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Joining up Climate Policy, by Hugh Saddler

Coordinated action is required to tackle the twin challenges of climate change and electricity supply

Published: 25 Feb 2019

Australia has no effective policy to mitigate the rapidly growing threats posed by climate change. It also has no effective policy to guide the future development of the electricity-supply industry. In much of the day-to-day public-policy commentary the failures in these two policy arenas are assumed to be one and the same, and there certainly are linkages between the two. However, the key problems in each arena are different, the failures are different, and the steps to addressing the failures are different.

Turning first to climate-change policy, the underlying premise is that global emissions of greenhouse gases need to be drastically reduced if the world is to avoid catastrophic environmental and economic damage in the later years of this century. Corollaries to this premise are that all countries in the world need to contribute to achieving the necessary reduction and that rich, developed countries such as Australia must make larger reductions than low-income countries.

What has Australia done? The best way to assess Australia’s efforts is to look at trends in national emissions since 1990. This is the foundation year from which developed countries are required to report their emissions under the United Nations Framework Convention on Climate Change (UNFCCC) and the base year against which parties to the Kyoto Protocol to the UNFCCC agreed to measure their emissions reductions. The year 2005 is also important, because it is the base year for the Paris Agreement, which is the next stage (after Kyoto) of international progress under the UNFCCC.

In 1990, Australia’s total emissions were 553 million tonnes of carbon dioxide equivalent (CO2-e), of which 293 million tonnes (53 per cent) arose from the production and use of fossil fuels and 47 per cent from all other emissions sources. The two largest of these other emitting sectors are Agriculture, and Land Use, Land Use Change and Forestry (LULUCF). The largest emissions source under Agriculture is methane from the digestion process of ruminant livestock (mainly cattle and sheep). The largest emissions source under LULUCF is the clearing of native vegetation for grazing and cropping.

By 2005 Australia’s emissions had increased to 610 million tonnes CO2-e, of which 400 million tonnes (66 per cent) arose from the production and use of fossil fuels. Emissions from all other sectors had fallen from 260 million tonnes to 210 million tonnes, mainly thanks to reduced land clearing and reduced livestock numbers because of drought over the period from 2002.

Preliminary official estimates of emissions for the year ending June 2018 show that total emissions were 536 million tonnes, a reduction of 12 per cent relative to 2005. However, fossil fuel–related emissions had increased again to 438 million tonnes, and comprised 82 per cent of total emissions, while emissions from all other sources had fallen to 120 million tonnes, again thanks to reduced land clearing and, to a lesser extent, various reductions in emissions from agriculture.

Overall, since 1990, Australia’s total emissions have decreased by just 3 per cent, while fossil fuel–related emissions have increased by 49 per cent. These figures represent a catastrophic failure of policy at the national level. By far the largest source of the emissions reductions that have been achieved over twenty-eight years is reduced land clearing in Queensland and New South Wales, mainly brought about by regulatory and legislative changes introduced by various Labor governments in the two states over the ferocious opposition of the conservative parties. I use the word ferocious advisedly: a few years ago a landholder in New South Wales murdered a state public servant who was working as an inspector of rural land management simply because the inspector was doing his job of enforcing the law on land clearing.

At the Kyoto conference in 1997 Australia succeeded in negotiating a much more modest emissions-abatement obligation for the period from 2008 to 2012 than most other developed countries. Even so, it was subsequently able to meet—indeed exceed—its Kyoto emissions-abatement target, solely because of the reductions in land-clearing emissions. Emissions from all energy-related sources were much larger than the pro rata Kyoto target level.

At the Paris conference in 2015, countries agreed to commit themselves to further emissions reductions, measured against their emissions in 2005, over the decade from 2020 to 2030. Again, the Australian target of between 26 per cent and 28 per cent (depending on what other countries do) below the 2005 level is less than what most other developed countries have agreed to achieve. Nevertheless, official projections of Australia’s emissions out to 2030 (released by the government, as has become standard practice in recent years, just one working day before Christmas) show that Australia’s emissions will continue to gradually increase throughout the entire decade (by about 4 per cent from 2020 to 2030). By 2030, projected national emissions, allowing for the effect of policies and programs currently in place or committed to, will not be 28 per cent below their 2005 level, as required to meet the Paris target, but only 7 per cent below. The large emissions reductions from reduced land clearing are projected to provide about half of the required reduction from the 2005 level, and electricity generation is expected to provide another 20 per cent. However, these will be significantly offset by emissions increases in almost all other sectors.

