Auction of subsidies on GHG emissions reduction

Last week we learned the outcome of the first round of ‘auction’ for the funds that the government pays to entities that commit to reducing GHG emissions.
Firstly, let me say that the use of the term ‘auction’ here is slightly misleading. We are talking about a reverse auction, where the entities do not bid to pay for something (as is usual in auctions), but rather put bids for the payment that they require to do something: in this case, to reduce or to avoid GHG emissions. One should make no mistake that we are still talking about subsides: the taxpayers are paying the emitters to reduce their emissions, even though the term ‘auction’ is used.
Secondly, the only price information that was made publicly available is that the average price of the accepted bids was some $14/tonne of CO2 equivalent. The government seems to be overly happy with this result, making a point that this price of $14/tonne is much lower than what would have the marginal tax rate been, had we continued with the Carbon Pricing Mechanism. However, this comparison is meaningless, as we are talking about two different instruments, as well as different quantities of emission reductions. In addition, the $14/tonne on average sends a signal that the actual cost of abatement in Australia is not particularly low, especially when taking into account that most of the projects that participated in the ‘auction’ are supposed to be low-abatement cost projects.
Thirdly, it is instructive to look into the list of the winning bids.There is a clear dominance of native forest protection projects, and perhaps more worrying, a dominance of few companies that have won contracts. While forestry carbon sequestration projects are potentially useful (even though one has to ask what would have happened to these forests had there not been for the subsidy: would they have all been cut down!?), the ability to actually measure and verify the extent of sequestration is limited. In other words, the uncertainty about actual emission reduction is very high for this type of projects, compared for instance, to emission reductions in electricity generation (which were dominant under the Carbon tax) that can be measured very precisely in real time.
So overall, I am much less enthusiastic about this result than the government is. We have just spent more than $660 million of our taxpayers’ money that are very scarce at the moment as per government’s own admission, on subsidising, what appear to be, special interests!

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.