Renewable energy could have a significant role in our future energy supply, but policy makers should be aware that renewables may not be the `clean and green' panacea. In the absence of certainty regarding the costs and benefits of renewable energy use, policy makers should ensure their policies are appropriately focussed on promoting cleaner energy within a flexible framework.
Renewable Energy has received considerable attention in recent years, culminating in September of this year at the World Summit on Sustainable Development (WSSD) in Johannesburg. Here, the European Union proposed that countries set a target to increase the renewable component of energy production to 15 per cent by 2015. This was a highly contentious issue at the Summit. The resulting agreement calls for countries to act `with a sense of urgency' to substantially increase the global share of renewable energy sources.
Recent advances in renewable energy technologies indicate they have significant potential as a viable source of future energy requirements. However, policy makers should exercise caution when promoting renewable energy. Common justifications for renewable energy are not clear cut. Contrary to commonly-held beliefs: the world is unlikely to run out of fossil fuels even over a time horizon of several centuries; its is not clear that promotion of renewables should be pursued to replace energy imports; current renewable energy technology entails environmental costs; and renewable energy may not be the most cost-effective way to reduce air pollution and greenhouse gas emissions.
In light of the uncertainty surrounding the costs and benefits of renewable energy production and use, broad-based, non-prescriptive market instruments are likely to be the best way to simultaneously stimulate the development of cleaner energy technologies and achieve good environmental and economic outcomes generally.
The case for renewable energy
Renewable energy is increasingly recommended as a solution to air pollution problems such as particulate emissions and smog, rising greenhouse gas emissions and diminishing fossil fuel energy sources.
A big selling point for renewable energy is that it is, as its name suggests, renewable. It is energy derived from sources such as agricultural by-products, the sun and wind. An increase in the use of renewable energy implies less use of non-renewable energy sources, such as coal and oil. This then would reduce the rate at which exhaustible resources are depleted. Another reason renewable energy is promoted is that it could reduce Australia's reliance on imported energy.
In addition, renewable energy sources can displace carbon intensive energy sources and those that contribute to other forms of air pollution. Therefore, the increased use of renewable energy may reduce emissions in the atmosphere. This could therefore lead to a reduction in air pollution and greenhouse gases and an improvement in the environment.
In the following sections we examine the arguments in favour of renewable energy in more detail.
Outlook on fossil fuel availability in the medium term
Technological advances in extraction, new discoveries and improved efficiencies in energy generators suggest that we are not running out of fossil fuels in the medium term. If anything, they are becoming increasingly plentiful.
The World Energy Assessment estimates humans have used less than 6 per cent of the world's fossil fuel energy resources since the onset of industrialisation (World Energy Assessment, 2000). If these resources begin to become scarce, their prices should rise. This will cause consumption to fall and signal to producers that consumers need alternative energy sources. This should stimulate investment in alternative energy sources, leading to invention, innovation and dispersion of alternative sources of energy.
Therefore, promoting renewable energy on the grounds that it would reduce the rate at which fossil fuels are depleted seems to be ill founded. However, most fossil fuels do impose external costs on the community and future generations by increasing levels of greenhouse gases and air pollution generally and this is a serious problem.
Reducing reliance on energy imports
Australia is a net exporter of energy. However, it does import some forms of energy, such as crude oil. It does this because the technical characteristics of Australian feedstocks make them unsuitable for some applications. In other words, Australia imports some forms of energy because it is cheaper to do so than to produce domestic alternatives. These price savings reduce household and business costs. This allows people to enjoy a larger range of other goods and services, and allows businesses to be more competitive.
Increasing the use of renewable energy in order to reduce Australian energy imports would only be of a net benefit to the Australian economy if domestic renewable energy could be produced at a lower or comparable cost to imported energy.
If domestic renewable energy (or other domestic energy sources) costs more to produce than imported energy, then policies to promote its use would impact on the competitiveness of Australian business and reduce real household disposable income. Such an outcome would be analogous to those arising in countries that have pursued discredited import replacement strategies.
Renewable energy is not always environmentally benign
While current renewable energy sources offer benefits to some aspects of the environment, they may damage others. Even though renewable energy is renewable, it does not necessarily mean it is environmentally benign. Like fossil fuels, renewable energy can also impose external costs on the community. For example, biomass, wind and solar renewable energy sources are not without environmental costs.
Not all renewable fuels provide more greenhouse gas benefits than petrol/diesel (CSIRO 2001).1 Renewable fuels can also have mixed effects on air quality.2 The CSIRO found that the greenhouse and air quality benefits of renewable fuels are highly dependant on certain variable factors, such as production technology, the feedstock or raw material used to produce the fuel and whether this feedstock is a by-product of an agricultural process or grown specifically for fuel stock.
In addition, promotion of these renewable fuels may have indirect environmental costs. Development of renewable fuels from biomass may stimulate additional production of biomass from sugar cane, wheat or canola oil. This expansion of farming activities, however, may put pressure on scarce water resources, adversely affect ecologically sensitive areas and have adverse economic impacts elsewhere. For example, it is considered that agricultural activities in the adjacent Great Barrier Reef catchment are affecting the reef. To the extent that increased agricultural production places greater pressure on the reef, it may also have negative economic impacts, perhaps affecting the economic sustainability of tourism industries that operate within the reef, as they depend on a relatively pollutant free ecosystem.
While wind power is a low carbon intensive form of energy,3 the large-scale use of wind turbines may adversely affect landscapes, migrating bird species, and pristine wilderness areas. Additionally, it may result in noise and aesthetic pollution, particularly when it is situated near residences (Bradley 1999). Commercial solar power operations would require considerable tracts of land. For example, a 1000 megawatt4 average solar electric system placed at the equator would require 20,000 hectares of land (70 square miles) or about 100 times more than a natural gas plant (Richter, 2002).