In their reluctant comments on these emissions projections, prepared by their own, highly professional departmental staff, ministers have implied that they expect to meet the 2030 target by using ‘credits’ earned, under the Kyoto Protocol, by reducing Australia’s emissions below the very generous levels allowed to Australia under the protocol. Such a narrow, legalistic approach is of course completely inconsistent with any genuine commitment to reducing the grave crisis posed by anthropogenic climate change. What more, then, will need to be done by a government genuinely committed to achieving the 2030 emissions-reduction target level?

One technically feasible option would be to significantly increase the reduction in electricity-generation emissions while doing nothing about emissions from other sectors. Putting aside the issue of whether this would be the least costly option, a perhaps more important point is that doing nothing about the other emissions sources would leave Australia grievously unprepared to make further, deeper and essential emissions reductions after 2030.

What are the options to reduce emissions from other source categories? As noted, agricultural activities are a major emissions source. However, the only way to achieve large emissions reductions would be to drastically reduce sheep and cattle numbers. This would imply a comprehensive restructuring of Australia’s agricultural sector. While some might see such a restructuring as desirable in terms of long-term environmental sustainability, it is hardly a feasible near-term objective.

The other major emissions sources today are all fossil fuel related. They can be separated into four groups: electricity generation, transport, other stationary combustion emissions and fugitive energy emissions. Together these sources contributed 53 per cent of Australia’s emissions in 1990 but 82 per cent in 2018, and accounted for almost all the increase in emissions over that period. Between 2005 and 2018 the total increase in fossil fuel–related emissions was 38 million tonnes CO2-e, equivalent to 10 per cent. However, emissions from electricity generation, until now the largest contributor to fossil-fuel emissions, actually fell by 14 million tonnes CO2-e, while emissions from the other three major energy-related sources increased by 53 million tonnes.

Two main factors explain the decrease in electricity-generation emissions. Strong growth in electricity consumption prior to 2005 slowed to zero by 2010, and consumption actually fell for a couple of years thereafter. At the same time, new zero-emission renewable generation displaced supply from old, inefficient and high-emission coal-fired power stations.

A number of factors have contributed to the changed trajectory of electricity demand. National regulatory measures that mandated minimum energy-performance standards for a wide range of residential and commercial electrical appliances and equipment, plus buildings, made a major contribution, as did greater consumer awareness of and responsiveness to opportunities to use electricity more efficiently, further stimulated by sharp increases in electricity prices after 2010. Interestingly, similar slowdowns in the growth in electricity consumption have been seen in both North America and Western Europe. Throughout the years of the Howard government, and the subsequent Labor governments, regulatory efficiency measures progressed steadily in terms of both breadth of coverage and stringency. Some of the most effective of these measures, notably those affecting lighting, were introduced by then environment minister Malcolm Turnbull in 2006–07. With the election of the Abbott government, however, progress came to a virtual halt, in the name of doing away with so-called red/green tape.

The main drivers for increased renewable generation were the Large Renewable Energy Target, which mainly drove investment in grid-scale wind generation, and the Small Renewable Energy Scheme, which continues to support rooftop solar installations. Both these national schemes provide subsidies for investment in new renewable generation, financed through a small impost on the prices that most consumers pay for electricity. The Abbott government tried but narrowly failed to shut down these programs in 2014–15.

Transport emissions arise from the use of fossil fuels (at present almost entirely petroleum-based fuels) to power road, rail, air, water and pipeline transport. (Under UNFCCC rules, only emissions arising from domestic aviation and shipping count towards national emissions inventories; emissions associated with international transport are reported globally in a separate category.) Transport emissions grew by 19 per cent between 2005 and 2018, when they contributed 19 per cent of total national emissions, up from 14 per cent in 2005. Road transport is by far the largest contributor (currently about 82 per cent) to transport emissions. Trucks, light commercial vehicles and buses contribute just under half and cars just over half of the total. Emissions are projected to continue to grow slowly between now and 2030. Unlike almost all other developed countries—not to mention many other countries, such as China—Australia has no regulatory measures to constrain motor-vehicle emissions or mandate minimum fuel-efficiency levels. Efforts to shift passenger and freight transport from private cars and trucks to generally lower-emission public transport and rail freight have been manifestly inadequate.

Other stationary combustion includes all emissions from combustion of fossil fuels in activities other than electricity generation and transport. In Australia today, this means mainly emissions from consumption of natural gas across a wide range of manufacturing activities, together with use of gas in buildings, mainly for space heating, hot water and cooking, in the commercial and residential sectors. It also includes emissions from the use of coal in a few heavy industries, such as steel and cement, plus the use of diesel fuel by off-road mobile equipment used in agriculture, mining and construction. Between 2011 and 2014 there was a large increase in emissions from diesel use in the mining industry, driven by the boom in production of iron ore and coal. Since 2015 there has been an even larger increase in emissions from gas used to produce LNG for export. The increase is projected to last until 2020, after which emissions are expected to remain roughly constant, implying no new LNG plants in Australia after that time. Interestingly, despite the large and widely reported increases in wholesale gas prices over the past couple of years, there do not appear to have been significant reductions in gas consumption across the generality of industry. Unlike efficiency in energy use, there are effectively no measures to regulate gas-use efficiency. A succession of programs under the Howard, Rudd and Gillard governments, intended to encourage and assist manufacturing industry to use energy more efficiently, were terminated by the Abbott government.

Fugitive emissions is the term used for all emissions of carbon dioxide and methane arising from the extraction, processing and transport of fossil fuels, other than emissions arising from the combustion of those fuels to produce useful energy. While fugitive emissions arise from a wide variety of sources, most emissions are associated with just two source categories: methane released from coal measures when the coal is mined, and carbon-dioxide and methane emissions arising from the production and processing of gas, including both conventional and coal-seam gas. Despite the steady increase in production of coal and gas, emissions grew only slightly between 1990 and 2013. In particular, a government program introduced around 2001 recognised that a major share of coal-mining emissions comes from a small number of underground mines with particularly high levels of emissions per tonne of coal mined. These mines received financial support to install equipment that mitigated methane emissions from these mines, thus helping to offset growth in emissions as coal production from mines with lower levels of emissions per tonne of coal mined continued to increase.

Available technology would allow further emissions mitigation, at a reasonable cost, from almost all underground mines, but there are no measures in place to require mining companies to install such technology. Consequently, coal-mine emissions are projected to grow steadily from now to 2030, based on an assumption of steady growth in the volume of coal mined and exported.

Emissions from gas production and processing almost doubled between 2014 and 2018 because of the large increases in production of conventional and coal-seam gas to supply five new liquefied natural gas (LNG) export projects in Western Australia and Queensland. All gas production gives rise to fugitive emissions, but some, such as the Gorgon project in Western Australia, are very large sources, because the raw gas underground contains significant volumes of carbon dioxide, which, for technical reasons, must be removed before the gas is converted to LNG. Development approval for the Gorgon project, by the WA Labor government of the time (but not by the Howard government), required Chevron, the project developer, to sequester the carbon dioxide stripped from the input gas underground on Barrow Island, where the processing plant was built. Chevron has encountered technical difficulties in implementing the sequestration, and the Gorgon plant has been operating for over a year while venting enormous volumes of carbon dioxide, mixed with some methane, to the atmosphere. Chevron has said that it expects sequestration to be operating successfully before the end of 2019. However, there has been a further sharp increase in fugitive emissions since the commissioning, last October, of the Ichthys LNG plant in Darwin. Like Gorgon, the Ichthys gas field contains large volumes of carbon dioxide, but Inpex, the Japanese developer of the Ichthys project, has no obligation to sequester the carbon dioxide.

It is clear, from this overview of measures to limit the growth of Australia’s energy-related greenhouse emissions over the past twenty years, that the record of the Howard government is better than that of the successive Liberal–National Party governments in power since 2013. This does not mean, however, that John Howard’s record was in any way good or even satisfactory. Recently released cabinet papers for 1996 and 1997 have revealed that conservatives within cabinet defeated a proposal to implement a comprehensive emissions-reduction policy during those years. It is a matter of public record that a subsequent similar effort between 2001 and 2003 was again defeated by conservatives. The government also worked assiduously to weaken international agreements to reduce emissions and refused to ratify the Kyoto Protocol. Ironically, had the Rudd Labor government, elected in 2007, not ratified the protocol, the present government would not have had access to the ‘credits’ with which it intends to meet its Paris Agreement commitment.

