The Carbon Tax

Gillard Government Ministers are about to mingle with the people and explain to us why the carbon tax is such a good thing. I’m not expecting one in our street today, but when he or she comes I’ll engage him or her in a discussion of my new energy bill. Our energy supplier sent us an educative message telling us that on average our gas bill in the new financial year will be on average 11.5 per cent higher, and our electricity bill 17.7 per cent higher. In the same mail I received a nice letter from my pension fund telling me that my pension will go up by 0.1 per cent in the next financial year. Great news: that’s about $2 a week, and of course it will all go to offset the new energy prices.

How is the 17.7 per cent increase made up? Well, there are pluses and minuses. The cost in generating power is going down slightly, as is the cost to us of subsidising people who have put solar cells on their roofs. But the carbon tax is causing 14.2 per cent of the increase. There’s been no sign that the ACCC is going to crack down on our supplier for having the temerity to tell us of the components of the increase, unlike what has happened to Brumby bakeries. So there it is: heating and lighting our house will cost us a whole lot more, without any compensation that I am aware of.

So I’ll ask the Minister who calls what we are getting for this whopping increase from one year to the next — which of course, as good-hearted Australians, we will cheerfully bear. I have some responses ready. If he tells me that Australia is leading the world in this endeavour I will reply that this is not the Olympics, or a race, or a popularity contest. Why are we doing it?

If he says that it will help to reduce greenhouse gas emissions I will ask by how much. The figures I have seen suggest it will not be of any consequence whatever, in the short run or the long run. A few new Chinese power stations coming on line burning our coal will overshadow our reductions in a week or two. In any case, it is not clear — still — that greenhouse gas emissions are a bad thing, or even that they have caused a measured amount of whatever warming has occurred over the past fifty years.

If there is a moment of silence from the Minister I will ask him something like this: Isn’t it the case that the carbon tax was the essential component of the deal that Julia Gillard struck with Bob Brown to ensure that her Government would be supported by the Greens? No one has said this exactly, yet it appears to be the case. After all, she had said firmly that there would be no carbon tax introduced by her Government, and then finally introduced one. Yes, I know that she could argue that the election results changed everything, but it was a firm statement, and the rejoicing by the Greens after the events suggests at least to me that it was the cornerstone of the deal.

I don’t expect that the Minister would agree with me. He will probably say that to argue this way is to bring politics into it, whereas what the Government is doing is preserving the world for my grandchildren. He will then leave quickly, and I will shake my head.

What a truly silly thing this carbon tax is! It can have no discernible effect on carbon dioxide in the atmosphere, and it is going to materially increase domestic costs everywhere. I think that the Ministers are going to be on a hiding to nothing.

Join the discussion 3 Comments

  • Peter Lang says:

    The carbon tax will cost $10 for every projected $1 of savings. However, the projected savings will never be achieved and the costs will be far higher than expected.

  • Peter Lang says:

    Australia is planning to spend $10 dollars for every $1 of benefit it hopes to derive – provided the assumptions about the consequences of AGW are correct. This suggests that our climate policies are flawed and need major change.

    The assumptions are academic but totally impracticable to achieve in the real world. Here are some of the assumptions:

    • Negligible leakage (of emissions between countries)

    • All emission sources are included (all countries and all emissions in each country)

    • Negligible compliance cost

    • Negligible fraud

    • An optimal carbon price

    • The whole world implements the optimal carbon price in unison

    • The whole world acts in unison to increase the optimal carbon price periodically

    • The whole world continues to maintain the carbon price at the optimal level for all of this century (and thereafter).

    If these assumptions are not met, the net benefits estimated will not be achieved. As Nordhaus says, p198 :

    Moreover, the results here incorporate an estimate of the importance of participation for economic efficiency. Complete participation is important because the cost function for abatement appears to be highly convex. We preliminarily estimate that a participation rate of 50 percent instead of 100 percent will impose a cost penalty on abatement of 250 percent.

    In other words, if only 50% of emissions are captured in the carbon pricing scheme, the cost penalty for the participants would be 250%. The 50% participation could be achieved by, for example, 100% of countries participating in the scheme but only 50% of the emissions in total from within the countries are caught, or 50% of countries participate and 100% of the emissions within those countries are caught in the scheme (i.e. taxed or traded).

    Given the above, we can see that the assumptions are theoretical and totally impracticable. To recognize this, try to imagine how we could capture 100% of emissions from 100% of emitters in Australia (every cow, sheep, goat) in the CO2 pricing scheme, let alone expecting the same to be done across the whole world; e.g. China, India, Eretria, Ethiopia, Mogadishu and Somalia.

    So, what will be the cost of complying with the requirements when they are fully implemented to the standard that will eventually be required?

    The Australian carbon tax and ETS will cost $10 for every $1 of projected savings. But the savings will not be achieved, because they depend on all the assumptions being achieved, and clearly they will not be. Furthermore, the costs can be expected to be much higher than is being admitted so far. Read more here:

  • Tim Curtin says:

    the price elasticity is such that a 10% increase in the price of electricity produces only a 1% reduction in demand, while a 10% increase in total income arising from the compensation scheme, raises demand by 8%, the net effect is an increase in demand for electricity of 7%.

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