In essence, policy makers need to be aware that, whil
e renewable energy technologies may have an important role to play in meeting our future energy requirements, they are not without their own environmental problems. These need to be taken into account when examining the costs and benefits of renewable energy projects.
There are other ways to achieve environmental outcomes
To minimise environmental damage associated with energy use, policy makers can look at new methods and technology which minimise the impact on the environment. However, they should also aim to reduce the environmental impacts of current technology. Often they need to combine both approaches.
For example, there are several ways to reduce greenhouse gas emissions, including efficiency gains in carbon fuel use, carbon sequestration,5 fuel switching and geosequestration.6 Geosequestration potentially offers scope for very large scale emissions abatement. In addition, production methods can be improved to minimise any potential damage from resource extraction technologies.
Some argue that the most cost-effective methods of reducing greenhouse emissions may lie in improving the efficiency of current energy sources through improving the generation, delivery and storage of coal-fired electricity. Alternative clean technologies such as hydrogen based technologies, also could be derived from fossil fuels, and may prove to be the most viable method of reducing greenhouse gas emissions in the future (Mitchell 2001).
In any case, the most appropriate path forward for society is not clear, and policy makers should be aware of the risks of prescriptive policy instruments aimed at `picking winners'.
The least cost approach to environmental policy
In this situation of uncertainty, it is likely that the best approach to addressing pollution is through the use of broad-based market measures. Market-based measures seek to influence the price signals individuals face, so individuals take into account environmental effects when making production and consumption decisions.
A major cause of undesirable environmental degradation is the existence of external costs and benefits associated with production and consumption decisions. Because these decisions are made in a framework that does not reflect the full costs and benefits of actions, it can mean producers and consumers undertake too little environmental conservation or too much environmental degradation. However, when resource users face the full costs and benefits of their actions, they take into account the costs and benefits born by others, in addition to the costs and benefits they accept themselves.
Under these circumstances, people are more likely to behave in ways that are consistent with society's objectives. Therefore, policies should aim to provide incentives that reflect better the costs of environmental degradation. Strategies to achieve this include changing prices through imposing emission charges or tradeable permit schemes, regulating to prevent damage, applying liability to parties whose actions may affect others, and improving the clarity and enforcement of property rights.
Market instruments are non-prescriptive, so they give individuals the flexibility to choose the amount and means of reducing environmental degradation, depending on their own circumstances. Those who can abate emissions only at a very high cost can opt to pay an established market price which represents a value of the environmental damage instead of reducing emissions, while those who can abate emissions at a relatively low cost can do so.
A further advantage of market instruments is that they provide a continuing incentive to find innovative ways to further reduce emissions, such as the development of more advanced clean energy sources. As these instruments do not prescribe certain technologies, they are less likely to lock communities into costly emission reduction strategies. This has the effect of inducing a least-cost path to reducing emissions.
The New South Wales load-based licensing scheme (NSW EPA, 1999) is an example of a market mechanism. Under the system polluting industries are charged a variable licensing fee, which is determined by the amount of pollution, how harmful it is and where the pollution is released. Pollution fees are levied on the annual total pollutant discharged by a firm, which provides ongoing incentives for innovation and cost-effective pollution abatement. Another example of a market mechanism is the sulphur dioxide emissions trading market in the United States. The sulphur market has resulted in estimated cost savings of up to $1 billion US per year (Stavins, 1998) and significant investment in new technologies (Schmalensee, et al, 1998), when compared to prescriptive regulatory alternatives that were considered by Congress in prior years.
Recent advances in renewable energy technologies indicate they may have a significant role as a future source of energy supply. However, there are several misconceptions surrounding current renewable energy technologies, in particular that fossil fuels are running out, that increased renewable energy use will reduce Australia's reliance on imported energy and that renewable energy, by the simple fact of being renewable, is always more environmentally friendly.
Deeper exploration of these issues reveals much uncertainty of future conditions. Faced with such uncertainty, broad based market mechanisms are likely to provide the best means to achieve desired environmental outcomes and to stimulate further development of clean technologies. There is a danger that prescriptive approaches could lock the economy into a high cost emissions reduction path.
Bradley, R. 1999 `The Increasing Sustainability of Conventional Energy', Policy Analysis, No. 341.
CSIRO 2001, Comparison of Transport Fuels, Final Report (EV45A/2/F3C) to the Australian Greenhouse Office on the Stage 2 study of Life-cycle Emissions Analysis of Alternative Fuels for Heavy Vehicles, Canberra.
Mitchell, C. 2001, Future Gazing: What can we hope to achieve through greenhouse gas reductions?, Contributed paper to the Emissions Trading and the Kyoto Paradigm Conference, Melbourne, August 13-14.
National Energy Advisory Committee 1979, Report No 9, `Liquid Fuels - Longer Term Needs, Prospects and Issues'.
NSW Environment Protection Authority 2001, Load-based Licensing: A fairer system that rewards cleaner industry, Sydney.
Richter, B. 2002 `Global Warming: What Comes After Kyoto?', OECD Observer, No. 233.
Schmalensee, P et al. 1998 `An Interim Evaluation of Sulfur Dioxide Emissions Trading', Journal of Economic Perspectives, Summer 1998.
Stavins, R. 1998 `What Can We Learn for the Grand Policy Experiment? Lessons from SO2 Allowance Trading, Journal of Economic Perspective, 12(3) pp 69-88.
United Nations Development Program 2000, World Energy Assessment: Energy and the Challenge of Sustainability, UNDP, New York.