More on Abbott and carbon taxes
My column in today’s Fin (over the fold) is an expansion of my recent post on Abbott’s bogus claim that a $40 carbon tax would double the price of electricity
Column for Thursday 5 August 2010
It’s often said that a country gets the government, and the media, it deserves. Looking at the current election offerings of the major parties, and the coverage presented by the media, it’s hard to see what we could have done to deserve this. The parties have offered gimmicks like cash for clunkers and unverifiable immigration targets. The media have eagerly focused on leaks and manufactured scandals, with no attempt to inform us about the choices before us.
A striking example is the free pass that has been given to Tony Abbott on his repeated claim that a $40/tonne tax on carbon would ‘double the price of electricity, on top of recent 35 per cent increases’. Five minutes with a calculator and a recent electricity bill would have shown any reporter who bothered to check that this claim is nonsense.
For coal-fired electricity, CO2 emissions are around 1 tonne/MWh for black coal), and a little more for brown coal. So, a $40/tonne tax implies an additional cost of 4-5c/kwh. Electricity prices vary a lot, but retail prices are typically around 20c kWh. So the price increase would be around 20-25 per cent for households. This simple estimate, a quarter of Abbott’s claim, is consistent with published Treasury modelling.
But this absurd error is only the beginning as regards Abbott’s claim. No one is actually proposing a $40/tonne carbon tax in the current campaign. The Greens are the only ones to name a specific figure, and they’ve suggested an interim price of $23/tonne. Labor will certainly go no higher. So, a more realistic estimate of the impact of a carbon price would be an increase of around 2c/kWh or about 10 per cent. Abbott is out by a factor of 10.
More importantly, the 4-5c kWH cost calculation assumes that coal-fired generation is the marginal technology that determines prices. But, with a carbon price of $40/tonne, gas-fired power plants would be the cheapest source of electricity, followed by wind turbines. And, by the time a price of $40/t is actually reached, solar and nuclear power could also be competitive, as could carbon capture and storage for coal-fired plants.
Given the eagerness with which interviewers seek to trip politicians up on questions like the price of bread and milk, it ought to have been easy catch Abbott out. Yet in his recent interview with Abbott, largely focused on questions of Abbott’s credibility on climate policy, Laurie Oakes let this claim go through to the keeper.
At least this is an error of omission. Abbott’s spurious claim has been pushed hard by some media commentators, including Terry McCrann of the Sun-Herald who claimed recently that ‘if you were paying $1000 a year for electricity it would become $2000’.
How could Abbott (and McCrann) make such a basic error? The answer, it appears, is a confusion between the wholesale price of electricity and the retail price, which includes transmission and distribution costs and a retail margin. Traditionally, the wholesale price has been about 40 per cent of the retail cost, but, as Abbott himself has noted, regulated prices for distribution have risen sharply in the last few years, so the ratio of wholesale to retail prices has fallen.
This is not a trivial error. The only real issue in this election is that of a carbon price. Abbott has rejected market-based policies on the basis that theyw ill cause massive increases in electricity price. He argues that government can identify, and fund, opportunities for ‘direct action’ to reduce carbon emissions at a lower cost.
If Abbott’s estimate of the impact of a carbon tax were correct, this claim would have some credibility. The estimate is wrong, and his policy is a shambles. Such a disastrous miscalculation on a central policy issue ought to disqualify him from the Prime Ministership.
But one of this seems to matter. Julia Gillard is unwilling to fight and has passed the issue off to a randomly selected focus group. The media are focused, as usual, on personalities and scandals.
But climate change is not going away. We will have to deal with the problem sooner or later, and we will pay a high price for the decades of delay in getting started. Whatever our faults, Australia don’t deserve the weak leadership we are getting on this issue, or the distorted media priorities that let it happen.
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.