Thursday, April 23, 2015

Emissions Reduction Fund insufficient to hit Kyoto targets

I wrote a paper with Rob Waschik and Iain Fraser arguing that the ERF would be unlikely to achieve Australia's Kyoto target by 2020 - in fact we computed that the $2.55b in the fund would only hit 50% of the target. (The link is to a preprint - the paper itself is now published but paywalled).

The figures today on the outcome of the first ERF auction do not lead me to reconsider my conclusion despite the assurances of The Australian that the ERF is "within reach" of the 5% reduction target by 2020.

The arithmetic in The Australian is wrong since, to this time, about 1/4 of the $2.55b has been spent but emissions cuts of 236MT are only 1/5th of the 236MT reduction that is targeted.  Not a big deal this error however and the "within reach" conclusion might even be approximately justified.

The difficulty is that the emissions cuts achieved so far are likely to be the cheapest cuts available - the "low hanging fruit".  As cuts continue to be made the cost per tonne of making the cuts is likely to rise well above the average rate paid this round of about $14 per tonne.  The "marginal abatement curve" is always supposed be to be a strongly increasing function of the level of cutbacks.

This is not to say that Australia won't hit its emissions targets.  It might. The economy may go into recession and continuing developments in energy conservation and the use of renewables (solar and wind) may help achieve this objective as might developments in coal burning technology and substitutions toward use of natural gas.  But the ERF itself won't be enough to achieve desired targets with its current budget.