Energy and climate change

Cadence staff have been at the forefront of providing policy advice in the area of energy and climate change for decades. We have worked effectively with governments at all levels providing a range of policy advice as well as being an independent voice for our clients in this complex area of policy development.

On many occasions this advice has been based on applied economic modelling, either computable general equilibrium (CGE) modelling, electricity market modelling, other partial modelling, or a combination of these.

Issues in energy markets

Energy markets are in a constant state of change and have undergone significant reform over past decades and experience changes in conditions. The staff at Cadence have been involved in analysing the impacts of energy market reform dating back to the Parer Review in 2002.

More recently, much of the focus of has been around gas markets and in that context our staff have been involved in assessing the economic impacts of higher gas prices on manufacturing output at the national and state level for the Australian Industry Group as well as a specific analysis of this issue in relation to the New South Wales economy for the NSW Treasury.

Our staff have provided an account of the economic impact of the large-scale gas investments in Western Australia, Queensland and the Northern Territory to demonstrate how the sectors footprint will grow in the future as well as assessing the potential impacts of domestic gas reservation on the Australian economy for Australian Petroleum Production & Exploration Association (APPEA). Related to the gas supply issue, we also assessed the potential benefits of gas market reforms on the Western Australian economy for the Fortescue Metals Group (FMG).

Policy analysis

Climate change policy is a vexed issues for governments at all levels. The challenge of dealing domestically with a global issue, balancing cost and competitiveness issues has been problematic since Australia first participated in the Villach Conference in 1985.

Cadence staff have been actively involved in analysing various elements of climate change policy since 1990. More recently, our staff undertook a CGE modelling exercise to analyse the economic costs of various timing issues related to international greenhouse gas commitments, specifically comparing the effects of the 'early action' versus a 'soft start' for the Australian Industry Greenhouse Network (AIGN).

In the lead up to the Copenhagen Conference, our staff undertook two pieces of analysis for the AIGN around the issues of 'comparable effort' in the context of Australia's position. The first report was based on a desktop study that highlighted various indicators relevant to effectively compare individual economies' commitments such as:

  • efforts relative to existing commitments
  • per capita emissions reductions
  • efforts relative to business-as-usual emissions
  • national economic costs.

The second report estimated considered a more comprehensive measure of effort defined as the economic welfare impacts of various national allocations. Based on global economic modelling, we were able to demonstrate that by considering economic welfare as the measure of 'comparable effort', either both the USA and the EU would need to take on significantly greater commitments than they had, or that Australia should take on a significantly less challenging commitment than what was being considered at the time.

Some other examples of our work include:

  • Analysis of design issues in relation to an international climate change agreement in the context of the then Clean Energy Future (CEF) considering proposed allowances affecting the availability of international trading of emissions permits. Our analysis considered how so-called Default Pollution Caps built into the CEF framework would affect Australia's abatement task to and the economic costs of abatement for the Business Council of Australia (BCA).
  • In the discussion around the then Carbon Pollution Reduction Scheme (CPRS), we undertook modelling of the relative impacts of a consumption-based approached to carbon tax for the Committee for Economic Development of Australia (CEDA).

Economy-wide impacts of climate change policy

Cadence staff have been engaged in large-scale modelling of climate change policy since 1990. Since the Kyoto agreement we have been engaged by various governments and private sector clients to provide independent modelling of the economic impacts of climate change policy.

Our economy-wide modelling has been used to demonstrate the economic (and budgetary) impacts of adopting emission abatement targets for a number of state governments and for the Council of Australian Federation. This includes several exercises for the Queensland Treasury and considering both the CPRS and CEF, including detailed analysis of the impacts on profitability of Queensland Government-owned electricity generators and, for the then Department of State Development, considering demand side energy efficiency responses. These projects involved numerous scenarios with regard to the operation of an emissions trading scheme including different coverage scenarios, permit price scenarios, international responses and treatment of trade exposed, emission intensive sectors

Similar work has been undertaken for the Victorian government where we advised on a range of likely greenhouse gas emission abatement policies to assist with the Victorian Department of Premier and Cabinet (DPC) to reduce greenhouse gas emissions, assisting in the development of their Climate Change White Paper.

Our staff we engaged in producing a comprehensive analysis of the impacts of the CPRS and the Renewable Energy Target (RET) on the Australian economy for the Energy Users Association of Australia (EUAA). The innovation in this analysis was our ability to combine economic modelling of carbon pricing with direct action (through linking our CGE modelling to detailed electricity modelling). This approach was replicated by Cadence staff in recently contributing to the RET Review in work commissioned by the Australian Chamber of Commerce and Industry (ACCI).

For private sector clients and industry associations, we have considered the detailed sectoral impacts of carbon pricing on steel making, gas production, coal mining, the aluminium value chain and petroleum refining.

Evaluation of direct action policies

In addition to carbon pricing, our staff have considered a wide range of other direct action approaches to climate change such as the renewable energy target, energy efficiency policies and international emissions trading.

One form of this analysis has been producing Regulatory Impact Statements (RIS). For example, our staff prepared an assessment of the costs and benefits of the Federal Government's commitment to extend the Energy Efficiency Opportunities (EEO) program to cover electricity generators. We provided a modelling framework to assess the impact to electricity generators under a range of assumptions including implementation profiles, carbon prices, inclusion or exclusion of renewable generators, thermal and auxiliary energy efficiency improvements and capital costs.

We undertook modelling to support the development of an energy efficiency strategy for the NSW Department of the Environment and Climate Change (DECC), based on cost-benefit analyses of a potential NSW energy efficiency target and a potential NSW energy efficiency trading scheme and an analysis of deferred electricity generation impacts. We also provided an estimation of the electricity market impacts of carbon pricing and, combined with cost/payback curves for energy efficiency improvements in the commercial, residential and industrial sectors, modelled impacts of carbon pricing and energy efficiency policies.