My evidence on the carbon price

Last week I appeared, by videolink, before the Senate Committee on New Taxes, to talk about the government’s carbon price and compensation package. I made some dot points, over the fold.

The inquiry was interesting, with one Senator insisting that the carbon price was different from the GST because, under the GST, businesses could claim their inputs and therefore didn’t have to pay anything. I tried to suggest that this was only true for businesses that didn’t add any value (it is, after all, a value added tax), but to no avail.

Proposed Carbon Price Legislation: Key points

This is a summary of the main points I propose to present in evidence to the Senate Select Committee on Scrutiny of New Taxes regarding the proposed Clean Energy Future legislation.

Both major parties state support for a target of 5 per cent reductions in Australia’s emissions, relative to 2000 levels, by 2020.

While a range of policy measures may be used to reduce emissions, all serious economic analyses of the topic show that a carbon price must be a central element of any cost-effective emissions reduction policy

The distinction between a fixed carbon price (for example, through a carbon tax) and a price determined by trade in a permit market with a fixed quantity of emissions (an emissions trading scheme) is of secondary importance. Broadly speaking, a fixed price is simpler and therefore preferable in the case of a national policy, especially if the issue is surrounded by confusion and controversy. An emissions trading scheme is easier to integrate with similar policies in other countries.

Treasury modelling shows that, especially after the return of revenue to households and businesses is taken into account, the effects of the proposed carbon price will be so modest as to be barely noticeable against a general background of a growing but variable economy. My own analysis confirms the results of this modelling. A particularly relevant observation is that the impact of the proposed carbon price will be about one-quarter that of the GST.

Recent claims by the NSW government that the carbon price will have a devastating impact on households on the state’s economy are unfounded and rely on misleading presentation of extreme cases, most notably in the claim that “household electricity bills will rise by ‘up to’ $498 a year.” The correct analysis, based on Commonwealth Treasury modelling yields average cost increase of $3.30 or about $170 a year. The NSW number is derived by taking a high-price projection applied to a household with electricity consumption far above the average.

The proposed compensation package for households is well-designed in its focus on low-income households, for whom the effective price increase as a proportion of income (around 1.2 per cent) will be substantially higher than for middle-income and high-income households.

The suggestion that the provision of compensation in the form of income tax cuts or higher pensions will undermine the incentive effects of a carbon price is incorrect, and reflects a misunderstanding of basic economics

Compensation provided to electricity generators and emissions-intensive export industries is somewhat higher than would be suggested as necessary by economic analysis. However, compared to the CPRS, the design of compensation has been improved, with a greater focus on measures designed to assist adjustment to a clean energy future.

The main area where Treasury modelling is subject to doubt relates to the extent to which Australian carbon emissions will respond to a price and, conversely, the proportion of the targeted emissions reductions that will be met by purchases of permits from overseas. International and Australian experience has shown that standard estimation procedures persistently underestimate responsive to carbon prices in the medium term and beyond. Most notably, whereas early projections suggested that the New Zealand ETS would require substantial purchases of overseas offsets, it now appears that the target will be reached without any such requirement.

44 thoughts on “My evidence on the carbon price

  1. @Michael
    Thanks Michael, it is really difficult to gain traction with messaging when you are up against the negative machina that is groups like News Limited and even the LNP, who are constantly saying that “all monies from offset carbon trading will go offshore, and that we are “unaudited” or that carbon savings are “unauditable”.

    The fact that there is bugger all industry of our type (CER creation) in Australia at the moment is because there is no carbon market here. Despite this there are a few companies struggling to do it, and the only 2 Australian companies doing it are based in Melbourne. If the appropriate infrastructure existed (ie a market, bankers that could monetise the credits appropriately etc) then there would not be a “flow of funds overseas” for CERs as industry could actually develop here.

