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Factor of five

February 4th, 2011

The Oz reports Opposition spokesman Greg Hunt, saying that “FAMILIES face electricity price rises of up to $1100 a year” under a carbon price of $30/tonne. Oz reporter James Massola doesn’t check the arithmetic behind this scary claim, so I guess it’s a job for the blogosphere.

Using black coal as the fuel source, a tonne of CO2 is emitted for each MWh generated, so the tax comes out at 3c/kWh. Our hypothetical family would have to use nearly 40 000 kWh each year. The average NSW household uses 7300 Kwh/year, putting Hunt’s claim out by a factor of five. That “up to” is doing an awful lot of work, the kind that would get a commercial advertiser into a lot of trouble with Consumer Affairs.

Assuming Hunt isn’t deliberately lying (and to be fair, he’s one of the best on the Opposition side) how did he get such an absurd number? My guess is that he divided an estimate of total revenue ($16 billion, which looks about right for emissions of 500 million tonnes a year), then divided by the number of households. His mistake of course is to assume that 100 per cent of emissions arise from household use of electricity – the correct figure is about 20 per cent.

Coming back to the average household, the implied cost is around $200/year, which would, in a properly designed scheme, be returned one way or another, either in direct compensation or in offsetting tax cuts.

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  1. jquiggin
    February 7th, 2011 at 11:13 | #1
  2. Charlie
    February 7th, 2011 at 11:16 | #2

    JQ “MRD”, was ist das?

  3. BilB
    February 7th, 2011 at 11:29 | #3
  4. Socrates
    February 7th, 2011 at 11:44 | #4

    BilB

    Having just read the whole exchange between yourself and JQ, I find your claims utterly unconvincing.

    “I’d be happy to be wrong about all of this, but I do not think that I am. And the quick proof is that I am paying more for my domestic electricity and am receiving no compensation as was promised under the CPRS legislation.”

    Recent price rises in retail electricity prove nothing about a CPRS or a straight carbon tax. It is hard for a policy that was not introduced to be responsible for an outcome of the existing system. Many of them are due to State governments first gouging revenue out of electrical distribution systems by various means, then privatised electricity operators “recouping” the cost of maintenance and needed network upgrades. These costs were entirely predictable and should have been budgetted for when the assetts were privatised. So the privatised operator either got the purchase price wrong, or took out too much in profits in years when they did no maintenance and upgrades. Either way, it is a complete non-sequiter to a debate about the future cost of carbon taxes that may now be introduced.

    So be happy BilB – you are wrong. A carbon tax will cost the average Liberal voter less than their psychiatric bills.

  5. BilB
    February 7th, 2011 at 12:00 | #5

    Well Socrates,

    I suggest that you actually read the announcements made at the time of the electricity price rise schedule. Specific mention was made that in the event that the CPRS legislation not coming to fruition that the electricity price would fall back by a proportional margin.

    Hasn’t happened.

    If you have anything other that uninformed assumption, then I am listening, but you don’t. So far, I am right. The mere inference of a carbon trading system is costing all voters 30% increased electricity bills, for zero reduction in CO2 emissions.

    Prove otherwise.

  6. Charlie
    February 7th, 2011 at 12:24 | #6

    BilB – I used to love that MRD

  7. Socrates
    February 7th, 2011 at 12:26 | #7

    BilB

    If states and generators are profiteering I don’t doubt it. It has nothing to do with a CPRS though. If talk of a CPRS stopped tomorrow, it would still be happening.

  8. BilB
    February 8th, 2011 at 05:55 | #8

    Hehehe, here is an interesting read

    “In 1991 the Norwegian Parliament decided to deregulate the market for trading with electrical energy, with the aim of ending the monopoly era for the power industry and introducing competition. The main objective changed from security of supply to efficiency of the sector.

    http://www.theoildrum.com/node/7404

    The bit that I like is

    “The immediate consequence was an increased risk to investors and a reluctance to install new power plants, and after a few years the result was a new balance between supply and demand of electricity”

    What? Surely business does not cope with risk with under supply? Well apparently yes. And that is with the easy safe product. What ever will business do when the product is more expensive

  9. BilB
    February 8th, 2011 at 06:16 | #9

    ……Damn keyboard……..

    ….and difficult to manage. This Norwegian example demonstrates the huge hole in the economist’s market model for electricity supply in general, let alone when the investment requirement is forced upon business with some kind of punitive manipulation. ie CPRS/ETS/carbon tax.

