into helping him build a robot-run factory in Las Vegas. With Bush in the White House, Mills and his rivals haven’t been able to get power companies to buy the kit, however. He has a deal with Pacific Gas and Electric, California’s largest power company, for a 180-megawatt solar thermal plant to supply peak-load electricity from two square kilometres of desert. PG&E also has deals with two other solar thermal companies. But construction is on hold because state utilities regulators haven’t been prepared to sanction investment in solar plants without long-term arrangement for tax credits for renewable so far denied by Washington legislators and the Bush White House. The new administration in Washington should break that logjam.

Meanwhile, the state has other plans. California was one of the pioneers of wind power thirty years ago. Since then, it has stalled while Europe took the lead. But now it wants to grab back the initiative, by going offshore. All the talk in recent months has been about drilling for oil offshore, in California and elsewhere. But in Sacramento they think there is more wind power than oil to be had off the California coast. The wind that drives its famous surf could also drive its power stations. A study by Stanford civil engineer Michael Dvorak last year found a number of good windy, shallow-water sites for offshore wind farms, along the lines of those being developed in the North Sea in Europe.

Some sectors of state industry back the AB32 plan with its opportunities for new businesses. Tutt says: “We have a long history of environmental leadership supported by our business community. They know that they profit in the end.”

In September, when I sat in on a meeting of the California Air Resources Board’s Global Warming Economic and Technology Advancement Advisory Committee, which included representatives of leading state industrialists, there was no acrimony, just a determination to make it work effectively.

But others are less sanguine. The California Chamber of Commerce is among organisations voicing opposition. “They are gearing up to raise a ruckus,” said one state official, “particularly against the current background of economic turmoil.”

At the Air Resources Board they remain gung ho, however. Last month, the state published a report predicting that the measures would be broadly beneficial to the state economy, increasing economic productivity by $27 billion by 2020, primarily through improved energy efficiency, while creating 100,000 jobs. Mary Nichols, chair of the Board, said the financial crisis effected neither the plans nor their profitability.

Not all industrialists agreed. The California Manufacturers Technology Association called it “long on wishful thinking but short on economic reality.” In Stanford University, I discussed this with Jim Sweeney, director of the Precourt Institute for Energy Efficiency and an adviser to governor Schwarzenegger on energy issues. He said he thought the board’s predicted benefits were a tad optimistic, but saw no great harm being done. And if there is federal backing for similar measures from the new administration, then the optimistic prognosis could prove correct.

One unresolved issue is how much “offsetting” of emissions to allow. In other words, will polluters be able to meet some of their obligations to reduce emissions by investing in carbon-cutting technologies outside the state? “For us the bottom line is whether this is beneficial to the state,” says Scheible. Since the ARB thinks green technology will be good for the state’s economy, the general answer will be no. “We want investment in California industry,” he says.

But other parts of the state administration seem more in favour of offsets. California has a traditional of joint environmental action with state and municipalities across the border in northern Mexico, and Tutt says these may be extended to include carbon offsets. “The idea of some offsets is generally accepted”, she says. Especially because the state wants to see action to reduce emissions and increase sinks from on agriculture and forestry, and Mexican offsets would be one way of achieving that.

And she points out that Pacific Gas and Electric, the state’s largest power utility already has a programme encouraging its customers to offsets their emissions: “it would be crazy to outlaw that.” The scoping plan suggests a limit on offsets at 10 per cent of the total compliance obligation.

The detail of how this all plays out will undoubtedly in the end depend on policies framed in Washington, and how they mesh with international negotiations set to conclude late next year. But California remains the place where the US pioneers its environmental laws, especially on air pollution. Soon it may be leading the world. •

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