Home > Economics - General > More on Abbott and carbon taxes

More on Abbott and carbon taxes

August 5th, 2010

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.

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  1. aj
    August 5th, 2010 at 10:55 | #1

    Thank you Professor Quiggin for explaining this to me. I do think that no time has been given to actually proving if Abbott or Hockey are costing their policies correctly. The media seen to be fixated on the triva and if you follow there tweets – a great deal of group think.

    This election will be determined by how much analysis the journo’s are willing to give the policies and asking questions of the policies.

  2. Fran Barlow
    August 5th, 2010 at 11:08 | #2

    As the ALP has pointed out, Abbott, inter alia took a shine to NZ’s way of doing things. Apart from missing the recession there, the Liberals also missed the fact that their conservative counterparts introduced an ETS.

  3. Uncle Milton
    August 5th, 2010 at 11:56 | #3

    John, OT but did you see that your sometime protaganist on climate change matters, Ian Castles, died earlier this week?

  4. jquiggin
    August 5th, 2010 at 12:41 | #4

    @Uncle Milton

    I did see that. Sad news. Ian made many valuable contributions before unfortunately losing the plot as regards climate change.

  5. TerjeP
    August 5th, 2010 at 14:16 | #5

    Thanks for including nuclear in the article. It is the option that should not be forgotten.

  6. August 5th, 2010 at 16:05 | #6

    I am reminded of Grog’s Gamut’s blog piece last Friday of the terrible job done by the media when covering this election campaign. The inability of the media to question Abbott’s ridiculous claim about electricity prices is a classic example of this.

  7. Chris Warren
    August 5th, 2010 at 18:17 | #7

    This is where economists always seem to lose the plot:

    solar and nuclear power could also be competitive,

    Labelling something as economically ‘competitive’ is socially misleading.

    - Unsustainable population growth makes nations competitive.

    - Unsustainable farming practices makes agriculture competitive.

    - Unsustainable forestry practices makes the timber industry competitive.

    - Unsafe work practices makes the oil industry competitive.

    - Oppressed labour makes a nation competitive.

    - A fascist state, economically, is more competitive than a democratic state.

    - Increased debt also makes a economy competitive.

    But all of these pass savage costs, and exponentially climbing risks, onto future generations.

    Precisely the same occurs with nuclear, but with city destroying accidents, and acres of high-level waste accumulating. This is something our economists typically blink-over.

  8. TerjeP
    August 5th, 2010 at 19:36 | #8

    Nuclear power has never destroyed a city and never will. The Chernobyl accident didn’t even destroy the Chernobyl power plant in which the accident occurs which operated for another 14 years after the accident. As far as global averages for power stations it didn’t even kill many people relative to it’s lifetime energy supply. Coal fired power plants cause vastly more deaths per unit of energy. Nuclear is a very safe technology. Safer than hydroelectricity. And most so called nuclear waste is an assett not a waste. It should more accurately be called partially used nuclear fuel. And even if you regard it as waste the only way to get rid of it is with a nuclear power plant.

  9. Chris Warren
    August 5th, 2010 at 19:42 | #9

    @TerjeP

    Surely that old record should stop spinning by now?

    Propaganda never replaces facts.

  10. Rationalist
    August 5th, 2010 at 20:05 | #10

    This sounds like a great big new tax.

  11. Michael of Summer Hill
    August 5th, 2010 at 21:31 | #11

    Chris Warren, leave Terje for he is trying. But IMHO I cannot see any nuclear plant operator being a contender for the NSW Green Globe Award now or in the near future.

  12. Ben H
    August 5th, 2010 at 22:01 | #12
  13. Tony G
    August 5th, 2010 at 22:34 | #13

    Lets get this straight – the Gillard and Brown clowns want to double or triple our electricity bills (AND OTHER COSTS INDIRECTLY) with a carbon TAX, to reduce our 1.5% of global CO2 by 5% or 0.075%. It is a con job by lunatics.

    Well I have a smart meter and my average cost is about 10c a kwh so that extra 5 cents is closer to a 50% increase.

    http://www.energyaustralia.com.au/State/NSW/Residential/Products-and-services/Electricity/~/media/Files/Residential/Pricing/2010/NSW_RES_PL.ashx

  14. paul of albury
    August 5th, 2010 at 23:30 | #14

    Did you read the post Tony? Only Abbot is talking about a $40 a tonne tax. The most anyone else is talking about is $23. So that extra 5c is still only in the other Tony’s imagination. And even so it would on your claims increase your bill by only 50%, not ‘double or triple’ them, and you would be hit atypically hard. You might have had some point if you stuck to the 50% claim, even though the most the Greens want is half that, but your first line exaggeration totally destroys your credibility

  15. Chris Warren
    August 6th, 2010 at 00:30 | #15

    Tony G :… clowns … con job by lunatics.