    It is one thing to draw a line on a graph, and another thing altogether to expect investors to follow that graph with their own money, at their own risk. The fact that the electricity industry is making massive windfall profits at present due to the horrendous politcal bungling of Australia’s 2 main political parties, is no guarantee that this sector will turn around and pump that money wholesale back into renewable infrastructure simply because the government of the day wants them to. One thing about business that gets comfortable with huge profits is that they like that to continue, and increase….its for the investors you know.

    This whole thing is going to end in accrimony. And from what I have seen here, is the truck load of economists who argued so vocally for a market solution to Global Warming are, when after 20 years nothing significant has been achieved in Australian CO2 emissions reductions, going to either say nothing and fade away, or shrug their shoulders and say “how were we supposed to know…you’re the politicians, you made the decisions..”. We are already at 4 years post JWH, CO2 is at 395ppm, and we are counting.

  10. February 9th, 2011 at 21:05 | #10

    Unfortunately we have been cursed with an evolved political system that has enabled boneheads to run government. Where unskilled politicians with their party’s agenda dictating its priorities and not the priorities of the people. Where they have allowed international laws to surpass our Commonwealth Constitution and pass new legislation without any referendum accepted by the people who suffer the consequences. Common sense solutions to these problems are found at http://www.aussieswannakiss.com I would urge all Australians to invest a few minutes to change our future.

  11. BilB
    February 11th, 2011 at 04:38 | #11

    Oh look, here is another example of market driven “success” in energy systems.

    “Another issue is electricity deregulation in Texas. The competitive marketplace produces a situation not all that different from the situation in which BP operated that led to the oil spill in the Gulf of Mexico. Under Texas’ structure, there are many entities, each concerned primarily with its own bottom line. In this environment, cost cutting in the name of profitability is rewarded, but can lead to power outages. Integration with the many other units involved in electricity generation, while possible in theory, is extremely difficult in practice in times of market stress. The competitive marketplace provides price integration, but leads to a greater chance of cascading failure, since each company can be expected to look out for itself, leaving regulators with an expanded role in making certain that the system as a whole functions properly.

    We are now considering adding more wind to the electric grid, as well as adding natural gas and electric vehicles. These will all have the effect of making the organization more complex. Each entity will be working to optimize its own profitability, with little focus on the overall success of the system. The failure of the Texas grid system in cold weather should act as a caution to those who expect that the integration of even more types of providers into the natural gas/electricity system can be done with few problems.”

    From The Oil Drum

  12. jquiggin
    February 11th, 2011 at 05:39 | #12

    BilB, I agree that electricity deregulation was a mistake, done more or less badly everywhere. Australia’s has been among the least bad, but is still a net obstacle to progress on climate change.

    But you can’t go from some particular market failure (or success) to the proposition that “markets are bad” (or “we should have free markets everywhere”). We have a mixed economy for a reason.

  13. BilB
    February 11th, 2011 at 06:52 | #13

    Deregulation is for mature stable commercial structures. Where dramatic change is REQUIRED, and more particularly when a specific end result is necessary, market instruments are inadequate in organising that process for all of the reasons cyted in the previous examples. That does not mean that markets have no place in the process, they do, but in the actuallisation rather than the organisation. Business routinely says to government “lay down the road” (rules) and we will drive along it. Where business says that it (buiness) will lay down the road it is rarely in the interests of the public at large (Bolivian Water crisis for example).

    Yes we have a mixed economy because it is mature. But we are now seeing that markets structures left to themselves can yield ultimate destruction. ie Global Warming through the efficiency of fossil fuel use, Global Financial Crisis through the efficiency of dispersing financial risk, Food Shortages through the efficiency of dispersing land ownership, Agricultural Pollution through the efficiency of dispersing fertilizers and pesticides, ,,,,,.

    In other words business does not have the ability to call a halt to its successes even in the face of ultimate destruction.

    Markets are a means to an end. Markets are not capable of determining where that end is, or how to get there. Markets do not serve fringe interests (80/20 rule). Markets do not work in times of broad destructive chaos.

    In other words, in the place where we are now headed (Global Warming driven Climate Change affect Environment), a product of market success, markets will fail. They will fail to determine what the problems are, they will fail to determine how to affect change that might moderate damage, they will fail to determine which infrastructure is required to resolve problems. They will not fail in delivering that infrastructure once it is known what is required. They may fail to deliver it in a uniform manner as community expects or at an affordable level.

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