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Introduction

Date

The Strong growth, low pollution: modelling a carbon price (SGLP) report provided a comprehensive analysis of the implications of carbon pricing on the economy at global, national, sectoral and household levels. The costs of cutting pollution and transforming the Australian economy to clean energy sources through carbon pricing are modest.

Modelling of household impacts in the SGLP report was based on a starting carbon price of $23/t CO2‑e in 2012‑13 and other aspects of the final policy design. The modelling showed carbon pricing will increase aggregate consumer prices by 0.7 per cent in 2012‑13 and that a second increase of 0.2 per cent by 2015‑16 is projected, reflecting the move to a floating carbon price and other policy parameters. These effects are small compared with the increase from the Goods and Services Tax introduced in July 2000, and small in the context of movements in consumer prices from year to year. Nothing in this modelling update affects those conclusions.

The national and sectoral economic modelling contained in the SGLP report did not incorporate some elements of the Clean Energy Future policy package agreed by the Multi‑Party Committee on Climate Change (MPCCC). The long lead time required to commission detailed modelling of the electricity generation and other sectors meant it was not possible to incorporate some details of the package, including the initial $23 carbon price. This update revises the policy parameters of the national and sectoral economic modelling and compares results with those in the SGLP report. The modelling covers over 50 industry groups with detailed sectoral analysis of electricity generation, road transport and land sectors.

The four scenarios are:

  • medium global action scenario — unchanged from SGLP, assumes the world takes action to stabilise greenhouse gas concentrations at 550 ppm CO2‑e but Australian carbon emissions are not priced;
  • SGLP policy scenario — the ‘core policy scenario’ presented in SGLP;
  • Clean Energy Future scenario — where possible incorporates features of the Clean Energy Future package endorsed by the MPCCC, and reflected in the legislation currently before the Parliament; and
  • Government policy scenario — includes additional Government‑only measures for heavy on‑road transport and some of the additional assistance for the steel industry.

The three policy scenarios assume Australia introduces a domestic carbon price in a world where other countries also act to mitigate climate change. They assume a fixed price scheme from 1 July 2012, before moving to a flexible world price of around $29/t CO2‑e in 2015‑16. The SGLP policy scenario assumed an initial starting price of $20/t CO2‑e. The two updated policy scenarios are based on the same assumptions as in the SGLP policy scenario, apart from updated policy details. In particular, the Clean Energy Future scenario incorporates:

  • an initial $23/t CO2‑e price, rising by 2½ per cent per year plus inflation during the fixed price period;
  • a requirement that businesses meet at least 50 per cent of their annual liability from domestic permits and credits until 2020;
  • no maximum cap on transitional assistance to emission‑intensive trade‑exposed industries under the Jobs and Competitiveness Program; and
  • permanent exclusion of heavy on‑road transport combustion emissions from carbon pricing.

The Government policy scenario includes an effective carbon price on fuel used by heavy on‑road transport from 2014‑15, as in the SGLP policy scenario, and additional steel industry support compared to the SGLP policy scenario through a 10 per cent increase from 2016‑17 in the allocative baseline under the Jobs and Competitiveness Program. The Government proposes to seek Parliamentary approval for additional steel industry support shortly after passing the carbon price legislation, but will not legislate for an effective carbon price on fuel used by heavy on‑road transport until after the next election.

The modelling covers the main impacts of the Clean Energy Future package on the Australian economy; however, modelling all the detailed elements of the plan is not feasible.

In relation to the roll out of renewable energy, it is important to note that the modelling of the renewable energy sector does not include the Clean Energy Finance Corporation. The Government is yet to finalise consultation with key stakeholders about how the corporation will operate. The inaugural Chair of the Clean Energy Finance Corporation will report to the Government by early 2012, including on a proposed investment mandate and risk management policies. In addition, the modelling does not include policies that provide investment and innovation grants, such as the $3.2 billion Australian Renewable Energy Agency, the $1.2 billion Clean Technology Program or the $300 million Steel Transformation Plan. The Carbon Farming Futures Fund and the Biodiversity Fund also are not modelled. The impact of these programs on investment and behaviour is difficult to predict. Generally, they reduce the cost of investment in energy efficiency, renewable energy, and abatement in the land sector. These policies would likely lead to more investment and lower domestic emissions.