    The face at the bottom of the well is your own.

  16. August 6th, 2010 at 04:48 | #16

    I contend part of the Government failure to get the public on board last year with a carbon tax or a ETS was to property sell the idea to the public and the media. We got lost in the detail with the ETS as both Penny Wong & Kevin Rudd I think got themselves confused in the process. All it took was then a one liner from the coalition that it was a great big new tax to mask the meirt of the scheme and effectively bury it for now…

  17. TerjeP
    August 6th, 2010 at 06:20 | #17

    Chris – each of my statements about nuclear was a fact. Refute them if you can. However I know you can’t because each of them is a verifiable fact.

  18. TerjeP
    August 6th, 2010 at 06:22 | #18

    I presume that the $40 figure quoted by Tony Abbott is the price cap under the CPRS.

  19. Chris Warren
    August 6th, 2010 at 08:18 | #19

    TerjeP :Chris – each of my statements about nuclear was a fact. Refute them if you can. However I know you can’t because each of them is a verifiable fact.

    Sorry, that has all been done to death, and anyway its like discussing Auschwitz with David Irving.

    In a few years time BP will be telling us that their oil leaks did no permament harm to wildlife and killed far less than natural predators etc.

    It is all just religious, anarco-capitalist spin.

  20. jquiggin
    August 6th, 2010 at 08:44 | #20

    Please, no more derailing the thread onto nuclear power. It has, as Chris says, been done to death here.

  21. David Douglas
    August 6th, 2010 at 10:00 | #21

    “Expert rubbishes Abbott’s carbon cost claims” – report by ABC

    http://www.abc.net.au/news/stories/2010/08/05/2974949.htm

    “A doubling of that wholesale price would only add four or five cents – perhaps 20, 25 per cent – to the cost paid by retail consumers”

    Shame that the bit about the carbon price starting at only half of Abbott’s $40 / tonne figure was left out. It follows that the true measure of Abbott’s distortion does not come through in this article.

  22. James Haughton
    August 6th, 2010 at 10:57 | #22

    Any chance you could follow this up with a column about the fallacious reasoning behind the demands to put the budget in surplus? (and the ALP’s shonky claims about grocery price rises?)

  23. jquiggin
    August 6th, 2010 at 11:57 | #23

    I have one more column to come out on the Thursday before the election. My chance to swing the many undecideds who look to the Fin Op-Ed page before making up their minds!

  24. Fran Barlow
    August 6th, 2010 at 12:20 | #24

    It strikes me (and I made this point in Ben Eltham’s column over at The Drum- Spruik the Economy that the general claim that budget surpluses are a good thing ought to be challenged not merely on empirical grouds but on theoretical grounds as well.

    After all, if it is accepted by conservatives/neoliberals that the market place is the most efficient and rational allocator of investment, then having a government levy the populace more than is needed to meet obligations ought to be resisted. A neoliberal really ought to be embarrassed at having a surplus. Hockey’s saying that the state is better off accruing and deploying these funds than the private sector — for him it’s a virtue — something that serves the unwashed masses. Really, if he was capable of thinking beyond vacuous slogans, he’d be embarrassed. Luckily for him, and for the journalists interviewing him, they don’t go beyond household budget analogies.

  25. Fran Barlow
    August 6th, 2010 at 14:12 | #25

    This somewhat pessimistic 18-page PDF from Garnaut is worth a read.

    CLIMATE CHANGE, CHINA BOOMS AND
    AUSTRALIA’S GOVERNANCE STRUGGLE IN A
    CHANGING WORLD

  26. Gerard
    August 7th, 2010 at 10:27 | #26

    Great big new tax – four bogan targeted monosyllables that triggered the ALP slide into a panicked spiral of self-destruction. Congratulations to Tony Abbot! He obviously knew that the ALP wouldn’t have the ticker to attempt treating the public as adults

  27. Alice
    August 7th, 2010 at 10:40 | #27

    @Fran Barlow
    Fran re yr comment “Hockey’s saying that the state is better off accruing and deploying these funds than the private sector — for him it’s a virtue — something that serves the unwashed masses.”

