In front of the world?

Coincidentally, Australia’s carbon price will come into effect on the same day, 1 July, as the new feed-in tariffs for solar PV, wind and other renewable adopted in Japan as part of the response to the Fukushima disaster[1]. The tariffs are incredibly generous (around 50c/kwh on a net feed-in basis) and supposedly guaranteed for 20 years. I can’t see it lasting that long, but it will certainly make Japan one of the world’s biggest markets for renewables, having installed almost none until now. China has also adopted feed-in tariffs, but at more realistic prices around 20c/Kwh. These policies will ensure continuation of the spectacular growth in installations of renewable energy and the associated reductions in costs.

What does this make of the claim that Australia is moving ahead the rest of the world with the carbon price policy. There’s a sense in which it’s true – our experience with MRET and various state-level policies have shown that these are second-best options compared to a comprehensive carbon price. The Europeans can teach the same lesson, but it seems as if everyone has to learn it for themselves.

But the belief among economic doomsayers that we are the only country doing anything about this is just nonsense. Even in the US, where nothing can be done through legislation thanks to Republican delusionists, a combination of regulation and low gas prices is leading coal-fired power plants to shut down at a rapid rate.

At this point, the global choice is not between doing nothing and doing something. It’s between sensible market-based policies and costly second-best options, of which the worst is the “direct action” in which Tony Abbott claims to believe.

fn1. Two nuclear plants are also to be restarted, and presumably most of the rest will follow eventually. The government still wants to build more,

35 thoughts on “In front of the world?

  1. The Economist is currently running pieces on the Arctic and warming with the conclusion that a carbon tax is the “safer approach”

    In thecEconomist there is no debate on warming, the evidence is overwhelming.

  2. It’s interesting to note that US emissions have declined without direct carbon penalties. That’s because wholesale gas prices have declined to under $2 per GJ due to oversupply from the fracking boom. In Australia the eastern piped gas price is nudging $5 while LNG is getting up to $15, perhaps $2 of that from the liquefaction process.

    Some US commentators doubt the US gas price can remain low for long
    Non power users like Dow Chemical have argued that a lot of gas needs to be conserved for decades from now. When the gas price escalates then any US coal resurgence will face new EPA rules. That’s perhaps 5 years from now. Note that fracking is not producing the hoped-for gas and oil results in Europe.

    When gas becomes seriously expensive perhaps 20 years from now some other way will have to be found to balance the variability of wind and solar. That’s assuming that coal remains out of favour, via either carbon tax or point source emissions standards.

  3. To me the feed in tariffs in Japan appear to be some sort of corporate welfare or possibly even backdoor stimulus. It would be interesting to see if the government got any concessions, economic or political, from industry in return.

  4. Now that I think about it, Japanese reports always have extremely unrealistic future price projections for solar power, probably as a result of the influence of the nuclear industry. So we could have a situation where the nuclear industry, by trying to stall solar development with unrealistic cost projections, has now ended up fueling a massive boom in solar energy. I’d be amused if there wasn’t so much tragedy mixed in with it.

  5. @Hermit “some other way will have to be found to balance the variability of wind and solar.”

    Fortunately, economists have discovered a brilliant way of dealing with mismatches between supply and demand, one that is already used (a bit differently) to deal with the existing mismatch arising from the inflexibility of coal and nuclear.

  6. There appears to be compelling anecdotal (!) evidence that markets do not provide useful consistent incentive for change. A simple tax with an expectation of gradual adjustment until there is sufficient response from the market seems superior. This revenue, combined with taxes on other detrimental activities, plus resource rent on natural resources and land can be the real game changer for our economy when combined with matching reductions in a swathe of inefficient taxes.
    As an aside, from July 1 rail freight will be disadvantaged because of the carbon tax relative to road – is that smart?

  7. “Even in the US, where nothing can be done through legislation thanks to Republican delusionists”

    the democrats controlled both the congress and the white house between 20/1/2009 and 3/1/2011. they had plenty of time to act or die trying.

    In June 2009, the House approved the Waxman-Markey bill, which would have imposed a nationwide cap on emissions. the majority was 219-212, 48 Democrats voted against the bill, while eight Republicans backed it.

