Budget clears decks for carbon tax

That’s the title of my piece in yesterday’s Fin, over the Fold

Budget clears decks for carbon tax
The 2011 Budget is unlikely to produce much of a change, for better or worse, in the Gillard government’s political standing. The government managed expectations well in the leadup to the Budget, warning of deep cuts, but in the end not taking too many risks. However, this caution only emphasises the extent to which the government has bet its survival on the successful introduction of a carbon tax.
The details of the carbon tax have yet to be finalised and the Budget took no account of its likely introduction. As regards the macroeconomic impacts of fiscal policy, this is not an important issue. The carbon tax policy will almost certainly be revenue neutral or so close as to make no real difference to the budget balance.
Despite its absence from the list of budget measures, the proposed carbon tax stood, like Banquo’s ghost at the banqueting table, behind a number of the measures announced on Tuesday night. The abolition of the Green Car scheme along with earlier announcements ending the subsidy for rooftop solar photovoltaic systems make some sense on the basis of the government’s argument that these are inefficient substitutes for a carbon price.
But if the government now backs away, or fails to get the legislation through Parliament, it will be left, in effect with nothing.
The critical importance of the carbon tax was doubtless one of the factors behind the heavy emphasis on regional Australia, also present in more coded form in giveaways targeted at small business ‘ute owners’. The government needs the support of the regional independents, not only on votes of confidence but for the passage of this complex and controversial legislation.
If they can manage this (and Gillard has been remarkably successful in steering legislation through Parliament so far), the prospects for re-election will improve dramatically. The tax will have none of the disastrous effects claimed by its opponents. Its effects will be hard to detect against the background noise of a volatile economy.
Of the measures that have been abolished in the Budget or the leadup, few have attracted more condemnation than the subsidies for solar photovoltaics. These subsidies were massively oversubscribed, and drastically scaled back or scrapped altogether. There have been similar episodes in Germany, Spain, Italy and many other countries.
Looked at on a country-by-country basis the criticisms of these schemes seem entirely justified. They achieved relatively modest reductions in emissions at far higher cost than would have been incurred under a fixed carbon price, or with an emissions trading scheme.
Globally, however, the results have been striking. The price of solar modules has fallen from 4.75 to 2.70 euros/watt in just five years.Even as subsidies have been reduced, volumes have continued to grow, and cost reductions have continued.
Solar power is already outpacing nuclear, with installations of 18 gigawatts in 2010, and annual growth rates of 20 per cent or more. Assuming a gradually increasing carbon price, solar power is likely to be cost-competitive within the next decade.
For economists, this is a striking result. Every student of trade theory is exposed to the well-known argument for protecting ‘infant industries’, along with the observation that most such infants never grow up to walk unaided. This is one infant that is, at least, toddling, and may soon be walking or even running.
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He is the author of Zombie Economics: How Dead Ideas Still Walk among Us.

22 thoughts on “Budget clears decks for carbon tax

  1. Would solar have achieved the growth is has without subsidies and quotas? Perhaps we’ve done it back to front; put a price on carbon first then see if wind and solar can grow without subsidies. No doubt there are spectacular growth figures for newly fashionable diet supplements like Omega 3 but it would not be prudent to extrapolate that growth.

    The second task for solar is to transform itself from a novelty item to a real player. That is to help power aluminium smelters at 2 a.m.. Photovoltaics are already very costly and something like giant battery banks might be required to store the energy for night. We need a cost breakthrough in energy storage as well to achieve the low prices industrial electricity consumers expect, on threat of relocating to China. Thermal storage may achieve this for a few hours but then there is the problem of extended overcast periods.

    The funny thing is I’ve had 2kw of PV since 2005 paying $10 per watt before the capital subsidy. My State has no feed in tariff. My conclusion is that PV is little more than a middle class fashion statement largely paid for by others and not a major energy player. No doubt others will point out where I’ve failed to get it.

  2. Well – while we talk about costs of solar as if its some big deal that it doesnt yet compete on costs people forget its been around a long time and was actually successful in the US in a number of states, where it established a healthy market….until the government came along, subsidised electricity, got everyone hooked on the grid by subsiding builders to intsall electric hot water heaters for free.

    The infant industry rules can be used again to get us out of the mess of electricity, which no governments had any problems subsidising then. The government and half the unhelpful modelling economics profession, just need to get off this private market model addiction that they have been blowing the economy up with.

  3. Solar is now benefitting from economies of scale, presumably, and whether the demand is “stimulated” or natural, it still allows growth of plant, and perhaps more importantly, growth in the research underpinning solar PV function. Each new generation of solar PV is a substantial improvement upon previous ones.

    Of course it is unsustainable to devote subsidies in perpetuity to solar PV, but at least there is now a series of solar PV product that just might compete outright once a carbon price signal is finally established. The ETS was voted in when the Rudd-led Labor government was voted in; the hostile senate and some fairly bloody Liberal opposition knifing of Malcolm Turnbull on the eve of a deal with Labor, well that killed the ETS and a market-based carbon price. It killed the illusion of one as well, I’d say.

