The Carbon Price: The Tim Tams are safe; not sure about hyperbole

By Greg Jericho

So word leaked out this morning that the Carbon Price was going to not wreak the  expected havoc on the price of consumer goods. It was reported that the price of Tim Tams would increase by $0.012. This I guess means my masterful plan to stock up on chocolate biscuits and reap the windfall gains once the world comes to an end with the institution of a carbon price was rather misplaced.

Oh well, no less stupid than suggesting the mining industry is fighting for its survival, I guess. But let us not be side-tracked, when Julia Gillard came out at noon and announced the carbon price, it was a significant moment.

One of the criticisms of the Rudd Government was that is didn’t make the tough decisions; didn’t do anything unpopular. Putting a price on carbon is definitely in the tough decision pile, and quite snuggly fits in the “unpopular” drawer as well. Deciding something which heretofore had been free will now have a price is not something that happens everyday.

The whole policy can be read here (56 pages – have fun). The Treasury modelling is here (even more fun).

To say that it is pretty complex is to take a big drink out of the understatement bottle. So let’s have a quick squiz at a few things:

First the Government has come up with a bit of a video on how the carbon price works. I quite like it:

http://www.youtube.com/watch?v=fQd_DlkdQ1w

It’s simple yes, but not demeaning, and not boring like the bloke with the power point trying to explain the Resources Super Profit Tax (RSPT). Do not underestimate how few people understand how a carbon price works. I would bet a majority think it is like a Goods & Services Tax (GST) or is something we need to account for in our incomes tax returns. So explaining how it works is item number one for the Government. Now to the announcement:

The introduction of a broad based carbon price in Australia, commencing from 1 July 2012 with a fixed price period and transitioning to a fully flexible cap-and-trade carbon pricing mechanism on 1 July 2015.

  • The fixed price will commence at $23 per tonne of CO2-e;
  • Coverage of the scheme will include stationary energy, most business transport emissions, industrial processes, non-legacy waste, and fugitive emissions, with direct liability under the mechanism limited to large emitters;

The price was not a shock – it had been leaked on Thursday. The general reaction seems to be – yeah that’s lower than we’d like, but higher than we’d hate. The Treasury modelling gives a nice graph on where it sits visa vis the European carbon price: image

So it’s pretty comparable. What does it mean for prices?

image

So not a big hit to prices; a lot less than the GST – but remember as well the GST was accompanied with much bigger compensations and tax cuts. But the difference of course is the GST was meant to do that, the carbon price is supposed to be felt – Abbott is exactly right when he says that. When it goes to the flexible ETS in 2015, the rules are thus:

Pollution caps:

  • Five years of pollution caps will be announced in advance and extended each year to maintain a minimum five year period of caps at any given time. Price cap: – A price cap will operate in the first three years of the flexible price period. The price cap will be set at $20 above the expected international price in 2015/16 (as set in regulations no later than 13 months before the end of the fixed price period) and will rise by five per cent in real terms each year. – A review of the role of the price cap will occur after the first three years of the flexible price period.

Price floor:

  • A price floor of $15, rising by four per cent in real terms each year, will operate for the first three years of the flexible price mechanism.
  • A review of the role of the price floor will occur after the first three years of the flexible price period.

So a minimum of $15, and a maximum of $20 above whatever is the international price. What else was there?

  • International linking will be allowed in the flexible price scheme;
  • Kyoto compliant credits from the Carbon Farming Initiative will be able to be used for compliance.
  • The establishment of a new more ambitious 2050 target for emissions reductions which will be set at 80 per cent below 2000 levels.
  • The establishment of a new independent Authority – the Climate Change Authority – which will provide advice to the Government on progress towards meeting announced targets;
  • make recommendations on pollution caps, voluntary action, trajectories, long term emissions budgets and mechanism design issues;
  • conduct regular reviews on the carbon price mechanism, NGER reporting, the Renewable Energy Target and other matters upon request.

