With investors unsure about the cost of carbon and the least-cost alternatives, experts say Australia could end up with costly energy solutions.
Difficulty in getting approval for new projects and increased regulatory uncertainty has led to a number of companies cancelling their investments in Europe to the point where €2 trillion ($A3.7 trillion) will need to be spent over the next 25 years to rectify the situation.
Johannes Teyssen, chief operating officer at E.ON, Germany's biggest energy group, said the number of reasons for the cancellations included the European Commission's plans to make companies pay for all pollution permits from 2013, huge delays in approving planning applications and confusion among national regulators.
“We see now every week a new investment project being cancelled across the EU,” said Teyssen, the vice-chairman of the World Energy Council Europe.
Origin Energy spokesman Tony Wood believes Europe is the architect of its own downfall and Australia needs to learn from their mistakes.
Most of the pain being felt by European businesses was due to the abundance of free permits handed out during the first stage of the EU's emissions trading scheme, Wood said. Australia should take lessons from the European experience to avoid such pain once a scheme was brought in.
“Australia's design people are talking about aims to avoid what happened in Europe so that the majority of permits are auctioned and the only circumstances where permits are allocated free would be where companies get compensation for disproportionate loss.”
Antony Cohen, head of KPMG's Power and Utilities group and a designer of the National Electricity Market, said Australia's scheme needed to be developed quickly but with precision.
“Good market design creating the right incentives is likely to result in us getting emissions reductions more cost effectively than we expect today,” he said.
“There is quite a degree of uncertainty as to how the emissions trading scheme will apply to the electricity sector.
“With that uncertainty there is a risk of delay of constructions in power stations or construction of more expensive types of capacity than we ought to have.”
Federal Climate Change Minister Penny Wong said last week details of the emissions trading system, including legislation, would be completed by the end of the year.