    Solar PVs aren’t sexy but they have a place in any future low carbon economy. Eventually though we have to tackle root causes of the need for carbon emission reductions in the first place.

  4. Hermit, solar power does not need to be able to run aluminium smelters at 2 a.m. in the morning to be useful. For example, here in South Australia exactly zero percent of our electricity generating capacity is suitable for running an aluminium smelter at 2 a.m. in the morning, but despite this, we still find the generating capacity we have to be quite useful.

    Solar PV is becoming competitive with other forms of electricity generation in large parts of Australia. That is, we are reaching a point where it is cheaper for some businesses to install PV than not to install it. In Germany the cost of installing PV has dropped to around $4.11 US per watt for medium sized systems that are suitable for the roof of a supermarket, service station, school, warehouse or other large building. If these PV systems can be installed for the same price in Australia as Germany then they will pay for themselves without subsidies in many rural areas. In Brisbane where electricity costs about 20 cents a kilowatt-hour during the day, a $4 a watt point-of-use PV system with a lifespan of 25 years will give a return of about 7%. This isn’t quite enough to make it worthwhile for most businesses to invest in PV, as many of them have borrowed money at 8% or higher, but it’s getting close and a feed in tariff and or a moderate carbon price is likely to be enough to make up the difference. Woolworths is already taking advantage of the ACT’s feed in tariff to install PV on its service stations. Australia’s PV industry is quite small compared to Germany’s, so it will probably take time for Australia’s installation costs to drop down to Germany’s current level, but I think this will happen fairly quickly and I expect the price of solar PV to continue to drop, resulting in very large amounts PV being installed because it will be a money saver.

  5. Solar Power means poor people subsidising rich people to put panels on their roofs. The social justice types should be right on to this.
    The coal fired turbines operate flat out 24/7. They cannot be turned down when the sun comes out so there is zero reduction in GHG s.

  6. My understanding of combustion is that if you stop putting coal inside a coal power plant it will shut down. I could be mistaken about this.

  7. @chrisl
    Rubbish – Chrisl – more solar power means less poor people subsididing privatised electricity operators and lower costs as more use it. Bring it on. Make a public utility out of solar and get the government to subsidise it. How do you think electricity and sewarage and water got rolled out? Not by waiting for a price mechanism and a private market to arrive, thats for sure. Get people off the grid and out of gouging by electricity companies. Electricity has been sold off (and maybe its time for some competition – its a dirty industry). Its time electricity utilities had some competition with a hefty whack of subsidy to a cleaner energy form.
    When the price comes down more people will want it. Fix the grid to handle it – get them on and hey presto, some big dirty energy problems solved.

  8. Ronald: Have a think about it… What is happening down at the coal fired power station at sun up and sun down. Do you think they have the ability to ramp up or ramp down the power as the solar panels kick in or out?

  9. @chrisl
    ChrsL – perhaps there is something you dont know. The problem with the solar subsidies in NSW was not that they werent getting enough power. They were getting too much. It was blosing the grid and they had ti burn off (waste) traditional power.
    Wouldnt want to get the electricity boys upset now would we. ‘
    Shut the electricity boys up (bad move to sell it) fix the grid and there is nothing unproductive aboutsolar.
    You know its also a shame when ten extra trains on the western line blow the gris and cause blackouts as well.
    Want sustainable energy? Sustainable transport? Back to the grid. Fix it so it can handle it.

  10. chrisl, this is exactly what would happen at a coal fired power station at dawn:

    PLANT MANAGER: Terrible news! During the night someone installed 20 gigawatts of photovoltaic solar panels! It’s an absolute disaster! Fifteen minute spot prices are now below our marginal operating costs!

    CHIEF ENGINEER: What? You mean the price we’re being paid for electricity is now less than what the coal we are burning is worth? I guess we have no choice but to power down.

    PLANT MANAGER: Power down? What do you mean, power down? Are you crazy! We can’t power down! It’s not one of his appointed holy days of maintenance!

    CHIEF ENGINEER: What are you talking about?

    PLANT MANAGER: You know exactly what I’m talking about!

    CHIEF ENGINEER: You don’t mean the stories the night shift workers whisper in the dark are true do you?

    PLANT MANAGER: Every word!

    CHIEF ENGINEER: So, if we don’t… He…

    PLANT MANAGER: Yes! If we don’t keep the turbines operating at near maximum capacity, Gilgamax will arise and feast upon the carbon of the living! We have no choice but to keep this plant operating at full capacity and dump the surplus electricity into the grid and use it as a huge resistor! It will blow out every mains connected electrical device within ten klicks, but if we don’t do it, those poor fools out there will loose a lot more than just TV and refrigeration!

