The Australian Industry Group and other industry organisations are arguing that Australia shouldn’t have a renewable energy target because emissions trading will bring about reductions at “least cost”. They argue that because the amount of emissions is set by the emissions trading cap, policies that encourage the deployment of renewables will not reduce emissions further, and will increase the cost of emissions reductions. It is true that in a traditional emissions trading scheme there will not be a reduction in total emissions, because the cap has already been set. However, if there was a price floor (which could be maintained by having an additional carbon tax), this is no longer a problem, provided the floor (tax) is sufficiently high.

There is a flaw in their argument which relates to how much we value the future (discount rates). The costs of renewable energy depend on the initial investment cost (high compared to other energy sources) and the ongoing costs (extremely low). Firms will discount the future more than an ethical approach to climate change will discount the future. This means that firms are likely to invest more in emissions reductions that are cheaper now but not necessarily cheaper over the long term. This is a market failure, which can be addressed by policies that encourage the deployment of renewable technologies, such as mandatory renewable energy targets and feed in tariffs.