This is a copy of aletter sent to a number of MPs during Jan 2011. The key message is that the government will have very little tangible action to show for 5 years of Labor government unless it puts the search for the carbon price magic bullet to one side and gets on with some of the things that clearly ned to be done.
The letter also argues that the carbon price approach is far less effective than alternatives that leave the price of dirty unchanged and only charge for the higher price of clean (if applicable). In the case of driving investment in clean electricity the price increase per tonne emission reduction will be four times the value for the alternative suggested at the point where emission have been reduced by 25%.
It concerns me that, despite all the climate action promise of 2007, very little ended up being achieved during the last parliamentary term. It concerns me even more that it looks like much the same will happen during the current term. Once again, the government will stuff around chasing the carbon price “answer to everything” until the contracts and regulations required to get emissions reduction back on target has to be deferred till after the next election. If nothing much is achieved before the next election both the Labor and Greens parties will be rightly blamed because of their insistence that “putting a price on carbon” has to be done before anything substantive can be done.
The irony is that we don’t need a carbon price to get emission reduction back on target. More to the point, a carbon price based approach is not the best way to do important things like driving investment in cleaner electricity, reducing the fuel consumption of cars or, for that matter, anything else I have looked at.
When comparing climate action alternatives what really counts is the cost/tonne emission reduction. So how does the carbon price approach compare by this measure?
The fundamental problem with the carbon price approach is that depends on “putting a price on dirty” to drive climate action. Unless the result is 100% emission reduction, the price increase for some emissions will be “unproductive” in the sense that it will result in little or no action. These unproductive price increases add to the price per tonne emission reduction. For example, if a $10/tonne carbon tax on all emissions reduces emissions by 10%, the carbon tax/tonne emission reduction will be $90/tonne, well above the carbon tax of $10/tonne. This is because 90% of the original tax will still be being paid and be part of the price per tonne emission reduction.
By contrast, alternatives that do not depend on changing the price of dirty avoid this unnecessary addition to the price/tonne emission reduction.
In theory, some of the money that goes into the higher prices associated with the carbon price approach can be recovered and returned to taxpayers. In practice, admin costs, compensation payments, etc. will reduce this return.
The other fundamental problem with “putting a price on dirty” is that the whole strategy depends on this price increase. For this reason the full price increase has to be imposed at the beginning of the clean-up process.
By contrast, alternatives that do not depend on changing the price of dirty avoid this need for any increase in prices at the start of the process. Even in cases where the clean alternative needs to sell at a higher price than dirty, the average price will only ramp up slowly as the proportion of clean increases.
A comparison of the carbon price approach with alternatives for driving investment in cleaner electricity and reducing the fuel consumption of cars is appended. To summarize:
Driving investment in cleaner electricity:
The alternative involved the setting up of contracts to supply cleaner electricity combined with regulations to ensure that the purchase of the cleaner electricity produced under these contracts would take precedence over the purchase of dirty electricity. It was calculated that, for a targeted carbon price of $30/tonne CO2:
The carbon price approach would result in an increase in the national power bill of $150/tonne emissions reduction by the time power related emissions had been reduced by 20%. In addition, the average price of power would have to rise suddenly to 3¢/kWh no matter how much emissions had been reduced.
By comparison, the alternative would have increased the national power bill by only $30/tonne emissions reduction no matter how much emissions were reduced. The average price of electricity would ramp up as the proportion of cleaner electricity increases. The average price increase would have reached only 0.6¢/kWh by the time emissions had been reduced by 20%.
Driving down car related emissions:
The alternative uses regulation to ensure the average fuel consumption per km of new cars stays below a target that ramps down with time. It was calculated that:
The carbon price approach would increase the national fuel bill by $870/tonne emission reduction when a carbon price of $30/tonne CO2 is introduced. This would drop to $170/tonne after several years. In addition, the price of fuel rises by 12¢/litre as soon as the carbon price is introduced.
By contrast, the alternative REDUCES the national fuel bill by $300/tonne emissions reduction. It does not require any change to fuel prices to work.
RECOMMENDATIONS:
It is recommended that:
1. The government puts a high priority on setting up the contracts required for the supply of cleaner electricity. (If we start now the government should be able to have enough contracts in place before the next election to at least bring emissions back on target by 2016.)
2. Serious consideration be given to setting up enough contracts to replace almost all coal fired power with gas fired CCGT and some renewables. (The figures I have seen suggest that this could be achieved without increasing the cost of power by more than 2¢/kWh - Would cost only 55¢ per person/day including cost to business.)
3. A system be set up to control the average fuel consumption of new cars. It is suggested that the initial target by set at 5.5litres/100 km. (Half the average consumption of the current fleet. There are many low cost cars available right now that consume less than this target. )
NOTE: Right now the coal and mining industries are in a very healthy state. So it is the right time to get on with the job of replacing coal fired power with something cleaner. At the moment, many of the coal mines that would lose power station contracts will be able to sell the coal elsewhere. However, there are some mines feeding power stations for which this is not an option. While it is never a good time for these miners to lose their jobs, it is better to do so while the demand for experienced mine workers is strong.
Regards
John Davidson
9 Pontefract St
Chapel Hill
Qld 4069
Australia
07 3878 9167
0408 727 486
davidson.john.robert@gmail.com
APPENDIX: DETAILS:
NOTE: In order to get a feel for the financial impact of various alternatives a carbon price of $30/tonne CO2 has been used where required. (This would add about 3¢/kWh to the price of dirty electricity and about 12¢/litre to the price of petrol.) $30/tonne was used because Michael Fraser, the managing director of AGL, has publicly stated that “his company will not start making investments in lower-carbon energy if the carbon price is below $30 per tonne CO2.” (1)
What should be done before the next election to regain climate action credibility?
