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Do the math, Tony

August 2nd, 2010

Unimpressed as I am by Labor Julia Gillard’s Prime Ministership, they (and she) remain far preferable to the alternative. For an illustration of what’s on offer, let’s look at Tony Abbott’s claim (repated on quite a number of occasions) that a $40/tonne carbon tax will double the price of electricity. For coal-fired electricity, CO2 emissions are around 1 tonne/MWh for black coal (a tonne of coal generates about 2.5 tonnes of CO2, and also about 2.5 MWh of electricity), and a little more for brown coal. So, a $40/tonne tax implies an additional cost of 4c/kwh. Electricity prices vary a lot, but currently the standard retail rate in Queensland is around 20c/kWh, so the price increase would be around 20 per cent for households. Businesses that use large amounts of electricity pay lower prices and would therefore face a higher price increase, but since the generator cost of electricity is typically more than $40/MWh, no one paying a market-determined price would face a doubling[1].

What’s really striking about this is that it occurs in a context where Laurie Oakes is questioning Abbott about his credibility. The next question, referring to previous inconsistencies is “But, isn’t it important if you become Prime Minister, that Australians can believe what their Prime Minister says?”. Oakes is pretty good on who said what and when, but he lacks the basic arithmetic skills and policy background to call Abbott out on an obvious lie. And if Oakes doesn’t think it’s important to understand basic facts about the policy issues, you can bet the same is true of the rest of the Canberra Press Gallery, who hang on his every word.

fn1. Probably there are some aluminium smelters on cosy deals from the 1980s and 1990s paying prices below generator cost, but the odds are they would have tobe compensated in any case, whether or not this is justified economically or socially.

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  1. Alice
    August 3rd, 2010 at 20:07 | #1

    @Jim Rose
    JR – the Americans are absolute heathens when it comes to good grammar.

  2. Alice
    August 3rd, 2010 at 20:10 | #2

    SJ – I cant get over AmericaniZations in spelling and grammar. I was taught properly english grammar and I know friends in academia who have to alter their english grammar to “appeal” to US journals. Whatever it takes (a lot of Zs instead of Ss). It still jars with me and my third grade english teacher….

  3. Jim Rose
    August 3rd, 2010 at 22:01 | #3

    @Alice
    the problem with math and maths was with pronunciation

    I also had to use the American pronunciation of Krugman before he recongised the name.

  4. robert (not from UK)
    August 3rd, 2010 at 23:33 | #4

    Although I guess it’s really only a minor inconvenience, it does irk me every time I type an E-mail and use a spelling such as “honour” or “behaviour”, because my E-mail provider (Yahoo) insists on trying to turn such spellings into US English. If any reader of this website knows of a method for preventing such a problem, I’d be happy to hear about it. Oh yes, and it’s interesting that there has been a dispute here over “maths” versus “math”, because the former spelling is another source of E-mail trouble.

  5. TerjeP (say tay-a)
    August 3rd, 2010 at 23:55 | #5

    I blog a lot on the iPhone and it is endlessly trying to convert everything to American. They already got their way with the billion but they want more. I fear for the future of the kilogram.

  6. Kevin Cox
    August 4th, 2010 at 04:25 | #6

    The objective of putting a price on carbon is to encourage investment in renewables.

    4 cents extra per kwh is not enough to encourage investment in renewables under typical investment models. Most organisations want at least a ROI of 20% to justify new risky investments. At $6,000 per continuous kw – which is about the cost of electricity at the factory gate for mass scale renewables – the price of electricity has to increase by at least 8 cents per kwh at the factory gate. The current price of electricity at a power plant in NSW is 6 cents per kwh. Maybe what Abbott was trying to say was that the price of electricity would have to double to encourage investment in renewables.

    Putting a price on carbon is not going to get the investment needed. A simpler approach more certain approach, is to reduce the cost of investment through interest free loans repaid over the life of the asset. With this sort of financing almost all renewables are immediately profitable and almost risk free.

    Depending on a price on carbon makes for a risky investment because it depends on the price being maintained for the life of the asset. Interest free loans can be written so that the interest free charge stays for the duration of the loan and so the ROI can be much lower than 20% and still be attractive to investors.

    What we need is a modern day Denison Miller (the first governor of the CBA) to become the governor of the Reserve Bank and to create the low (zero) interest credit to fund the investment. This will remove the need to increase the price of energy.

  7. Dave McRae
    August 4th, 2010 at 10:26 | #7

    Love your work JQ – but I suspect Abbott may be even worse than what you say – and your calcs may be slightly exaggerated

    a $40 per tonne of Carbon is about $11 per tonne of CO2
    (40/3.66 where 3.66=(12+16+16)/12 )

    So it may be closer to 1c/kWh for the $40tC

    (I could be really wrong – it’s been a long time – I think I may have to take my shoes off to check :p — I’ll be back)

  8. jquiggin
    August 4th, 2010 at 12:33 | #8

    @Dave McRae
    I’m pretty sure the price is meant to be per tonne of CO2 – for someone who doesn’t know the difference between wholesale and retail, a couple of extra oxygen atoms are neither here nor there.

  9. Hermit
    August 4th, 2010 at 15:19 | #9

    Remember that wind and solar will get two bites at the cherry, a carbon price and ongoing per-unit subsidies. Residential PV currently gets feed-in tariffs around 60c per kwh in some States (not mine) while commercial wind and solar can sell Renewable Energy Certificates currently worth $40-50 per Mwh or 4-5c per kwh. By 2020 some 45 million RECs were to have been purchased annually but I believe a new plan will split renewables into large and small categories with different arrangements.

