Physical Insights

An independent scientist’s observations on society, technology, energy, science and the environment. “Modern science has been a voyage into the unknown, with a lesson in humility waiting at every stop. Many passengers would rather have stayed home.” – Carl Sagan

Carbon Emissions Reduction Scheme: The Green Paper (Part 1)

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An extract from the green paper:

The key supply-side factor to consider is the relative emissions intensity of different production processes. If all entities in an industry use similar technology, they will all face a similar increase in costs under the scheme and entities will be able to pass these costs through to consumers to the extent allowed by their price elasticity of demand.

However, if an entity is significantly more emissions-intensive than others that sell the same product, it will not be able to increase its prices without fear that its lower emissions competitors will undercut them.

Competitors for such emissions-intensive entities are not limited to existing producers, but include potential new entrants that can use less emissions-intensive technologies.

Demand for electricity is relatively inelastic. This is important, because it indicates that, absent particular supply side issues, the industry as a whole may be able to pass a large share of its carbon costs to consumers.

Some generators may be constrained in their ability to pass on carbon costs to consumers. Different technologies are used to generate electricity in Australia, and they vary significantly in emissions intensity. Highly emissions-intensive coal-fired generators compete with lower emissions (but still emissions-intensive) gas-fired generators, and with zero emissions electricity sources such as wind or hydro generation.

In the context of the competitive structure of Australia’s major electricity markets, this variability might prevent coal-fired electricity generators, in particular, from passing on a significant portion of their carbon costs, reducing their profitability.

The profitability of emissions-intensive generators could be reduced in two ways.

First, generators could lose market share to generators with lower emissions intensity.
A reduction in volume is particularly significant for coal-fired generators, because they need to sell significant quantities of electricity to cover their high fixed capital and maintenance costs.

Second, competition with less emissions-intensive generators could reduce the margins earned on electricity sold by more emissions-intensive generators.

I can’t help but think they’ve overlooked something here. Here’s a bit of a tip for the federal government: emissions-intensive generators losing market share to generators with lower emissions intensity results in a reduction of the GHG emissions intensity of the market.

We can’t have that now, can we?

Written by Luke Weston

July 17, 2008 at 7:23 pm

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