The Rudd government succeeded in its election commitment to greatly increase the renewable-energy targets for electricity generation. However, as is well known, it failed in its attempt to introduce a comprehensive emissions-reduction framework. The subsequent Gillard government did succeed in legislating a comprehensive policy, which started in July 2012, but it was abolished after only two years of operation by the subsequent conservative government, under the leadership of Tony Abbott. During the period it was in force, the carbon-pricing policy applied only to electricity generation and to some consumption of gas. It was the effect on electricity generation that was the largest and had the most obvious impact on both the electricity industry and electricity consumers. That fact is undoubtedly one reason that, since 2014, almost all political debate around emissions policy and emissions-reduction targets has been narrowed to arguments about emissions from electricity generation. A further reason for the narrowing of the debate is the intense acrimony resulting from the political tactics adopted by the conservative parties under Abbott’s leadership. It is certain that any serious discussion of more comprehensive policies, which must include some form of price on emissions, as well as other complementary measures, such as vehicle fuel-efficiency standards and measures to accelerate the uptake of electric vehicles, will be off the agenda until, at the earliest, after the 2019 election.

We do still have, however, an ongoing debate about electricity generation, while, ironically, emissions-reduction targets for electricity generation may have become almost irrelevant. In the past two years it has become unequivocally clear that rapidly declining costs of building both wind and solar generation have brought the full cost, in terms of dollars per megawatt hour, of generating electricity from new renewable generators to levels below the dollar-per-megawatt-hour cost of generating electricity from existing, let alone new, coal-fired power stations. Not only are specialist renewable-generation businesses from all around the world rushing to build new projects in Australia, a growing number of large industrial and commercial electricity consumers—including, for example, all four major banks—are entering into long-term power-purchase agreements with renewable generators. Such agreements benefit the buyers by providing a guaranteed long-term price lower than the expected market level, and they benefit the sellers by providing a similarly guaranteed revenue stream at levels set to provide an adequate rate of return on their investment.

However, major problems are now emerging. Many of the best locations for new wind and solar farms, such as north Queensland, southwestern New South Wales and northwestern Victoria, are remote from both major existing power stations and major centres of demand for electricity. Consequently, they are served by very limited transmission capacity. New generation capacity is now being refused authorisation to connect to the transmission grid, because it would overload the system. In addition, the variability of renewable generation and other technical characteristics means that, beyond a share of total capacity that is now being reached in much of the National Electricity Market, it must be complemented by new investments, not only in transmission capacity but also in pumped hydro and battery storage, and other technical modifications to the existing electricity grid to ensure what are called system-security services, including frequency control, voltage control and system strength. The present system was largely designed and built, by the now long-departed state electricity commissions, so as to obtain most of these services from its then modern fleet of coal-fired power stations. Contrary to the monotonous refrain of conservative politicians and commentators, the ageing coal-fired fleet is technically quite unsuited to supplying these services in a system with a high level of renewable generation.

The current National Electricity Rules, running to many thousands of pages, were written to ensure that a market-based system would renew the then existing electricity-supply system, using the same sorts of technologies, at a rate needed to meet steadily growing demand for electricity and replace ageing generators, as and when required, on a like-for-like basis. The rules are quite unsuited to steering the electricity system through a transition without precedent in the 130-year history of the industry in Australia. The proposed National Energy Guarantee would address only some of the challenges presented by this transition, and would do so in an administratively burdensome and inefficient way, which would almost certainly place smaller electricity-generating and -retailing businesses at a severe competitive disadvantage.

What is needed, therefore, is a recognition than an electricity-system transition is well under way, and an acknowledgement that, if it is to be successful, extensive changes will be needed to the electricity-supply system as a whole. By definition, system-wide changes will need system-wide planning, both to minimise total costs and to ensure that technical performance remains at an acceptable level. It is hard to see how continuing the present largely uncoordinated melange of one-off investment decisions by large numbers of individual industry participants could meet these objectives. But if the transition is successful, there will be little or no need for additional measures to guarantee lower greenhouse-gas emissions from the electricity sector — lower emissions will be an outcome of the transition, driven by basic economics.