Methodological and Ideological OptionsComing Out Clean: Australian Carbon Pricing and Clean Technology Adoption☆
Introduction
Carbon pricing is considered one effective way of emissions reduction. However, the real impact of such scheme has to be measured in its capacity to expedite the adoption of newer and cleaner technologies. The economy thus thrives while containing its emissions. Alternatively, firms can simply reduce business activity to cut emissions. Such strategy adversely affects the economy. Moreover, it is reversible and as soon as the regulations are loosened or repealed, the economy can potentially revert to its pre-regulation level of emissions.
In this paper, I explore the technological impact of carbon pricing schemes using the Australian experience as a case study. For this study, I benefit from a database of energy and emissions reports of firms and their facilities in Australia. The rate of improvement in emissions technology of each facility is measured by a Malmquist index. Using this index, I examine whether the carbon pricing led to an acceleration in the adoption of cleaner technology.
The scheme was rather short-lived and ran from July 2012 to July 2014, when it was repealed by the succeeding administration. The rather short period of enforcement provides a unique window to observe how firms react to the introduction and then to the repeal of a carbon pricing scheme. In viewing both responses, one can better associate the findings with carbon pricing rather than with other causes such as changing energy prices.
I find that the rate of technological progress increases in the run up to the carbon pricing and during its enforcement. Most of the increase in technological uptake, however, is due to laggard facilities catching up with the front runners. Front-running facilities also increase their progress to some extent. Some facilities also opted for more efficient scale sizes. All these effects slow down after the carbon pricing is repealed. The pattern suggests that the acceleration in efficiency growth is very much tied to the carbon pricing.
I also consider another often overlooked strategy. Firms with multiple facilities can improve a few facilities and reallocate business operation towards them. However, if practiced in the absence of any investment and only as a temporary measure, reallocation does not help efficiency growth in the long term. This is especially true in case firms expected the carbon pricing to be repealed soon.
I introduce an index of resource reallocation to investigate. I find that resource reallocation was practically non-existent before the carbon pricing. During the carbon pricing, reallocating of resources takes place but mostly within firms in the Electricity, Gas & Utilities sector. Further investigation reveals that reallocation of resources is mostly happening where the firm has facilities that are close to the technological frontier. Where facilities are lagging in technology and merely catching up, there is not much resource reallocation.
In summary, the carbon pricing in Australia has led laggard facilities to take various forms of actions. Front-running facilities do not exhibit qualitatively different behaviors with or without the carbon pricing. These findings could help future policies to target emissions reduction more effectively but at lower costs to the economy by providing more customized incentives to different groups of firms.
The remainder of the paper is composed as follows: In the next section, I provide some background for the Australian carbon pricing scheme and emissions reduction schemes in other countries. In Section 3, I describe the source of data and show a few trends. Section 4 covers the adaptation of the data envelopment analysis for the application. The main results are reported in Sections 5 and 6. The paper is concluded in Section 7.
Section snippets
Background
On September 13, 2011 the Australian government introduced the Clean Energy Future Plan (Clean Energy Bill, 2011) that was enacted on November 18, 2011 (Clean Energy Act, 2011). The legislation was the culmination of a political battle that began with the 2007 election campaign, in which both major political parties committed in one way or the other to an emissions reduction scheme in line with Australia's commitment under the Kyoto protocol. The legislation came into force on July 1, 2012
Data
The source of data for this study is the National Greenhouse and Emissions Reporting Scheme (NGERS). This reporting scheme came into effect in 2008 in part to fulfill Australia's international obligations (see NGER Act, 2007, for details). It has also served as a platform for designing policies targeting emissions and energy consumption.
Firms whose annual energy consumption, energy production, or emissions are above a set threshold are obligated to report into the NGERS. At the start of the
Methodology
The efficiency of emissions technology is modeled in the context of a production function with energy consumption as input leading to emissions as output. The two scopes of energy and emissions can be inter-connected as industrial machinery and installations generally rely on both fuel and electricity. Improvement in fuel efficiency, thus, could affect electricity efficiency and vice versa. For this reason, I formulate the production function as follows:
Technology Adoption
Did the introduction of the carbon pricing scheme accelerate the uptake of newer and cleaner technologies? If affirmative, did most industries act in the same way or the reaction was confined to only a few? The Malmquist index has the ability to address each of these questions.
Consider a facility in period t versus the same facility in period t + 1. Over this transition, a facility can come closer to the new technological frontier or catch-up with the frontier. During the same transition, the
Reallocation of Resources
Another strategy to reduce emissions is to reallocate operations from the less efficient to more efficient facilities within a firm. This strategy only works for multi-facility firms. If practiced in conjunction with technology investment, it can accelerate the pace of efficiency growth. If the firm is already running old and improved new facilities at the same time, resource reallocation can also be a quicker and cheaper alternative to technology investment (conditional on the efficient
Conclusion
The period from 2012 to 2014, which coincides with the introduction and the enforcement of the Australian carbon pricing scheme, has been the time of upheaval among the firms and facilities across Australia. During this period, firms responded by accelerating their uptake of newer and cleaner technologies. Either as a permanent or temporary measure, firms in Electricity, Gas, & Utilities also moved towards scale sizes associated with more efficient operation and reallocated operation towards
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Disclaimer: Views expressed in this paper are those of the author and not necessarily those of the Department of Industry, Innovation and Science or the Australian government. Use of any results from this paper should clearly attribute the work to the author and not to the department or the government.
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Author Contacts — Address: Department of Industry, Innovation and Science, GPO Box 9839, Canberra ACT 2601, Australia.