The Coalition’s case against a carbon price on the grounds that it will harm consumers through electricity price increases has been methodically attacked by infrastructure expert Rod Sims in a presentation to the Government’s Carbon Price Committee.
Sims is head of the NSW Independent Pricing and Regulatory Tribunal and a Howard Government appointee to the National Competition Council, and his presentation was made public, along with those of Ross Garnaut and Will Steffen, yesterday.
The Opposition, via Tony Abbott and Greg Hunt, have consistently warned that a carbon price would harm households via a rise in electricity prices, albeit without noting that households under Labor’s abandoned CPRS would have been fully compensated for price rises, and that direct action incentive schemes would be more effective.
Energy sector stakeholders such as the Energy Supply Association has repeatedly pointed out that the lack of a carbon price is delaying major investment and driving up electricity prices now. ESA chief executive Brad Page has complained of a “race to the bottom” in which consumers are mislead “that you can deal with climate change at no cost.”
Sims’s presentation noted that electricity prices had risen by about 30% in real terms over the last 4 years, although this has only brought prices back to where they were, adjusted for inflation, in 1985. Price rises had been driven by the need to accommodate surging demand and the cost of replacing assets, but four factors would drive large price rises in the future in the absence of a carbon price:
- continuing infrastructure costs;
- rising prices for coal and gas;
- the unwillingness of the market to invest in new coal-fired power plants, coupled with reluctance to invest in gas-fired base-load plants without a carbon price, and
- high-cost non-market greenhouse abatement schemes.
Sims particularly criticised current approaches to costing the impact of a carbon price. “The CPRS was estimated to increase wholesale electricity costs by 60% by 2015; meaning, all else equal, that retail electricity prices would rise by 24%.”
However, “traditionally modelled results are based on comparing Australia with and without a carbon price but this comparison is no longer correct.” In fact, they “overstate the effect” of a carbon price. Sims called for more accurate modelling to reflect the high cost of, particularly, solar power under current direct action programs (this week’s paper on the cost of the Federal Government’s solar PV rebate program by Andrew Macintosh and Deb Wilkinson, which showed that the long-running program had spent between $250 and $300 per tonne of abated emissions, again demonstrated how costly direct action programs could be).
Hunt rushed out a press release this morning, cherry picking the 24% figure but not acknowledging that Sims had referred to it to say it was no longer correct. “Julia Gillard’s top advisers are telling her that her plans for a carbon price will force householders and businesses to pay another 24% for their power in three short years,” said Hunt.
Hunt’s quotation of Sims appears to have deliberately omitted his reference to the CPRS (which the Government shelved in May), replacing it with “the Government’s carbon price plans”, when the entire point of the committee is to develop a carbon price plan.
Sims concluded “the introduction of a carbon price will allow the currently lowest cost measures to be chosen while technological change drives the best longer term solutions.”
Hunt rejected any misrepresentation. “It is clear that there will be a 24% rise in electricity costs as a result of the Government’s plans on top of every other impact,” he told Crikey. “This is in line with IPART’s determination in March and at odds with Julia Gillard’s claims that there would be no electricity price rise as a result of a carbon price.”
However, invited to provide a quote where the Prime Minister had said there would not be a price impact of a carbon price, Hunt’s office couldn’t provide one by deadline.
Sims, said Hunt “hadn’t defined what he meant by a carbon price” and should examine the NSW Government’s GGAS scheme, which obtained low-cost carbon abatement (the Government has claimed that the GGAS scheme funds abatement activities that would have taken place anyway, and that the real cost of the scheme is around $40 a tonne of emissions).
More important is Sims’s conclusion not just that a carbon price would allow lowest cost measures to be chosen, but that it needs to be a substitute for current high-priced greenhouse schemes. This is broadly in line with Ross Garnaut’s conclusion that an ETS should be the primary carbon abatement tool and that others were unnecessary if an effective ETS was operating.
Since the abandonment of the CPRS, the Government has embraced direct action programs like cash-for-clunkers and promised regulation to prevent emissions-intensive coal-fired power stations and the Opposition has based its entire climate change strategy on “direct action” of buying abatement. Sims also suggests that a carbon price be introduced in a way that takes into account the other factors driving electricity prices up.