    Dont underestimate the unconscious power to influence outcomes of a protected group by a protected group. Surpluses, of course are desitrable to pay for the outrageously generous retirement incomes of past, present and future political and bureaucratic incumbents. This objective owes no allegiance to any economic theory except perhaps group self interest.
    Its called the unfunded superannuation of governments which of course the rest of us nuisances must fund. If it requires a rearrangement of the importance of budget surpluses to be presented to the nuisance masses in a palatable fashion – then Mr Hockey is only one media manager in the campaign.

  28. Jill Rush
    August 7th, 2010 at 12:03 | #28

    Gerard #26,
    Because Abbott keeps talking about a great big new tax I am truly worried that he intends to raise the GST. He also has a plan to tax business for a Paid Parental leave scheme. I fancy that he is telling us his agenda as in his action contract – a plan for Australia he mentions no new taxes but only talks about that on the mining industry – despite the record profits that are currently being made. Abbott has a clear preference for some Australians and for the big companies including the tobacco company and yet he only attacks ordinary Australians asking to be treated decently. A great big new tax on ordinary people while the big companies are treated with kid gloves would be an appalling outcome for the nation’s people. Abbott will not introduce carbon taxes but he will reduce wages and possibly increase the GST if he can.

  29. Alice
    August 7th, 2010 at 12:28 | #29

    I was out last night with two good friends. Commenting on the election I said “both main parties are chasing right wing policies that arent working and they are almost clones. Im voting for Bob Brown.”
    Expecting the usual look from somewhere (“is she on drugs or a traitor or mad or bad or dangerous or a communist or treehugger or dole bludger or hippie or watermelon or or or or or…. all of the above)

    It didnt happen. Instead the waitress came over and said “oh good on you. Im voting green too.”

    Have heart.

  30. James Haughton
    August 10th, 2010 at 15:44 | #30

    @Fran Barlow
    According to the Chartalists, running a surplus will actually induce a recession as it restricts the money supply.

  31. jakerman
    August 12th, 2010 at 17:01 | #31

    The standard useage of energy is 9,765 kW/year (for electricity only households) http://www.switchwise.com.au/personalised-search.asp

    $40/tonne CO2, & 1 tonne CO2/MWh (black coal), means a cost of $40/MWh (black coal). Which equates to approx $400/year for standard useage. Switchwise quote prices in South Australia of $2,200 to $2,800/year for this usage, which would mean a $400 ($40/tonne) rise is in the range of 14 to 18%.

    What type of carbon dividend would JQ suggest would be appropriate to offset the price rise to households (especially low income households)?

  32. jakerman
    August 12th, 2010 at 17:05 | #32

    That should read “The standard useage of energy is 9,765 kWh/year”

  33. Jim Rose
    August 12th, 2010 at 17:13 | #33

    Why are all of you letting yourself be distracted with the details, the details.

    A vote for Abbott is a vote for putting climate change policy on hold.

    The real question is how will Labour react to defeat on climate change policy.

    Will labour become more principled or more opportunistic? More smoke and mirrors like cash for clunkers, postponement pending a community consensus, or promising real action?

  34. Alice
    August 12th, 2010 at 18:55 | #34

    @Jim Rose
    JR – You completely ignore the turn off factor of mindless campaigning from both sides, even if Abbott or Gillard wins, the greens could hold the balance of power in the senate.
    Nothing Id like to see is better than that as far as climate change policies go…so people – just vote green.

    It doesnt matter who wins then which is how it should be. Bring back debate and bring back real representation rather than just shadow boxing from the majors.

  35. Jim Rose
    August 12th, 2010 at 19:15 | #35

    @Alice
    The greens will not hold the balance of power in the senate.

    Labour will hold the balance of power if Abbott wins, which is more likely as the campaign nears Election Day.

    Which party do you think Abbott has more in common?

    The greens are further to the left than Labour so on what could Abbott and the greens trade policy compromises? Climate policy, trade, economics, foreign policy, IR policy? What?

    The previous balance of power parties in the Senate were wedged between the Liberals and Labour. That is not the case of the greens.

    Abbott has no plans to do anything on climate change, and if the senate defeats what little he proposes to do, Abbott will throw his hands happily and gladly into the air and move on to other policies. Abbott can blame the opposition and greens for nothing happening.

    This lack of action can also serve as the lack of national consensus that the ALP uses as an excuse to do nothing on climate policy.

  36. Alice
    August 12th, 2010 at 19:19 | #36

    @Jim Rose
    Id like a nice bet on that one JR….how are you for $20? Yes I know you conservatives think you are born to rule and have been in power forever (or so you keep telling us ). You forget the long stretches in between when you have been in the desert…but I will pander to your illusions as long as you pay up.

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