    Waxman-Markey was too demanding for the Senate.

    After months of posturing and further concession-making, Senate Democrats failed to come up with a bill that they were willing to bring to the floor. President Obama did nothing to rally public opinion on the issue.

    there were 60 democratic senators for a few months in mid-2009, as I recall, so a filibuster was not an issue in this interval.

    Read more

  8. @Jim Rose You would think that after taking expert advice and considering the scientific evidence there would be a bipartisan approach to the threats of climate change – generally there was bipartisan support for the War on Terror. However on this issue, and others, the Republicans have gone out of thir way to deny any evidence.

  9. In the 1940’s Imperial Japan was a dangerous threat, but oddly enough no one back then claimed that there was no consensus that Japan had bombed Pearl Harbour, or that there had been no statistical increase in the number of Americans killed in death marches in the last 10 years.

  10. @John Quiggin

    “… economists have discovered a brilliant way of dealing with mismatches between supply and demand, one that is already used (a bit differently) to deal with the existing mismatch arising from the inflexibility of coal and nuclear.”

    Would you like to elaborate? I must admit that I had a little unkind thought that hinged on the feeling that is difficult, in these post-GFC times of sadly continuing neoliberal economic orthodoxy, to perceive mainstream economists as in any way brilliant. (No personal criticism intended as you are not a neoliberal economist.)

    Also, to be a tad pedantic, I would have thought that it was actually engineers and power system operators who dealt with mismatches between supply and demand in the power supply system. I assume you meant “dealing with” in another sense, probably a pre-emptive demand smoothing sense via pricing? A little elaboration would be good if possible.

  11. To elaborate, compared to an ideal load-following system that produced exactly as much power as demanded at a constant cost, the current system produces too much power at night when no one wants it, so it is sold cheaply through off-peak tariffs. A system based on renewables would face different mismatches, but they would be dealt with in the same way, that is, by raising prices in periods of excess demand and lowering them in times of excess supply.

    The GFC invalidates lots of claims made by economists, but not the basics of supply and demand.

  12. Interesting news from Japan and China. Kyoto is successful, albeit in an apparently round about way – a way around overt co-ordination.

  13. @Jim Rose

    The Democrats are not a monolithic party. (Even the Republicans are less monolithic than most countries expect of their parties, though they’ve been doing a good approximation recently.) They’re not even a liberal party, just the partly with liberals in it, more like a coalition of liberals/progressives and moderate conservatives. 60 Democrats combined with filibuster meant the equivalent of a razor-thin majority.

  14. With the 24 hour cycle of off-peak baseload pricing at least we get cheaper water heating. When unmet demand stretches to days at a time it gets more difficult. With a blocking high pressure system we could have wind farms becalmed and no solar at night so that gas fired plant has to take up the slack. I suggest that by 2030 or so burning gas to make electricity will seem like throwing Picassos on the fire.

    Time-of-use electricity pricing also raises cost and equity issues. We’ll need much smarter meters, house wiring and appliances than the one we have now connected by a parallel internet-like network. Suppose the smart meter advises the householder that electricity during a heatwave is now costing $1 per kwh. Pensioners and mothers of infants might decide to tough it out with occasional dire results. The dumb grid has already cost us plenty so I’d hesitate to spend more on a smart grid.

  15. Seriously, Hermit, are you arguing that we should go nuclear because smart meters are too hard? One of these is a change about as hard as the switch from analog to digital mobile phones, the other is a challenge that no democratic country has been able to manage. In economic terms, we’re comparing tens of billions to millions.

    As for your point about heatwaves, about 30 per cent of households don’t have airconditioners, presumably including most low income earners, so your equity concerns seem a bit misplaced. Until very recently, air conditioning was confined to a wealthy minority – I’ve spent most of my life in houses without it. The idea that it’s suddenly become a basic necessity reflects what happens when prices and costs diverge.

    In any case, the problems with an all-renewable system are mostly going to be cold winter nights – solar PV will reduce the summer peak load problem. Fortunately, storing heat is a lot easier than storing electricity.

  16. John Quiggin :

    In any case, the problems with an all-renewable system are mostly going to be cold winter nights – solar PV will reduce the summer peak load problem. Fortunately, storing heat is a lot easier than storing electricity.

