Policy Options to Reduce Electricity Greenhouse Gas Emissions

• Published date: 01 December 2018
• Date: 01 December 2018
• Author: John Freebairn
• DOI: http://doi.org/10.1111/1467-8462.12278

Policy Options to Reduce Electricity Greenhouse Gas Emissions

John Freebairn*

Abstract

The design and effects of different schemes to

reduce greenhouse gas emissions associated

with the production and consumption of

electricity are modelled. The tax scheme

achieves the lowest cost per unit emission

reduction because it encourages both busi-

nesses and consumers to reduce emissions, and

the recycled windfall revenue can meet equity

objectives. Comparing the Emissions Intensity

Scheme (EIS), Clean Energy Target (CET) and

Renewable Energy Target (RET) schemes with

common government revenue neutral and

emissions reduction design outcomes, the EIS

provides better incentives to generators to f‌ind

the lower cost per unit emissions reduction.

1. Introduction

Many government interventions have been

proposed, and some implemented, to reduce

greenhouse gas emissions in the production

and consumption of electricity as a component

of climate change mitigation policy. In

Australia, interventions include regulations,

such as the Renewable Energy Target (RET),

placing a price on emissions, such as the carbon

tax and the promised emissions trading scheme

of the Gillard government (Gillard, Swan and

Combet 2011), and subsidies, such as grants to

invest in renewable energy.

Recent policy interest and debate has been

stimulated by the Finkel Review (Finkel et al.

2017). Finkel favoured an Emissions Intensity

Scheme (EIS),and discussed the more restricted

Clean Energy Target (CET) and the RET. In

effect, the three schemesinvolve a self-funding

mix of a tax on fossil fuel generators and a

subsidy to renewable energy generators. The

EIS allows for variation of pollution per unit

electricity generationacross all different gener-

ator options.By comparison, the CET, and more

so the RET, explicitly or implicitly assume a

common pollution per unit of electricity rate

across many different generators with different

actual rates of pollution.Relative to the EIS, the

resulting f‌lat tax rate across some different

generators with the CET, and even more the

RET, removes some incentives and rewards to

reduce aggregate pollution by generators at

lowest cost.

The conventional recommended economic

policy intervention to correct an external cost

market failure dating back to Pigou (1920) is to

internalise the external cost with a tax per unit

of pollution. Williams (2017) provides a recent

discussion specif‌ically for greenhouse gas

emissions, including choice of the tax base

and tax rate, decision responses and market

* Department of Economics, University of Melbourne,

Victoria 3010 Australia; email <j.freebairn@unimelb.

edu.au>. I am grateful for the comments of Ian McDonald

and two referees on an earlier draft, and accept

responsibility for this version.

The Australian Economic Review, vol. 51, no. 4, pp. 474–485 DOI: 10.1111/1467-8462.12278

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C2018 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd