To Price or to Subsidise? Guiding climate-friendly financial flows.
The best response to the flight of clean energy finance from Australia is a climate dividend to Aussie households
Investment for clean energy projects in Australia appears to be drying up. A big battery in Melbourne worth $400m was the only project to reach financial close in the first quarter of 2023. This is worrying.
One major reason may be the Biden administration's Inflation Reduction Act (IRA) which is attracting big flows of global capital for clean energy in the US. The EU has responded with its own package to attract or retain capital in Europe.
Other factors include constraints on connecting to the grid, supply chain and workforce shortages and difficulties in planning and approvals. And the phasing out of the Renewable Energy Target (RET) by 2030 may also be reducing certainty for investors and causing global capital to flow elsewhere.
Suddenly Australia is no longer competitive despite being one of the best countries in the world to generate renewable power. It would appear that the reformed Safeguard mechanism is not sufficient to keep investment flowing. As a limited form of carbon pricing it only gives a weak price signal to potential investors. At CCL we have welcomed the safeguard reforms while expressing our concern that they are nowhere near enough and need to be complemented by a broader and more direct price, upstream in the carbon chain, i.e. close to the source of production or importation.
Another major issue is that clean energy is having to compete with heavily subsidised fossil fuels. For as long as fossil fuels are artificially cheap and abundant, they will remain attractive to consumers and therefore to investors.
The effects of the IRA and the EU's response demonstrates that subsidies can have perverse effects and unintended consequences. In this case, the IRA is creating competition between nations who would prefer to be cooperating to address global warming. It puts the US, EU and other nations in competition for the global capital needed for decarbonisation.
The inability of successive US administrations to price carbon has forced the US government to spend large amounts of public money to incentivise investment in clean energy. This adds further to the implicit subsidies that flow to fossil fuels when their negative externalities are not included in their price, or are not subject to a carbon price. It forces governments to pay much of the cost of decarbonising the economy and enables fossil fuels to continue planning for increased production, despite the many calls for no new facilities from the UN’s IPCC and the IEA. And taxpayers are in effect subsidising both carbon pollution and decarbonisation at the same time; clearly an irrational situation, even if there was no climate and ecological crisis. The looming climate crisis makes the perversity of the subsidies truly perverse if they lead to catastrophic climate collapse.
These expensive, perverse and wasteful subsidies would not be needed if the carbon content of fossil fuels was priced at source - the mine, well or port. Pricing carbon in this way….
internalises the external (social) costs of carbon, thus phasing out the implicit subsidy they receive by being allowed to pollute for free
makes clean energy more competitive without public subsidy.
In this way an effective carbon price removes two competing subsidies that work against each other and waste large amounts of public funds that could be spent constructively elsewhere.
In addition to these big savings, the carbon price gives a clear incentive for investors to divert funds from fossil fuels to clean energy, without government subsidy. If the price is set to rise predictably each year then investors have even more certainty that clean energy is the future and funds can flow more easily. And if the revenue returns a regular dividend to households, the pricing policy will protect low-income households and be able to withstand populist attacks, as it has in Canada, giving even more certainty to investors.
Whilst taxes, fees and levies can also have unintended consequences, the predictably-rising price in CCL's climate dividends policy is more likely to produce positive outcomes and will undoubtedly get Australia and the world to zero emissions more quickly and with more certainty. Australia’s best response to the IRA and the flight of capital would be to adopt climate dividends, after the next election at the latest.
