In each case, costs to reduce pollution, and actual prices, were much lower than governments and the experts expected.
The analysis suggests a general price for carbon is preferable to government funding for specific measures. Markets unlock ingenuity across the community to find reductions cheaper than we expect.
In addition, the poor record of forecasting shows that any scheme should have a floor price to provide certainty for investors. Floor prices effectively reduce the total amount of pollution permitted if it turns out to be easier than expected to reduce pollution.
Professor John Daley, CEO of Grattan Institute, said at the release of the second Energy Report, “technology innovation and carbon pricing can combine to reduce carbon emissions more cheaply than we expect”
“History shows markets, enabled by pollution prices, deliver more emission reductions more cheaply than government selecting specific actions or projects. Ironically, although schemes to promote renewable energy and encourage energy efficiency are proliferating, in Australia, we are still debating the merits of putting a price on CO2 emissions, which is likely to deliver the greatest reductions at lowest cost,” Daley added.
The question at the heart of the report is, why have forecasts been consistently too high? The reason, it concluded is, “government forecasts almost inevitably underestimate commercial innovation when money is at stake. Government forecasts tend to focus on opportunities for reducing emissions that are well understood, and about which forecasters are confident”.
According to the report, Markets to Reduce Pollution: Cheaper than Expected,“state and Federal Governments consistently got it wrong when picking in advance which technologies would deliver the cheapest reductions. Environmental markets routinely led to innovation to reduce emissions at lower cost in practice than in forecasts”
There are two lessons from experience for reducing Australia’s carbon emissions. First, markets, enabled by pollution prices, deliver more emission reductions more cheaply than government selecting specific actions or projects to reduce emissions. Markets unlock ingenuity across the community to find reductions cheaper than governments expect.
Second, any pollution-pricing scheme should have a floor price to provide certainty for investors. Floor prices effectively reduce the total amount of pollution permitted if it turns out to be easier than expected to reduce pollution.
In the six pollution and clean energy trading schemes looked at in the report, including the NSW Greenhouse Gas Reduction Scheme, the European Union's carbon trading scheme and the US sulphur emissions trading scheme, the market price turned out to be substantially less than forecast. Consequently, price crashes are a recurring feature of pollution markets.
Contrary to belief in some circles, the price crash in European carbon markets was not a “one-off” result of peculiarities in its initial design. The same pattern has recurred in a variety of environmental markets.
“Markets may not be perfect, but they are consistently effective at identifying lower cost opportunities, promoting innovation, and responding flexibly to changes. Markets are likely to deliver more innovation at lower cost than specific government programs,” the report notes.
In April, the Grattan Institute released a report in which it stated “there is no justification for the industry compensation mechanisms built into the proposed Carbon Pollution Reduction Scheme (CPRS)” and described it as a “$20 billion waste of money”
That report, Restructuring the Australian economy to emit less carbon, drew on companies’ own emissions and financial data and concluded only the steel and cement industries are worthy of getting any assistance under the CPRS. It found no case to support alumina refining, aluminium smelting, oil, liquefied natural gas and coal mining.