Similarly, the modelling does not include the planned closure of 2,000 MW of electricity generation capacity of the most emission‑intensive power plants, as this requires assumptions about which generators close under the tender process and when they close. The outcomes depend on expressions of interest from individual generators, negotiations with selected generators and an assessment of value for money, taking account of power system reliability requirements and other criteria. The contract for closure arrangements aim to provide certainty to new investors in low‑pollution generation and begin the electricity sector’s transformation to a clean energy future. Should the retirement and replacement of the highest‑polluting coal‑fired generation capacity occur sooner than under the modelling, emissions would fall below the levels presented in the scenarios.

The modelling does not capture policies that assist targeted facilities in industries with an unusually diverse level of emissions. For example, the effects of the supplementary allocation for liquefied natural gas projects and the Coal Sector Jobs Package for the few mines with high volumes of fugitive emissions are not individually modelled. These policies tend to support innovation and investment, resulting in a more competitive sector with stronger growth than presented in the SGLP policy scenario.

Nevertheless, the modelling provides a robust picture of the effects of the package at an aggregate industry and macroeconomic level.

The updated modelling reinforces results from the core policy scenario in the SGLP report. This paper focuses on key messages from the updated modelling and highlights the main differences between the scenarios. Revised charts and tables from the SGLP report including the updated policy scenarios are available at www.treasury.gov.au.

Table 1: Policy scenario assumptions

SGLP Clean Energy Future Government
Carbon price nominal
A$/t CO2‑e
2012‑13 $20
($23 for household modelling)
$23
Growth rate in fixed price period 5 per cent per year plus inflation 2½ per cent per year plus inflation
Flexible price Projected to be $29 in 2015‑16
World stabilisation target 550 ppm CO2‑e
Australian emission reduction target 5 per cent below 2000 levels by 2020; 80 per cent below 2000 levels by 2050
Allocation Set as straight line reductions: from the end of the Kyoto commitment period to achieve the 2020 targets; and from 2020 to achieve an 80 per cent reduction on 2000 levels in 2050
International linking Unrestricted from 2015‑16 Quantitative restriction ensures liable parties meet at least 50 per cent of their annual liability from domestic permits and credits until 2020
Fuel An effective carbon price is applied to: businesses’ combustion of liquid fuels from 2012‑13 (except light vehicles, agriculture, forestry and fishing) and heavy on‑road vehicles from 2014‑15, through the fuel tax credit system; and aviation fuel from 2012‑13 through the domestic aviation excise system. Private passenger cars are excluded. As for other policy scenarios, but with permanent exclusion of heavy on‑road vehicles from carbon price coverage As for SGLP scenario
Exclusions Agriculture, forestry (in terms of mandatory liability for emissions), decommissioned mines, legacy waste and existing emissions of synthetic gases
Emission‑intensive trade‑exposed industries Rate Assistance starts at 94.5 per cent or 66 per cent, depending on emission intensity, and declines by 1.3 per cent per year
Cap A cap of 100 per cent of scope 1 and scope 2 emissions No maximum cap on assistance
Additional assistance for steel industry A 10 per cent increase in permit allocation from 2016‑17
Household assistance Remaining scheme revenue is allocated to households as lump sum payments

Table 2: Headline indicators

Table 2: Headline indicators

Note: All dollar values are in Australian dollars at 2010 prices. Annual growth rates are from 2010. Initial employment is for 2011. All results in this publication refer to the financial year ending 30 June of the year quoted unless otherwise indicated.
Source: Treasury estimates from MMRF; and ABS.