    We are indeed audited: we have to spend a fortune on verifiers to be registered under the UN protocol. It is particularly costly for us because we have to send them to remote villages in Africa (and soon Asia) to audit 200+ individual households. It is quite amusing though, sending Japanese businessmen into the depths of Tanzania in a jeep where there is NO internet or phone access, and the villagers barely speak English and neither do they! We are yet to find a fluent Swahili/Japanese interpreter so we have to send a Swahili/English interpreter and an English/Japanese one. Believe me, it is nothing like tromping off to a single cement plant in industrial China, at least there are basic amenities in China.

    The whole situation is so frustrating, and really makes me cross!

  2. Thanks for doing this JQ.

    Bonus points for your attempt to improve senatorial numeracy standards, even if it failed 🙂

  3. Everything becomes so much easier it we work on the presumption of zero entitlement to GHGs, subject to a practical cutoff limit for compliance. Thus kerosene lamp burners may be guilty of a few kilograms of CO2 a year while Hazelwood power station releases 14 billion kilograms. We also sidestep interminable arguments about whether carbon abatement schemes are ‘additional’ or would have been done anyway.

    The danger is we will conflate offset trading with foreign aid, perhaps tinged with First World guilt about our carbon profligate lifestyles. Now China is becoming wealthier that country may become less fashionable as a source of credits. For example the $550m they got from the World Bank to change the gas in refrigerators. A simple regulation would have sufficed, not a bribe. I’m also suspicious that banks want to get in on offset trading because I think they will get most of the benefit.

    All of this must be falling on deaf ears because the parliamentary committee is to consider carbon credits for farmers. If they feed their sheep toasted muesli or something GHGs will magically vanish. We’ll see the heat rising from Hazelwood’s smokestacks but it will all be offset by sheep with newly fresh breath.

  4. @Hermit
    Hermit, you will be pleased to know that as of 31 December 2012 China will no longer be eligible to create new CERs. The UNFCC was so concerned about exactly that issue that they have changed the list of countries eligible to create these credits. The list will match the “LDC” list: the list of least developed countries. The countries dropping off the list include China, India, Indonesia, Philippines, South Africa, Thailand.

    As it takes well over 12 months to get any form of UNFCC approval for a CER generating project, it is unlikely that we will see new developments being funded with UNFCC “backed” funds into the future in those countries.

    It does make your point about the mix between foreign aid and CER projects more valid though, as the types of countries that will be left on the list are places like most of Oceania (excluding Aust & NZ), most of Africa, Bangladesh & Pakistan (this list is not exhaustive).

  5. @Jim Birch

    Maybe they don’t pay tax under GST because they have managed some great fiddle. I imagine if your accounting is creative enough, but you would have to make a large enough paper loss to avoid paying GST on your labour and capital inputs? What is a worry is that Barnaby Joyce is supposed to be an accountant, but they had to quickly pull the plug on his Finance spokesman gig when they found he was innumerate.

  6. But sometimes, the projects with the cheapest abatement costs also have huge beneficial by-products. That’s a feature, not a bug.

  7. Hermit, feeding toasted muesli to sheep won’t make greenhouse gases vanish. But every day you eat food that contains carbon that has been removed from the atmosphere by agriculture (unless you are a robot). Agriculture is the only industry with experience at removing CO2 from the atmosphere. All this carbon is normally released back into the atmosphere through either respiration or combustion. However, if the agricultural industry can receive a credit for removing CO2 from the atmosphere and keeping it out, then some of the hundreds of millions of tonnes of CO2 agriculture removes from the atmosphere each year in Australia will be removed long term. There are various ways to achieve this including increasing the amount of carbon in soil, growing trees, and dumping wood or other plant material in the ocean.

  8. I share Hermit’s scepticism about the idea that we should meet the 2020 goals largely through imports. As I argued, I think there is much more room for domestic emissions reductions than is captured in standard models.

    At some point, when a global trading scheme is properly established, and our per capita target declines to a level more comparable with the rest of the world, our energy endowments mean that importing permits makes sense. But that is some time off.

