The new boss of the Australian Energy Market Commission has described an emissions intensity scheme, currently ruled out by the Turnbull government, as the most effective policy for cutting greenhouse gas emissions.
Anne Pearson, who became chief executive of the rule-making body in February, also said uncertainty about climate change policy beyond 2020 was chilling investment and contradicted the argument than an EIS was less desirable in a market with sky-high gas prices.
A hearing of the parliamentary inquiry into modernising the electricity grid was told that the AEMC's EIS recommendation last year was based on a range of scenarios.
"And the reason we came to the conclusion that an emissions intensity scheme was the best way forward and the best, the most appropriate mechanism was because it was the one that worked the best against high gas prices, low gas prices, high demand, low demand or a range of those variables," Ms Pearson said.
"It was recommended on the basis of when you look at different variables, which of the mechanisms copes and has the best price outcomes and stability outcomes over time. The other thing we were looking at were the implications for system security, for keeping the lights on as well."
An emissions intensity scheme would impose limits on how much a power station can freely emit. Cleaner generators that emit less than the limit earn credits, and sell them to high-emitting generators above the baseline.
The AEMC's modelling found it would be more cost-effective than alternatives including the renewable energy target and direct government intervention to phase out coal-fired power.
Late last year, after saying all options were on the table in a review of Australia's future energy sources, Energy and Environment Minister Josh Frydenberg quickly ruled out an EIS following a backbench revolt.
The review, led by chief scientist Alan Finkel, will inform how Australia reaches its post-2020 targets, which seek to cut emissions by 26 to 28 per cent based on 2005 levels. The report will be delivered to a Council of Australian Governments meeting in early June.
On Friday, AEMC officials said investors were seeking certainty from Australia amid rapid change in global energy technology.
"The view of the commission is the market is in transition, a market that's in transition needs investment certainty, investment certainty will not come until there is some certainty in emissions reductions policies," Ms Pearson said.
AEMC senior director Richard Owens said that, for investors across different energy sectors: "it's very hard to know whether you will be able to make money because a key determinant of that is not just the wholesale market price but what do you think will happen with carbon policy heading out beyond 2020 and businesses seem to be delaying those decisions until they get more certainty".
Energy and Environment Minister Josh Frydenberg told Fairfax Media on Friday: "As the government has made clear in the past it will not be adopting an Emissions Intensity Scheme."
Mr Frydenberg said the government is "committed to ensuring affordable electricity while maintaining the stability of the grid as we transition to a lower emissions future."
