The power industry has been grappling with regulatory uncertainty in relation to carbon since late 2004 when Australian state governments committed to the introduction of an emissions trading scheme. This article estimates the additional cost to electricity users associated with the sub‐optimal introduction of new power generating capacity given regulatory delays. We find the costs to be significant; under a business‐as‐usual electricity demand growth scenario, prices in 2020 would be about $8.60/MWh higher than necessary. We also find that costs to consumers are lower where complementary policies are introduced to encourage energy efficiency and renewable energy.

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With the ongoing development of Australian anthropogenic climate change mitigation policies, there has been a steady increase in modeling studies undertaken to estimate Australian carbon prices and their impact on existing electricity markets. This article summarises some of the more prominent studies completed by many of Australia's foremost economic modelling firms. We developed a simple approach for testing the consistency of these studies and their findings in relation to carbon pass-through. Unfortunately, we have established that the studies are entirely inconsistent in their estimation of carbon pass-through. Furthermore, we were unable to establish why the estimation of carbon pass-through varies so significantly. This has important implications for policy makers given much of the compensation to be paid to households and businesses under the Clean Energy Future package is predicated on simple assumptions of carbon pass-through. Based upon our analysis of these economic studies, our conclusion is that Australian policy makers are best guided by relying upon the numerous a posteriori estimations of pass-through in the European Union Emissions Trading Scheme (ETS) rather than Australian a priori studies.

In this brief update on analysing the economic costs associated with carbon policy uncertainty, we outline the public policy processes commenced by the Commonwealth Government following the publication of Nelson et al. (2010). We also summarise the research completed by other economists testing the hypothesis that there are material economic costs associated with ongoing carbon policy uncertainty. Independent studies by Frontier Economics (2010), Deloitte (2011) and Sinclair Knight Merz (2011) all conclude that climate change policy uncertainty will result in sub‐optimal capital investment within the electricity sector. In turn, this sub‐optimal investment will manifest itself in unnecessary increases in electricity prices.