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Abstract
Australia’s carbon price has been in operation for two years. The electricity sector
accounts for the majority of emissions covered under the scheme. This paper examines
the impact of the carbon price on the electricity sector between 1 July 2012 and 30 June
2014, focusing on the National Electricity Market (NEM). Over this period, electricity
demand in the NEM declined by 3.8 per cent, the emissions intensity of electricity supply
by 4.6 per cent, and overall emissions by 8.2 per cent, compared to the two-year period
before the carbon price. We detail observable changes in power demand and supply mix,
and estimate the quantitative effect of the effect of the carbon price. We estimate that the
carbon price led to an average 10 per cent increase in nominal retail household electricity
prices, an average 15 per cent increase in industrial electricity prices and a 59 per cent
increase in wholesale (spot) electricity prices. It is likely that in response, households,
businesses and the industrial sector reduced their electricity use. We estimate the
demand reduction attributable to the carbon price at 2.5 to 4.2 TWh per year, about 1.3 to
2.3 per cent of total electricity demand in the NEM. The carbon price markedly changed
relative costs between different types of power plants. Emissions-intensive brown coal
and black coal generators reduced output and 4GW of emissions-intensive generation
capacity was taken offline. We estimate that these shifts in the supply mix resulted in a 16
to 28kg CO2/MWh reduction in the emissions intensity of power supply in the NEM, a
reduction between 1.8 and 3.3 per cent. The combined impact attributable to the carbon
price is estimated as a reduction of between 5 and 8 million tonnes of CO2 emissions (3.2
to 5 per cent) in 2012/13 and between 6 and 9 million tonnes (3.5 to 5.6 per cent) in
2013/14, and between 11 and 17 million tonnes cumulatively. There are fundamental
difficulties in attributing observed changes in demand and supply to specific causes,
especially over the short term, and in this light we use conservative parameters in the
estimation of the effect of the carbon price. We conclude that the carbon price has worked
as expected in terms of its short-term impacts. However, its effect on investment in power
generation assets has probably been limited, because of policy uncertainty about the
continuation of the carbon pricing mechanism. For emissions pricing to have its full effect,
a stable, long-term policy framework is needed.