  9. Hermit, if Australian farmers are to be paid to remove carbon from the atmosphere and sequester it, methods of preventing fraud will certainly be required. As distressing as it is to those accustomed to honesty from the Australian agricultural industry, at times agriculturalists have been found to lie about things ranging from the presence of cultural artefacts to whether or not they have grown cannabis.

  10. Our emission per capita are 25 tonnes a year. We could cut our emissions by 100% for only $100 per person per year! Seems like a no-brainer to me!

  11. @sam

    True. Buy Australian is always what people want the other guy to do. I note that those who want us to buy from ‘Australian owned’ businesses, in operating those businesses, don’t see any need to purchase more expensive inputs in Australia, or, in some cases, locate their factories in Australia, in preference to elsewhere.

    I think we all support the idea of others doing as we wish (but maybe not as we do). I know I do!

  12. Sam, I would gladly contribute towards family planning and education in poor countries, but I would do it simply to help people in those countries and would not do it in the name of reducing carbon emissions. This is because I am scared that if people start thinking about the emission benefits of preventing a Liberian person from ever being born, it may lead them to think about the even greater emission benefits that would result if I were prevented from reproducing. Or worse, the emission benefits that could result if I were prevented from being born retroactively.

  13. @Ronald Brak
    It doesn’t really matter why you do it, all the benefits come nevertheless. I agree there are all sorts of positive external benefits, but it just so happens that even from the narrow perspective of climate abatement, it’s the most efficient approach. The improvement in the status of women, the development gains, the reduction (from baseline projection) of demand for natural resources, all of this is just a happy bonus

    That this amazing investment opportunity exists is simply due to bigoted religious people in western countries forcing their governments not to do the rational thing. Finding ourselves in such a world, the best thing for us rational people to do is (as always) to buy cheap.

    I think this idea people have of population control being coercive is just really wrong-headed. With 250 million women out there with unmet need for contraception, nothing could be less coercive than handing out condoms and OC pills with no strings attached.

    No one is talking about preventing people from reproducing anywhere.


    Yeah, I don’t really get why people think buying Australian by preference is a good thing, even for other people to do. I don’t feel any greater solidarity for workers in Australia than workers in Asia. There are real problems with globalisation of course, but the lack of empathy for the global poor by the Protectionists is an attitude I find puzzling and can’t share.

  14. Ronald Brak, the Right has been pushing the ‘over-population is the root cause of our ecological problems’ meme, hard, for some time. It is, I believe, bulldust, to disguise the truth that it is the rich world’s over-consumption that is the real problem. To blame the poor and downtrodden is an age-old Rightist habit, but this time I detect a sinister neo-Malthusian edge. Indeed, if you venture into the horror-zone of racism and xenophobia that is the Rightwing MSM blog Comments, you often see it openly advocated. That what the world needs is a great cull of these teeming hordes, whose tiny environmental footprint outrages those whose size 14s are crushing the biosphere. The rapid rise of global food prices, due to production plateauing, climate destabilisation, diversion of food for animal feed and bio-fuels and elite speculation in commodities markets is nearing a real crisis, and gigantic famines still wrack less happy lands like Somalia, particularly after Western ‘benevolence’ worsens the situation, as ever.

  15. @Mulga Mumblebrain
    I have no idea why you think neo-Malthusianism is sinister. I can’t imagine what’s “rightwing” about giving women who ask for it access to free birth control. I don’t understand how you can think Somalia’s problems aren’t due in part to a fertility rate above 6.

  16. sam, I thought the thing about Malthusianism is that the population decline is caused by disease and famine, and is involuntary. A gradual and sustained reduction in the human population, realised humanely, by lowering the birth-rate, is something I believe in most strongly, and I see that process (which, alas, I now feel is unlikely to occur)as the exact antithesis of a Malthusian cull of ‘useless eaters’.

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