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.

36 thoughts on “More on Abbott and carbon taxes

  1. 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

  2. @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.

  3. 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.

  4. 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.

  5. The standard useage of energy is 9,765 kW/year (for electricity only households)

    $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)?

  6. 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?

  7. @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.

  8. @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.

  9. @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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