For the first time in its history, Australia has put a price on carbon emissions, with the release of the Australian Government’s “Securing a Clean Energy Future” policy.

So what are the likely impacts of this approach on the major industry sectors, and what changes are likely to occur in the way industry operates?

Electricity generation to be transformed

SKM MMA’s modelling suggests carbon pricing is likely to lead to a major transformation of the energy sector. In particular, emission reductions in electricity generation are likely to be the largest source of reduction of the emissions in Australia under the carbon pricing regime. Under a regime that limits concentration of greenhouse gases in the atmosphere to 550 parts per million (ppm), emissions in the electricity generation sector are predicted to fall to around 170 Mt CO2e in 2020 and to 80 Mt CO2e by 2050. Limiting concentrations to 450 ppm would likely see emissions fall to 129 Mt CO2e in 2020 and 40 Mt CO2e in 2050.

Figure 1: Predicted emissions from electricity generation in Australia

Electricity demand growth rates are likely to be smaller as a result of carbon pricing. Purchasing carbon permits and the shift to low-emission technologies are likely to add to the cost of generation, which is likely to be reflected in higher retail prices. The modelling indicates that average retail electricity prices could increase by 10% by 2015.

The price rises are likely to reduce electricity demand compared to what it would have been without carbon pricing. The modelling predicts that electricity demand will increase, but will be around five percent lower than business-as-usual levels by 2020 and about 17 percent lower by 2050. If the Government proceeds with its planned Energy Savings Initiative, demand could be even lower than predicted.

Significant changes will also occur in the supply side. Within the electricity generation sector, there will be a substantial shift to gas and renewable energy generation, with these two technologies contributing over 75% of the generation mix by 2050. Traditional coal-fired generation will diminish. The analysis suggests there will be limited development of new coal generation plant, with no new coal plant likely to enter the market until carbon capture and storage technologies are developed and deployed (which is not expected to occur until the mid 2030s). Coal industry experts share this view about the future of carbon capture and storage technologies or alternative low-emission technologies.

High gas prices are projected. This limits the growth in gas-fired generation relative to what would have occurred if gas prices remained at historical levels. Although carbon prices provides the opportunity for gas-fired generation to displace coal fired generation in the merit order, the level of displacement is limited by the high gas price.

Renewable generation is expected to grow strongly in the near term due to the Renewable Energy Target (RET) Scheme and in the longer term due to carbon pricing.

Around 2,000 MW of brown coal generation is likely to be retired by 2020.

Figure 2: Projected change in generation mix in Australia under carbon pricing

Gas-fired generation and renewable energy are likely to benefit from the package, and be major drivers of investment in the power generation sector. Gas-fired generation will likely grow modestly – with mainly open-cycle generation supporting increased penetration levels of wind generation to 2020 and combined cycle generation as coal plants are retired. Investment in renewable energy generation is expected to grow strongly due to the Renewable Energy Target Scheme until 2020 and carbon pricing incentives thereafter. The analysis estimates around 1,500 MW of new gas turbines and 8,000 MW of new renewable energy plant would be required by 2020. This represents an investment of around A$23 billion.

Industrial (stationary energy) impacts

For other stationary energy activities (direct combustion of fuels at industrial sites), the situation is more complicated. Fuel usage is already dominated by natural gas, with over 45% of fossil fuel combustion based on these fuels, with the remainder largely liquid fuels. Coal, which accounts for 13% of fuel use in direct combustion, is used mainly in cement plant, some alumina refineries and some food manufacturing plant. Thus, the prospect for fuel switching (from coal to gas) is not easily or cheaply available for this sector, but there remain significant opportunities to improve energy efficiency or switch to renewable energy.

The analysis by the Australian Treasury suggests gross output from all sectors would expand with carbon pricing, but at a slightly lower rate than under business as usual. By 2050, manufacturing output is likely to be about three percent less than under business as usual, but still around 70% above 2010 levels. This relatively modest impact reflects a shift towards manufacturing goods with low embodied emissions, and because countries face the same marginal carbon price, there is limited leakage of manufacturing in other countries. Similarly, mining is expected to continue to grow strongly (trebling current output by 2050), but about 4% less than under business-as-usual conditions, which reflects the continuing strong growth for minerals and energy commodities by developing countries.

The continuing growth and lack of fuel switching opportunities means that, based on the modelling assumptions for combustion activity in the manufacturing sector, emissions are predicted to reduce modestly over time.

In the near-to-medium term, the options for reducing emissions include:

• Conversion of coal to gas in the few sites that still use coal, although this is likely to be limited by the predicted increase in gas prices 
• Renewable energy, although this is likely to be limited in the short term due to limited biomass opportunities and low-energy density of other options 
• Cogeneration options embedded with industrial loads – these would be considerably improved with carbon pricing 
• Energy efficiency – likely to be the preferred option for this sector, backed by government support through a range of policies

Costs could be lower than predicted

Most of the analysis is based on conservative assumptions, and there is a range of uncertainties related to the rate of technological development, trends in technology costs and future gas prices, which will determine the level of uptake of gas-fired generation, and affect the predicted impacts. It is impossible to predict the development of other options to mitigate emissions, and development of (as yet) unknown options could significantly reduce the costs of carbon pricing. Ultimately, the key to success will depend largely on the ability to develop novel approaches to mitigating emissions.

This study adds to a body of work completed by SKM, both in Australia and internationally, which examines the potential impacts of carbon pricing on the economy overall and specific segments of the economy, including the energy sector, mining and metals, and water and infrastructure developments. SKM has also undertaken a large body of work which models the likely impacts of climate change and economically rational adaptation measures that can be made by industry in response to these impacts.

Based on these studies, SKM has substantial experience to help examine the:

• Impacts of mitigation scheme governance arrangements and mechanics, as well as complementary measures to these arrangements 
• Impacts on key industry segments 
• Challenges and opportunities faced by key industry segments 
• Options for mitigating adverse impacts and for realising the opportunities

To view the policy, click here.

To view SKM MMA’s report, please click here.

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