    CHIEF ENGINEER: Okay, I’m with you. I’ll do it. I just pray to god it works. And I pray that he’ll forgive those damn fools and their solar power! When will they ever learn!

  11. Why not remove ALL the subsidies for fossil fuel use?


    “The Fuel Tax Credits scheme costs Australian taxpayers $5 billion a year, with $ 1.7 billion of this going to big mining companies.” – ACF executive director, Don Henry.

    These same mining companies that refused to pay a new tax and brought down a PM to get their way, receive $1.7 billion of this subsidy. That is a disgrace.

    “Total fossil fuel subsidies worth almost $9 billion have been identified by research in Australia.[1]

    Australian governments (federal, state and territory) continue to use subsidies to achieve environmental and social goals. This may be justifiable where the cost of the subsidy is less than the value of the environmental and social gain that results from the subsidy.

    $8.1 billion (91%) of the total fossil fuel subsidies identified are likely to increase GHG emissions above the unsubsidised level. There is a much stronger argument for removal of these subsidies than for fossil fuel subsidies in general. In many cases, the subsidy can be restructured to achieve the desired economic or social objectives without encouraging increased GHG emissions.

    About 58% of the total fossil fuel subsidies identified are perverse subsidies as they increase GHG emissions while at the same time reducing economic efficiency. Removal of these perverse subsidies can provide a ‘double dividend’ of greenhouse abatement and improved economic performance. ” – Greenlivingpedia.

    (I’m afraid to add another link as the Link-Daleks will blast my post into oblivion.)

  12. It is not clear that renewables subsidies and quotas will end with the introduction of carbon tax as Garnaut has recommended. Evidently the PV installers and wind farm operators are assuming the Renewable Energy Certificates mechanism will continue after 1/7/12. The Greens are talking about a national feed-in tariff a la Spain and Germany, both schemes set to wind down. I believe that if RECs do expire next year then carbon tax alone won’t get new wind and solar over the line; they need unfair help.

    We will end up with double dipping. Carbon tax will penalise coal fired electricity 2-3c per kwh while RECs recently underwrite non-hydro renewables by 3-5c per kwh. That’s apart from any State based feed-in tariff. Garnaut says carbon tax should be enough and I agree. Prohibitions should be removed on all competing low carbon technologies like nuclear. Then we’ll see who gets market share without subsidies or quotas. The short term winner will be natural gas fired plant while the gas price remains stable.

    However there remains the slight problem of aluminium smelters expecting to pay 3-4c per kwh around the clock, not 20-30c. Perhaps the solar utopians could refrain from watching TV at night or boiling the kettle at sun up.

  13. I would expect solar power in its various forms to be part of the mix, not all of the mix. If Aluminium (aluminum nowadays?) smelters want cheap electricity they’re dreaming, unless they can become more efficient in their use of it. However, nothing is stopping them from continuing to use coal-fired power stations, they just have to adapt to price increases. If that flows through the entire chain of aluminium-based products, well that is how it is for the users of such products, and they may choose to pay more or to substitute where an alternative has innovatively sprung to fill the gap. Unless I’m wrong, that’s a part of the “price signal” everyone keeps talking about.

  14. “unless they become more efficient in their use of it” A new Thermical process for smelting aluminium. ” Power consumption will be about 40% lower. Fluoride emissions will be completely eliminated and the quantity of generated gases will be significantly lower.”

  15. “The Fuel Tax Credits scheme costs Australian taxpayers $5 billion a year, with $ 1.7 billion of this going to big mining companies.” – ACF executive director, Don Henry.

    Yes it is an outrage that people who drive in mines and on farms instead of on public roads don’t pay fuel tax for public road maintenance. That really sounds like a subsidy. NOT!! Don Henry is lying and engaged in a putrid propaganda campaign.

  16. @TerjeP

    TerjeP, where is your committment to free markets? Here is logic that a libertarian free-marketeer could agree with I think.

    The logical thing to do is;

    (1) cut all subsidies, rebates and taxes from all fuels and all methods of power generation.
    (2) then implement a carbon tax at a price which reflects the negative externality costs.
    (3) increase public hospital budgets if necessary.
    (4) increase or decrease other taxes to keep the above points revenue neutral.

    Let mines, farms and private hospitals, as businesses, survive or fail in the free market without market-distorting subsidies or penalties on energy inputs.

    I would greatly doubt your committment to free market values if you had trouble with those propositions.

  17. @TerjeP
    Mate, no one has made a statement and then said NOT loudly to underscore that the previous statement was subtle sarcasm since 1997.

  18. I’m not convinced that the subsidies are driving the drop in cost– and most estimates I have seen were of a smaller reduction in price than the one you cite. (See for example http://eetd.lbl.gov/ea/ems/reports/lbnl-4121e.pdf).

    I would split the subsidies between the existing subsidies for homeowners and increased grants for R&D.

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