Emissions pricing, ‘complementary policies’ and ‘direct action’ in the Australian electricity supply sector: ‘lock-in’ and investment

In Australia, carbon emissions pricing is politically contentious. The current Labor government has implemented such a scheme, but the Liberal National Party (LNP) opposition has pledged to repeal the scheme should it be elected. This article accepts the well-established position of emissions pricing as the core and least-cost approach to reducing greenhouse gas emissions. Its main focus is on examining and rebutting some recent LNP arguments to the contrary, notably in regard to the electricity sector under Australian conditions. In so doing, the article considers the problem of ‘locked-in’ carbon-intensive generating capacity, as highlighted by the IEA. As such, it focusses on use of price signals to reduce carbon intensity of electricity generation and also examines the role of passed-on price in encouraging end-use savings of electricity, including more energy-efficient end-use. Both of these mechanisms can be reinforced by well-designed ‘complementary policies’. These two examples of the price mechanism’s effectiveness demonstrate longer run impacts of prices and price expectations on investment decisions. This emphasis is appropriate given the context of catastrophic climate change as a long run phenomenon, albeit one also requiring urgent mitigating action in the shorter run.

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Working or Discussion Paper
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JEL Codes:
D62; D81; E27; H23; L71; L94; P46; Q41; Q42; Q54; Q58

 Record created 2017-04-01, last modified 2020-10-28

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