    There appears to be considerable reluctance across the community to include even the most basic thermal efficiency features in our homes. Given this, and the imposition of some regulations to address this, why not a regulation that mandates solar PV, and smart “management” rather than just metering, as part of any air conditioning installation, but without excess feed-in tariffs?
    Recent commentary suggests between $40-70 B of unnecessary poles and wires have been approved by the Regulator for a small number of summer peak hours, with consequent price rises up to 70%, inspite of him admitting on TV last night that they were excessive. Looks like a Nuremberg defence.

  17. John Quiggin :
    In any case, the problems with an all-renewable system are mostly going to be cold winter nights – solar PV will reduce the summer peak load problem. Fortunately, storing heat is a lot easier than storing electricity.

    And they don’t get much colder than in Canberra and yet we persist in completely ignoring solar gain as a FREE heat source.

    There are some new suburbs in the process of being developed in Canberra. Take a look at the Estate Map for Coombs:

    Click to access 11853_Coombs_Master-Estate-Map_FOR-WEB.pdf


    So easy to do it right at the beginning, so expensive (read impossible) to fix.

  18. I don’t know why some people are so concerned about the gas supply. Currently in Adelaide it is both windy and sunny and we are currently using a fraction of the amount of gas we would normally be using at this time just a few years ago. As solar spreads through Australia it will reduce gas and coal use and overseas it will reduce natural gas use in Japan and other importing countries. We don’t need to rely on gas power, but given the reality that natural gas wells and generators currently exist in Australia and gas emits less CO2 and toxins than coal, we will be using gas for quite some time. But as solar capacity expands we won’t use it as much.

  19. Prof Q @ 13 (and others), I recently changed my electricity supply to be 100% renewable. The timer on the “off-peak” meter for the water heater is set to run during the day, reinforcing the point you made.

  20. Hermit :

    Time-of-use electricity pricing also raises cost and equity issues. We’ll need much smarter meters, house wiring and appliances than the one we have now connected by a parallel internet-like network.

    Or we could just use the internet, which already exists, and home wifi networks, which most people already have.

    Also remember, it’s not an all or nothing thing. A semi-smart grid, with only part of the population connected, provides some extra grid stability. A smarter grid helps more. This kind of thing could be rolled out slowly, and could initially be voluntary.

  21. Pr Q I never mentioned the word ‘nuclear’ but now you mention it does seem like a good idea. With heat waves and cold snaps perhaps we’ll head to the concept of a single room with thermal comfort, a bit like the cyclone proof bathrooms in Darwin. If the daily grid energy ration is say 2 kwh for air conditioning it would be confined to that single room. Obviously it would be daft to run a large screen plasma TV in that room. In inland locations (eg Alice Springs, Canberra) PV + large battery might help in summer perhaps with a town gas/LPG assist in winter, neither making extra demands on the electrical grid.

  22. There is some resistance to smart meters, something about centralised control (another conspiracy theory I guess). I really don’t understand the rationale, if any.

  23. @Hermit
    Again with the batteries Hermit. Once again, most of the population is connected to the grid. Can you acknowledge this fact please?

  24. @rog
    Fair enough. But the smart grid won’t fall over if 5% of the population don’t sign up. It’ll just be 5% less responsive.

  25. @Hermit
    I always read what you write, though I’m quite sure the favour is not returned. The point is that in Australia, solar power doesn’t add stress to the grid, because the sun always shines when prices are at their highest. And all this rubbish about a “daily grid energy ration.” When has JQ ever called for anything like this? When has this even been implied?

  26. “Even in the US, where nothing can be done through legislation thanks to Republican delusionists”

    The 2008 Republican Party presidential nominee supported cap-and-trade.

    McCain had a strong legislative record. He introduced a bill with Joe Lieberman to introduce carbon trading in 2003.

    See which says that ‘McCain has been one of the most outspoken members of Congress on the issue of climate change’ and he “managed to force the first real Senate vote on actually doing something about the largest environmental peril our species has yet faced.” The McCain-Lieberman bill lost 43-55.

    In 2007 he reintroduced his bill, with bipartisan co-sponsorship. Obama missed the June 2008 vote on the Climate Security Bill of 2008.

