THE advocates of renewable energy would have you believe that they have discovered the economic equivalent of the fountain of youth. According to them, we can adopt more expensive ways of doing things, yet that will lead to cheaper prices.
That renewable energy is more expensive than fossil fuels should not be in dispute. If renewables were cheaper, they would not need the billions of dollars in subsidies they receive every year courtesy of taxpayers.
The most recent example of magic pudding economic modelling was released by the Climate Institute yesterday and purports to show that subsidising renewable energy will in fact reduce energy prices. The report concedes, at least in its graphs, that abolishing the renewable energy target will reduce power prices.
The Climate Institute claims that after a few years of falling prices, they will increase. This primarily occurs because the modelling assumes that renewable energy will get cheaper through learning by doing. Thanks to this miraculously rapid learning, it is assumed that subsidies to renewables will drop from more than $70 per megawatt hour in 2020 to just over $10 by 2030. The modelling refers to “international studies” to support this assumption without referencing any. So much for peer review.
Windmills have been around for centuries and despite massive investment from countries such as Denmark, they are still not economically viable without subsidies. But if the RET is about to solve the problem of affordable energy, why stop there?
For instance, Australia has long had a problem producing cheap and competitive cars but we have the solution. All we need is a domestic automobile target. The DAT will mandate that, say, 20 per cent of our cars should be produced domestically. Domestic manufacturers will receive domestic automobile certificates for every car they produce. Importers of cars will have to buy these DACs. We know this will work because it is a market-based solution. Just like the RET, it should magically reduce the price of cars for Australian consumers.
In reality, such a scheme would be nothing but a fancy form of tariff. Those who argued for tariffs argued that Australian industry needed protection when it was young, but one day it would grow up and would become cheaper and more competitive. Advocates of renewables use a version of this discredited infant industry argument today.
The models used to support this just confirm the old joke: ask an economist what two plus two equals and he will respond: “How much would you like it to equal?”
Some who can’t bear to defend wealthy companies asking for taxpayer handouts say the RET is cheap. It is true that credible economic modelling shows the RET probably costs consumers about $50 a year. Is that cheap?
Last week, the nation was gripped by the spectacle of a “regressive” fuel tax that would cost the average consumer $20 a year. The same people who pillory the Treasurer for indexing fuel excise argue for a RET more than twice as costly. At least fuel excise will help build roads, whereas the RET doesn’t make electricity more reliable or powerful, it just makes pensioners and the poor go without heating or airconditioning to subsidise the lucky few with the resources to invest in the latest fad: renewables.
The RET is an extremely expensive form of emission reductions, between double and six times the cost of the carbon tax.
And it doesn’t stop there. The big losers from the RET are those industries that use lots of energy, such as aluminium and fertiliser producers. Some economic modelling finds that the RET will lead to 5000 fewer jobs.
There are few supporters left of high car or other tariffs. The biggest protection racket left is renewable energy.
The final argument used to stop protection from being removed is that it introduces sovereign risk and would be unfair to those who have invested in an industry based on government policy. Even some who want to remove renewable subsidies argue that we should grandfather existing investments.
There is merit in this but it cuts both ways. When the 20 per cent RET was introduced five years ago it effectively devalued billions of dollars worth of coal and gas assets. Some estimates say the RET will transfer more than $5 billion from fossil fuel to renewable assets in the next 15 years. Such an expropriation also represents sovereign risk. It is fine to talk about grandfathering renewables but we should also great-grandfather those who invested in coal, gas or aluminium before there was a prospect of a RET.
As an economically damaging protectionist policy, the RET should be removed. The adjustment should be done over time and the costs should be shared between fossil fuel, energy-intensive and renewable sectors alike.
This article was originally published in The Australian on 19 August 2014. The original article is available here.