    On top of that renewable demonstration plants get capital assistance and it seems in future they may also get loan guarantees. Another low carbon form of generation has been criticised for getting loan guarantees but that privilege is no longer unique. That industry also maintains a fund to manage its own waste unlike the 200 million tonnes of CO2 that Australian coal and gas fired power stations add to the atmosphere each year. Times that by four when Australian coal and gas is burned by overseas customers.

    The obvious question is why don’t all forms of low carbon generation get the same subsidies? That is feed-in tariffs, RECs and capital grants on top of any carbon price. Hydro doesn’t need it since it can do well on the spot market if dams are full. Perhaps someone can explain why wind and solar get VIP treatment.

  10. August 4th, 2010 at 15:40 | #10

    Dave,
    PrQ is correct. The most used measure is per tonne of carbon dioxide equivalent where all emitted gasses are given a measure which equates their global warming potential (GWP) to CO2. Methane, for example, has a GWP of around 70.
    .
    Incidentally – This could mean Abbott is correct, depending on whether the calculation PrQ is using is based purely on the CO2 emitted or on all gasses emitted. I don’t know and haven’t the time to do this.

  11. Chris Warren
    August 4th, 2010 at 17:23 | #11

    @Kevin Cox

    Why not both – interest free loans for socially useful, taxes or charges for the socially damaging?

    If current polluting investment is getting ROI of 20%, (and I see no risk that equates to this) then there is scope for a tax/levy.

    The fact that present damaging production is making profits creates a resistance to change so we cannot just expect renewables to overtake fossil fuel producers. For example BP (a fossil fuel producer) has purchased many of the solar technology patents and is sitting on them or letting them play in the market (eg BPSolar) but at prices that protect the role of fossil fuels.

    As I see it economics cannot solve the real problem.

  12. Donald Oats
    August 4th, 2010 at 22:16 | #12

    The price increases due to an operating CPRS would hopefully be small, but persistent and possible to compensate for by increasing efficiency with respect to energy use, electricity in particular. It is not rare for a business to pare off say 3% from the costs of manufacturing, for example, and to devote significant effort to the goal. A persistent and growing cost will definitely get the attention of businesses.
    As an interesting example of what may be achieved with a bit of elbow grease and brains (of course this is a media release because in the modern world scientists and politicians alike get spin-doctored to death :-) ) Really though, it underscores the point that improved use of energy is feasible even for less obvious businesses, prunes for example.

  13. TerjeP
    August 5th, 2010 at 01:08 | #13

    Chris – rather than a cocktail of policies I’d like to see proponents on a price on carbon stay true to their message about it being the most efficient means to achieve transition to lower emissions by dumping all the bells and whistles that are less than efficient. If you want more incentives just have a higher price.

  14. Kevin Cox
    August 5th, 2010 at 06:17 | #14

    @Chris Warren
    You are right Chris. We can do both and to make the system ‘compound’ we should insist that the money raised from the charges be invested in ways to reduce the damage caused by burning fossil fuel.

  15. TerjeP
    August 5th, 2010 at 08:55 | #15

    Does invest mean subsidies? Why would you take an efficient method of lowering emissions, a carbon tax, and bolt on an inefficient method?

  16. August 5th, 2010 at 17:26 | #16

    @Kevin Cox
    “The objective of putting a price on carbon is to encourage investment in renewables.”

    Interesting, I thought the objective of a price on carbon was to reduce greenhouse gas emissions. Just like investing in renewables reduces greenhouse gas emissions.

    The distinction is important because there are activities that would be driven by a carbon price, that reduce greenhouse gas emissions, but not necessarily involving renewables. These could include investments that increase energy efficiency, or shifts in consumption from lamb and beef to other foods.

    Whether there is investment in renewables depends on the expected carbon price over the investment period. So if the carbon price starts at $40, but is expected to increase in real terms by 4% per year, renewables are more likely to be an attractive option.

  17. Mug Punter
    August 6th, 2010 at 22:57 | #17

    Laurie Oaks and lots of the MSM are just gossip columnists …. content free. We deserve better.

  18. Chris Warren
    August 7th, 2010 at 02:27 | #18

    TerjeP :Does invest mean subsidies? Why would you take an efficient method of lowering emissions, a carbon tax, and bolt on an inefficient method?

    The “inefficient” is an economics-based tag. It is not “inefficient” when judged by the longer-term requirements of humanity.

    Those who wave the economic efficency flag, usually destroy society for some to benefit others.

    I suppose if we can subsidise the military and parliaments – surely subsidising ecolological security should not be too difficult.

  19. Tony G
    August 7th, 2010 at 07:29 | #19

    Peter Woods @ 16

    “The objective of putting a price on carbon is to encourage investment in renewables.”

    Interesting, I thought the objective of a price on carbon was to reduce greenhouse gas emissions. Just like investing in renewables reduces greenhouse gas emissions.

    The distinction is important ”

    It is debatable whether a price on carbon will reduce emissions, but it will not necessarily encourage investment in renewables. Any increase in energy costs will have a corresponding reduction in the standard of living, as the funds at the disposal of the individual would be reduced.

  20. August 15th, 2010 at 18:15 | #20

    We have to recognise the (fossil fuel) path dependencies we’ve created. And that the point of any form of carbon pricing is to put fossil fuel/ energy intensive organisations out of business. Maybe there are a few lessons to be learnt from Germany – going from opposing the EU ETS to becoming one of the leading exporters of wind technology and know how.

    It is sober to still observe that in Australia most of the debate – if not all – is about who should bear the economic cost of putting a price on carbon, rather than tackling climate change and making that long overdue shift towards a low(er) emissions economy.

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