Grattan Institute's latest report, Building the bridge: a practical plan for a low-cost, low-emissions energy future, seeks to address a fundamental problem in current climate change policy.
Australia has only four decades to transform its electricity sector from one dominated by coal and gas towards one producing near zero greenhouse gas emissions. The new carbon price is vital to achieving this transition, but for it to happen quickly and at lowest cost, government must take another essential step.
At present no low-emissions technologies can produce power at the speed and scale Australia needs. Even with a carbon price, potential developers of low-emissions technologies are reluctant to invest on the scale required to significantly reduce emissions. The costs and risks are too high, the potential returns too low.
On top of that, developers require a long-term, reliable and rising carbon price to underpin their investments and make their low-emissions technologies competitive with traditional sources of electricity. But the carbon price is dependent on government decisions, and therefore unreliable.
Grattan's report presents a solution designed expressly to address this difficult problem. It proposes that government enter into long-term contracts with project developers to buy electricity at a price that makes low-emission projects viable. In other words, it would give low-emissions technology developers the certainty they need to invest.
Government would award the contracts through a series of six-monthly auctions, held over 10 years. Developers bid to provide low-emissions electricity and the lowest bids succeed. The scheme could produce about 5 per cent of Australia's power – not a large amount but enough to get low-emissions electricity projects started at the lowest price.
The experience project developers gain through building projects will enable them to cross the bridge to commercial viability – to learn by doing. At this point government can withdraw support.
Grattan's proposal has a cost but if we do nothing, the cost will be much higher as the emissions reduction task gets harder in years to come. Far better to free up constrained investment and innovation now, and put Australia on the most efficient path to a low-emissions future.