Get a group of renewable energy folk in a room and they are likely to agree on one thing – the need for a price on 'carbon'.

The concept of a price on carbon comes in various forms – ETS, CPRS, or phrases like 'carbon tax' and its variants.

What is it? It is, in effect, a levy that will be placed on electricity generating plants that emit carbon during production operations. These additional costs would provide an economic dis-incentive for the building of new coal-fired power stations and is expected to cause owners of existing stations to exit the market.

As a rough guide, a carbon price could add three or more cents per kWh to the output cost of running a brown coal plant. However, if supply is constrained, it is likely that these costs will be passed on through the supply chain, ultimately, to the customer and potentially cost an even higher amount for consumers, allowing for profit margins.

But whether or not a carbon price mechanism is legislated in Australia is still in the lap of the political gods.

We have tried this before.

One of the emissions generated by humans much closer to home for many of us is, well, cigarette smoke.

Over the years we have increased taxes on cigarettes to significant levels – presumably to either cause manufacturers to withdraw from the market or deter cigarette purchase and use.  Regardless, the additional taxes have been passed on to the customer.

Despite these economic signals to smokers, not a day goes by, for me, where I am not the recipient of the by-product of a smoker's pleasure.

Even with many years of increasing taxes and extensive advertising campaigns on the dangers of smoking, emissions from smokers are still prevalent in our everyday lives. Sadly, this includes smoking around young children.

Where we have achieved significant success on smoking is through a lot of "direct action".  By banning smoking in offices, planes, restaurants and now bars and gaming venues, the non-smokers of the world have gained some refuge from this habit that does widespread collateral damage. Now even sporting stadiums are, mercifully, smoke free.

Did the "smoker's tax" achieve these changes? No. Smokers will always find a way to smoke wherever if allowed. Increased taxes alone would not have brought about these changes.  Instead, we improved the environment, health and life enjoyment of millions of non-smokers by doing one basic thing – forcing smokers to “butt out”.

What we didn’t do was to say to the venues – “hey, you can still continue to allow smoking but you will need to pay a ‘smoke tax’”. If we did, many venues would have preferred to pay the tax than take the perceived risk of the change. Rather, we mandated the cessation of smoking at a then future date to allow venue operators to prepare for the change. That worked.

After an initial change-over period, many venues operated at even higher patronage levels following the smoking bans – as the vast non-smoker population came forward to enjoy the new, clean environment that previously they could not stand before.

So, back to those other emitters – coal plants – and the hope that a carbon price will make it less attractive to run high emitting plants by increasing costs and creating uncertainty on future costs.

This cost (and inevitable price increase) should, in turn, help close the gap between the prices required by renewable generators, such as wind and solar, and current prices in the wholesale generation market. The closer, and smaller this gap becomes, the more likely it will become attractive for investors to deploy more renewable energy power stations – hence the renewable industries' strong push for a carbon price.

But, like cigarette buyers, the electricity customers will likely end up footing the bill for the additional costs that are levied as a result of a carbon price, removing the “pain” from the supply side. Further, there is no guarantee that the revenue raised by implementing a carbon price will be used directly to help facilitate new investment in clean and renewable energy plants.

This price levy on emitting generators could be paid for many years before there is any meaningful change in the generation mix that would reduce emissions.  

And, like our experience with smoking, there is no guarantee that the smoking chimneys of coal plants will be shut down as a result, particularly when one considers the expected growth in demand. Part of the problem is we need those plants to keep working to keep our lights on, so while we may not like to see these emissions happening, we continue to grow our reliance on the very stuff that these plants produce.

So, given the uncertainties on whether or not there will be a carbon price, what form it will take and its effectiveness, we need to consider a Plan B if we are serious about change.

A Plan B that includes methods and actions to responsibly shut down the worst emitters and replace them with clean and/or renewable plants should work.

This plan can be funded by a simple levy across the board – collected by the electricity retailers – where that levy fund is used to facilitate the closing of current plants and attract required investment in new power stations. A levy in the order of one to two cents/kWh of electricity consumed would create a significant fund to assist with orderly decommissioning of existing emitters and facilitating new investment in clean/renewable energy plants and may cost consumers less than a carbon tax might.

There are many lessons we can learn from curbing the emitting of cigarette smoke as we tackle the carbon emissions of our electricity generation portfolio. Perhaps the most important is that, while price signals may curb activity, the only real way to get the desired result is to turn something completely off. In the case of power generation, we need not only to turn things off, we also need to turn new, appropriate power plants “on”.

Andrew Dyer, a former McKinsey & Co consultant, has worked extensively in the energy and utilities industries in Europe, the US, Asia and Australia.  He is now a Company Director.