Reviews the cost pressures that may confront the Australian economy if the Renewable Energy Target is to continue in its current form.
Climate change presents a considerable challenge for policy makers across the globe, often requiring a trade-off between environmental and economic objectives. In Australia, electricity is predominantly generated from coal which accounted for around 35% of our greenhouse gas (GHG) emissions in 2010. A key area of interest for policy makers has therefore been to engineer a means of reducing the GHG emissions associated with electricity generation — and do so at the least possible economic cost.
Over the past decade or so, there have been several attempts at both a State and Federal level to reduce our carbon footprint. One such response is the Commonwealth Government’s Renewable Energy Target (RET) scheme, which encompasses two elements:
- Large-scale Renewable Energy Target (LRET), which requires that 41 TWh of Australia’s electricity must come from renewable sources by 2020. As part of the LRET scheme, financial incentives are provided for the establishment or expansion of renewable power stations, intended to bring forward investment in renewable energy.
- Small Scale Renewable Energy Scheme (SRES), which provides an upfront subsidy to small scale generation technologies such as rooftop solar PV and solar hot water.
The RET scheme was implemented with the intention of lowering the externalities associated with carbon emissions from fossil fuel energy generation and encouraging the commercialisation of renewable energy technologies. Both LRET and SRES schemes involve subsidies paid by consumers to the renewable energy industry to encourage a greater level of investment in renewable energy than the market would otherwise deliver, given the externalities. Once the market for renewable energy is more developed, this rationale is less important.
Since the current RET scheme’s introduction, investment in renewable energy has helped shift our electricity generation mix to cleaner and more diverse sources – supporting growth and employment in the renewable energy sector.
However, such subsidy-induced investment generates costs to broader parts of the economy that need to be offset against these gains. In influencing the electricity generation mix, the RET scheme affects the price paid for electricity, which is an important input into many economic activities.
The research was commissioned by business groups the Australian Chamber of Commerce and Industry, Business Council of Australia and Minerals Council of Australia