Tuesday, May 17, 2011

Carbon pricing silly season

Those trying to have a rational discussion about carbon pricing must feel like they are stuck in a never-ending silly season. Today's topic is the $40 a tonne magic number for a carbon price, with the headline in the usually fairly reliable Sydney Morning Herald screaming "Carbon price shock: now it's $40 tonne".

Except that it almost certainly isn't.

A report to be released on Wednesday will apparently show that a carbon price of $40 a tonne will be required for gas generation to compete with/replace black coal. This isn't really a surprise and I have been under the impression for some time that a carbon price of less than $30 a tonne will make brown coal uncompetitive, with a higher price of ~$40 a tonne for black coal. As far as I know can tell, this means even at a $25 dollar a tonne starting price, the dirtiest brown coal power stations (ie: Hazelwood) will need to start cleaning up their act, start running only as peaking plants instead of baseload, or look to close. A price on carbon will have the biggest effect on the most polluting plants first which is brown coal, (which generates 26% of Australia's electricity).

So what about black coal? Well (and this is where the SMH headline goes all wrong), just because a carbon price doesn't start high enough to make a polluting form of power uncompetitive, doesn't mean it won't over time. The carbon price will rise as time passes and will reach a point where it hits $40 in today's money at which time black coal will become uncompetitive (and plants will start to close etc).

But there is another effect we need to remember too and that is new power generation. Power plants are long term infrastructure and need to be profitable over many decades (or they won't be built). Even if the initial carbon price doesn't make black coal uncompetitive a clear signal will have been sent to the market about what power plants will be profitable in the long term with a rising carbon price. The effect, which may be starting to be felt already after several years of carbon price discussion, is the that the dirtiest forms of power generation (ie: coal) simply won't built anymore. Which will certainly help to clean up the electricity industry given the steady stream of new plants opened every year.

Ps: I should note that from an environmental POV, or if you only wanted renewable energy to be competitive, a carbon price of $40 (or higher) would make sense. What I'm trying to point out here is that carbon pricing works in both the short and long term and that the price doesn't need to start high to be effective.

PPS: the actual SMH article was pretty ok, mostly its issue was the silly headline. Although it's probably not as bad as The Australians' "Westpac chief Gail Kelly joins carbon tax revolt" when, as the article made clear, she said no such thing.

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