The Climate Change Authority (CAA) is interesting – it will be headed by former Reserve Bank head Bernie Fraser, and will advise the Government on the carbon pricing mechanism – including future pollution caps, which will in effect help determine the carbon price under the flexible pricing system – because it will determine how many permits are in the market. The CCA will also work with the Productivity Commission on issues such as assistance to polluters. The Productivity Commission report will be looking at such matters as: “Industry sectors where there is strong evidence of windfall gains as a result of the assistance.” Of which you can bet there will be many, given emissions-intensive trade-exposed are getting free permits covering 94.5 per cent of their activities affected by the carbon price. (This point alone pretty well renders Abbott’s suggestions that the mining industry is fighting for its survival and that Whyalla will be wiped off the map are complete bulldust) But enough of this; let’s get down to a couple things – what will it do to emissions:

image

As you can see a big swag of the reductions in carbon emission come from overseas. Abbott will be onto this, suggesting it is a waste of tax payers money (and also trying to suggest his own policy would not require such abatement if it was to get to 5 per cent reduction). What it also shows is that in terms of domestic levels only we are not going back to the stone age. Two per cent by 2050 sounds like nothing, but bear in mind the population will grow to an expected 35 million by then, so we’ll have an extra 13 million people generating 2 per cent less emissions. What it also shows is just how damn hard it is to reduce carbon emissions. And given no one – not even those economists who do not like the carbon tax – thinks a direct action policy such as suggested by Tony Abbott will reduce emissions more efficiently, it gives an indicator of the job ahead of Abbott – especially if he wants to tell us it can be done without abatements sourced from overseas. To believe Abbott is right is like suggesting price increases of cigarettes has been less effective at reducing smoking than warnings on packets. Sure warnings and nicotine patches (essentially direct action measures) are great, but if smokes still cost $4 a packet, a hell of a lot more of us would still be smoking. What the ALP will focus on is the reduction compared to what would have happened had there been no carbon price. In her speech announcing the policy, Julia Gillard said:

“By 2020 our carbon price will take 160 million tonnes of pollution out of the atmosphere every year.

That’s the equivalent of taking forty five million cars off the road”.

That’s a good figure to spout. It makes sense to put things in a form people can grasp. 160 tonnes of carbon sounds a lot, but is it – you feel like you need to know a climate scientist to ask to find out? 45 million cars on the other is a lot and you don’t need to be a bloke in a scientific white coat to grasp it (you just need to ignore that the main driver of car use, petrol, is excluded from the carbon price!). But what will it do to the economy – especially electricity generation. This graph is pretty instructive: image

Notice the green column next to “brown coal”? Err no? That’s because it ain’t there. By 2050 it is planned that no brown coal fired power stations will be operating. Black coal ones also take a big hit. They are replaced by a huge boost in renewable. This policy is hoping to change the economy. As the Treasury modelling states:

“Over time, the electricity sector will move away from coal-fired generation to renewables, with renewable energy growing from 10 to 40 per cent of the generation mix by 2050, and conventional coal-fired generation falling from 70 to below 10 per cent of the generation mix by 2050″.

The key is that “over time” bit. The statement also contains:

“Once commercially viable, carbon capture and storage (CCS) technology will deliver significant emission reductions, comprising almost 30 per cent of generation by 2050″.

Which is ummm… optimistic. It ends with:

“Of course, the exact mix of generation will depend heavily on a range of uncertain factors, including the cost of new technology and the price of energy commodities like gas”.

In other words, we hope it’ll get there, but geez, we’re talking 2050.

 

 

This is a shortened version of an original post at Greg’s ‘Grog’s Gamut’, which includes number crunching on Australia’s tax system and what this will mean in terms of compensation for individuals and families. 

Greg is a guy interested in sport, literature and politics. He is currently working in the Office for the Arts of the Department of the Prime Minister and Cabinet. The views expressed are his and his alone and in no way reflect the views of the Government nor any Department, nor do they in anyway reflect the work undertaken by Greg in his capacity as an employee of the Australian Public Service. You can contact him at ggamut[AT]live.com.au 

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