Hasn’t anyone noticed how much coal we export (25% now, approaching 1/3 of our export income in the near future?) and how much we import from (coal loving) China and everywhere else where cheap costs mean low environmental standards? If the costs of our (remaining) industry goes up, then wouldn’t that just go overseas too? For this reason the whole thing seems a bit pointless and possibly even dangerous if it drives up our net emissions and because of the smug factor, means consumers become more complacent and do even less. It just seems like a massive exercise in self gratification without seriously considering anything that can really make a difference, like nuclear power, and ‘equalising tariffs’ on non-complying nations so that our and other exports from ‘complying’ nations can fairly compete. None of this has ever been discussed and I doubt I am the only person to ask these questions, possibly explaining part of the last election result.
Minimising electricity prices should not be the policy objective. Some programs funded by budget measures may be more expensive to the economy than technology-neutral measures such as the RET, but will shift costs from electricity consumers to the taxpayer. The cost to the economy arises from investments in low-emission measures, not from electricity prices themselves. Trying to artificially constrain electricity prices will increase the cost of emission reductions.
Policy-makers should not try to control the price of electricity, but they should take into account the price of electricity and other goods on the income of low-income households. They should not do this by altering the tax and transfer system, and by providing to households some sort of dividend that depends on the carbon price.
The key policy objective should be to do what we can to reduce global emissions – to provide a public good. As Steffen has demonstrated, this requires that we be close to zero emissions by 2050. Policies that drive down technology costs have an important role in achieving this. But this means that policies that encourage renewable energy should be designed in order to drive down these costs. This means more public support for RD&D, and it also means that we should create the right investment environment for emerging low-emission technologies.
The lesson from the CPRS is that it is by no means guaranteed that we will have a carbon price soon. And it is likely to be a long time before the carbon price is anywhere near the marginal damages from greenhouse gas emissions. There is no need to put the cart before the horse on this issue.
“This is broadly in line with Ross Garnaut’s conclusion that an ETS should be the primary carbon abatement tool and that others were unnecessary if an effective ETS was operating.”
Yes yes yes! The other carbon abatement schemes are more or less wasteful. Not to say that the technologies they promote are not worth promoting; but in the presence of a carbon price the market would drive them.
I can, however, think of three exceptions.
I think there should be a moratorium on new coal-fired electric power stations.
I also believe it makes sense to bribe the owners of the heaviest-polluting coal-fired power stations to get out of the business as early as possible: a shutdown bonus.
And I think research funding for clean energy innovation and seed funding for large-scale demonstration power plants using emerging technology (eg. solar thermal and hot-rock geothermal) should be increased, without any regard for the cost of the abatement achieved by such nascent industries since it is obviously going to be higher than that achievable by a commercial industry that has already matured such as wind or gas-fired power.
@cosmicharade:
“If the costs of our (remaining) industry goes up, then wouldn’t that just go overseas too?”
If the costs to “our” industry aren’t somehow aligned with the environmental damage externality then there’s reduced incentive for Australian industry to develop high-tech, environmentally-friendly solutions. We’ll be reduced to buying them in from overseas when some forward-thinking organisation develops them.
If Australia was a company and you were the CEO, you’d want to maximise output from existing business lines – but only as long as that didn’t cannibalize future growth plans. Our existing business lines are 20th-century industry, manufacturing and farming. Yes, they’ll keep earning income for a while, but our future growth isn’t going to come from them. Our future growth will come from 21st-century innovation, much of which will cater to the growing market for resource-efficient, carbon-neutral, environmentally-friendly solutions to old problems.
So let’s not be stupid and waste too much time trying to protect old industry. Let’s do our best to prioritise innovation and invention. A carbon price is one step towards that.
Political humbug and rentseeking on all sides combined with egotistic quasi-religious sentimentality is unbecoming the clever country. We are far ahead of intelligent Americans in embracing nonsense. And it is nonsense for Australia to be “doing something about climate change”. We can’t. And if we have to fulfill obligations to others whether legal or humanitarian money should be our contribution because it doesnt make sense for one of the most efficient producers of electricity in the world not to contribute that to the global economy. As it is we are demonstrating Gadarene stupidity by driving up electricity prices with futile and counterproductive solar voltaic and windfarm direct and indirect subsidies.
That said, we should have a modest carbon tax which, even if some short cuts have to be taken in applying it, impinges equally on imported and local products according to their actual or deemed CO2 emission quotient. Such a tax would be a de facto modest increase in GST which the states couldn’t get their hands on (and shouldn’t while their tax structures are so defective). It would contribute to sensible reform of income tax if vote seeking pols didn’t find ways of wasting it.