    In a March 2008 speech, McCain called for a “successor to the Kyoto Treaty” and a cap-and-trade system” that delivers the necessary environmental impact in an economically responsible manner.” McCain’s climate policy included by 2012, U.S. emissions should return to 2005 levels; by 2050, the U.S. emissions should be 60 percent below 1990 levels.

    In January 2010, the Pew Research Center asked Americans to rank the importance of twenty-one issues. Climate change came in last. After winning the fight over health care, another issue for which polling showed lukewarm support, Obama moved on to the safer issue of financial regulatory reform.

    Many others including McCain soften or reversed positions as voter support waned as the great U.S. recession depended.

    CO reduction action will be limited to modest reductions of a largely token character.

    There are many expressive voting concerns that politicians must balance to stay in office and the environment is but one of these. Once climate change policies start to actually become costly, expressive voting support for these policies will fall away.

    p.s. there were 5 republican senators who would have voted for the cap and trade bill in April 2010: Lindsey Graham, Susan Collins, Olympia Snowe, Scott Brown and George LeMieux.

  27. In this cold winter Melbourne is having, I keep thinking about how it must have been for indigenous Australians living here before Europeans came. How did they feel about winter? I thought maybe thy might stand around a fire all day, cold and wet, and tough it out for a couple of months. Then I realised they would need to spend a fair amount of time each day hunting and foraging. Pretty tough!

    Now here we are talking about access to affordable air conditioning being a life or death situation. Have humans become less robust, or are heat waves stronger, or did people simply die of heat exhaustion before widespread domestic air conditioning and that was simply that? I’m really curious about this.

    I was born in 1969 and grew up without air condioning, and choose to go without it as an adult. On those unbearably hot nights (i.e. when the house itself has heated up) i sleep in my back yard in a hammock. I like seasons!

  28. rog, voter concerns and priorities are sensitive to the business cycle.

    The pro and con arguments about global warming were around for a long time. The for and against cases needed to wait for a market, as do ideas about economic reform.

    Stigler contended that economists exert a minor and scarcely detectable influence on the societies in which they live.

    He said that if Richard Cobden had spoken only Yiddish, and with a stammer, and Robert Peel had been a narrow, stupid man, England would have still moved toward free trade in grain as its agricultural classes declined and its manufacturing and commercial classes grew in the 1840s onwards

    As Stigler noted, when their day comes, economists seem to be the leaders of public opinion. But when the views of economists are not so congenial to the current requirements of special interest groups, these economists are left to be the writers of letters to the editor in provincial newspapers. These days they would run an angry blog.

    In DEMAND FOR ENVIRONMENTAL GOODS: EVIDENCE FROM VOTING PATTERNS ON CALIFORNIA INITIATIVES, Journal of Law and Economics, April 1997, MATTHEW E. KAHN and JOHN G. MATSUSAKA studied voting behaviour on 16 environmental ballot propositions in California in order to characterize the demand for environmental goods:

    • The environment was found was to be a normal good for people with mean incomes, but some environmental goods are inferior for people with high incomes, at least when supplied collectively.

    • An important price of environmental goods is reduced income in the construction, farming, forestry, and manufacturing industries.

    • In most cases, income and price can explain most of the variation in environmental voting – it is not essential to introduce non-economic concepts such as ideology and politics.

  29. What a lad of cobblers. Republican repudiation of their previous policies is their responsibity.

  30. Here is an extract from an article on the arrival of Solar Impulse in Morocco.

    “A solar-powered airplane flying to Morocco’s Quarzazate region, home to the Moroccan Agency for Solar Energy (MASEN), sends a powerful message as to the future of clean energy in the desert heat. This intense sunlight and heat will help power a 160 megawatt thermo-solar power plant, first of several such units that will eventually produce 500 MW. Morocco is counting on this and other forms of renewable energy to provide 42 percent of its energy needs in less than 10 years”

    What was that? a third world country managing towards having nearly half its electricity from Renewable sources within the next eight years?

    I thought that I heard Tony Abbott declare that Australia should not get ahead of the rest of the world on Climate Change Action. Well he can stop worrying, there is no fear of that happening at all.

    I wonder what the next lame Coalition excuse will be?

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