A review of subsidy and carbon price approaches to greenhouse gas emission reduction

Climate change Power resources Australia

The Climate Institute requested SKM MMA and Centre of Policy Studies (CoPS) to undertake an assessment of alternative policy options to achieve a given carbon emission target in Australia. The focus of the study was to compare outcomes under a suite of subsidy based policies to the outcomes under an emission trading scheme. The outcomes of the study are presented in this report.

There are several market based approaches that could be used to achieve a carbon emission target. Which approach is more or less effective in achieving the target will depend on any restriction placed on the measure, the ability of each approach to manage the uncertainties on the cost and future scale of abating carbon emissions, the long term behavioural signals provided and the relative impacts on the broader economy.

In principle, a subsidy scheme, such as the proposed Emission Reduction Fund (ERF), could achieve the same level of abatement at a similar cost to an emission trading scheme provided the sectoral coverage was the same and the eligible abatement options were the same. Any difference in effectiveness and cost may be due to other factors such as a limit on the budget available to be spent through the subsidy scheme and differences in sectoral coverage. Whether projects receiving funding under the subsidy scheme will proceed or go under either before they are built or after a few years of operation, as has happened under other subsidy scheme, is also important to the effectiveness of the scheme.

SKM MMA used a marginal abatement cost approach to assess the options chosen under the subsidy fund. The approach was used to assess a range of emissions abatement opportunities in a range of sectors covering energy, transport, agriculture and land use change, industrial processes, fugitive emissions, and waste. The approach involved the assessment of the cost and potential emission abatement of the eligible options. The assumption was that the lowest cost combination of options is selected under the fund to meet the abatement cap up to any budget or other declared constraints. Only options that are additional (i.e. would not have proceeded in absence of the fund or carbon abatement incentive) were considered.

The estimated level of abatement by options and their cost are input into CoPS’s Monash Multi Regional Forecasting Model (MMRF)to determine broader economic impacts.

This report outlines the assumptions and method used and discusses the result of the modelling. Limitations and uncertainties in the approach are also outlined. The focus of the analysis was on potential impacts – there is no discussion on which approach is more efficient.

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