Carbon price won't work on its own: report

15 Jul 2012, 6:01 pm   -   Source: AAP

The Grattan Institute believes the carbon price is "inherently uncertain" because it isn't fixed and relies on the decisions of governments.

The federal government should combat continuing uncertainty over its carbon price by locking in 20-year contracts for the provision of low-emissions electricity, a Melbourne-based think tank says.

The Grattan Institute believes Labor's pollution price is "inherently uncertain" because it relies on the decisions of governments. The coalition, for instance, has vowed to axe the carbon tax.

In its latest report, Building the Bridge, the institute also argues technologies that could generate large amounts of clean energy are still expensive and high-risk.

"For both these reasons investment in low-emission technologies is, and will remain, critically inadequate," the report states.

"Governments must address these market failures beyond putting a price on carbon."

The think tank says if Australia is to reduce emissions by 80 per cent by 2050 the government should enter long-term contracts with developers to buy electricity "at a price that makes low-emissions technology viable".

The report suggests developers of low-emissions electricity bid for contracts at auctions to be held every six months over the next 10 years.

"Developers can invest knowing the contracts will be honoured irrespective of government policy on the carbon price," it states.

Winning developers would be paid a guaranteed carbon price and a premium above the average wholesale market price.

Initially the focus would be on solar photovoltaic (PV), solar thermal, wind power and carbon capture and storage.

The institute estimates over its 30-year life span the scheme would cost $4 billion and produce five per cent of Australia's electricity.

Report author Tony Wood says over time the government would put more money into technologies whose costs were coming down fast "and less on the ones which are falling behind".

"You are using the market information about what's actually happening to help determine how much support goes where," Mr Wood told AAP.

"So ultimately if there is a winner it's backed but in the meantime options are kept open."

To ensure companies meet their end of the bargain they'd be required to pay a "project bond".

Agreement for project finance would also be required at the time of bidding, "meaning that bankers will perform the necessary due diligence" rather than the government.

Mr Wood said the coalition's direct action policy effectively created a "shadow carbon price" so the institute's scheme would still work if Tony Abbott became prime minister.

The report examines other approaches that have been used to drive deployment of low-emissions technology but finds them wanting.

The Renewable Energy Target hasn't driven diversity or price reduction, Mr Wood said.

Feed-in tariffs are "too expensive" partly because governments attempt to set the price.

Capital grants schemes have been riddled with problems mainly because it takes too long to negotiate the contracts.

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