I am engineer whose experience includes involvement in tender and bid preparation for large contracts in the mining industry. On the basis of this experience my guess would be that, if the government decided right now to set up the contracts required for the supply of clean electricity, the contracts would be finally signed some time in 2013 and the cleaner power would come on line sometime during 2016. This means that it is desirable to have enough contracts in place before the next election to ensure that the electricity clean-up program will be back on target by the end of 2016.
Setting up regulations to help reduce emissions may take less time. However, in the case of regulations to change the efficiency of new equipment, keep in mind that it takes time for old equipment to reach the end of its life. For example, if something last 20 years, halving the emissions of new units now will only result in a 25% reduction in average unit emissions by 2020.
So what is wrong with putting a price on carbon?
Let us start answering this question by looking at two specific cases.
Case 1: Driving investment in cleaner electricity:
Potential investors will decide to invest on the basis of the price they expect to receive and their confidence that consumers will buy their product. They will not be concerned about the price of dirty electricity as such unless this is going to affect their price or sales.
Option 1: Carbon price orthodoxy: The carbon price is used to drive up the costs of dirty electricity by 3¢/kWh. If we assume that all this cost increase will be added to the price, the average price of electricity has to rise by at least 3¢/kWh no matter whether we are replacing 1% or 100% of the dirty electricity. What this means is that by the time we have replaced 20% of dirty electricity the increase in the country’s power bill will have dropped to $150/tonne emission reduction.
NOTE: In reality, dirty electricity suppliers will absorb some of the cost if the alternative is to lose sales. The carbon price may have to be set higher in anticipation of this response.
Option 2: Use competitive tendering to set up long term contracts for the supply of cleaner electricity: In this case the price of dirty electricity can remain unchanged and a series of long term contracts for the supply of cleaner electricity set up. Regulations would be needed to ensure that the purchase of the cleaner electricity produced under these contracts would take precedence over the purchase of dirty electricity.
Because the price of dirty electricity remains unchanged, the increase in the country’s power bill will stay at $30/tonne emission reduction no matter how much dirty electricity has been replaced. The average price of electricity would ramp up slowly as the proportion of more expensive, cleaner electricity increases. Thus the average price of electricity would only have risen to only 0.6¢/kWh by the time emissions had been reduced by 20% - A far better result than what would have been achieved under option 1.
NOTE: In practice, these figures understate the advantages of option 2. Competitive tendering should give a lower cleaner electricity price than what would result from the government trying to set a high enough carbon price to be sure that investment would follow. In addition, competition amongst dirty electricity producers competing for a declining market should drive down the dirty electricity price as well.
A contract approach has the added advantage of allowing much better control over the rate of investment as well as issues such as location, technical details etc.
Case 2: Reducing the fuel consumption of cars:
Option 1: Carbon price orthodoxy
The $30/tonne carbon price is used to drive up the price of fuel by 12¢/litre (10% for a base fuel price of $1.20/litre.) This increase in price will only have a limited impact on emissions. Reviews of numerous studies in both the UK(2) and the US (3) found that a 10% increase in the price of fuel reduced car related emissions by about 2.5% in the first year and 6.0% in the longer term. This is in line with our own experience of negligible cuts in fuel consumption during fuel price surges.
On the above figures, a $30/carbon price would increase in the country’s fuel bill by $870/tonne emission reduction for the 2.5% reduction in fuel consumption dropping to $170 when the 6% reduction has been achieved.
NOTE: The smallness of the emission reduction should not be surprising. ABS data for 2007(4) indicated that the average car consumed about 1500 litres of fuel a year at an average consumption of 11.4 litres/100km. An increase in the price of fuel of 12¢/litre would add only 49¢ a day to the cost of running this average car. Hardly enough drive most people to make inconvenient changes.
Option 2: Use regulations to control the average fuel consumption of new cars
The proposed alternative consists of the following elements:
Firstly, a target that ramps down over time is set for the average fuel consumption of new cars. An initial target of 5.5litres/100km is suggested. (50% of 2007 figure.)
Secondly, an offset trading system may be set up to allow for the buying and selling of offset credits. (Ex: A new car consuming 3 litres/100km below target might obtain 3 credits. A car consuming 2 litres/100km above target would require the purchase of 2 credits.)
Thirdly, regulations would be introduced to ensure that importers and manufacturers keep the average fuel consumption of what they sell below target unless they buy sufficient offset credits from others to compensate.
This alternative does not require any changes to the price of fuel. It will actually REDUCE the national fuel bill by $300/tonne emission reduction for the base fuel price of $1.20/litre because of the reduction in average fuel consumption per car.
It is harder to say what effect this alternative will have on the new car bill. If enough people react by buying smaller, cheaper cars the new car bill may actually fall.
NOTE: Reducing the average price of new cars is only one of the things that have to be done to reduce car related emissions. However, the average car lasts for something between 10 to 20 years so there is some urgency in bringing down the average fuel consumption of the new cars entering the system.
In terms of national fuel bill reduction it is worth noting that transport group Linfox has managed to achieve a 28% reduction in emissions per km since 2007 without a carbon price. Climate Spectator (5) reported that: “Linfox argues that a carbon price would be ineffective in the transport industry, but is pushing for regulation instead”. Quite so.
The irony is that we don’t need a carbon price to get emission reduction back on target. More to the point, a carbon price based approach is not the best way to do important things like driving investment in cleaner electricity, reducing the fuel consumption of cars or, for that matter, anything else I have looked at.
When comparing climate action alternatives what really counts is the cost/tonne emission reduction. So how does the carbon price approach compare by this measure?
The fundamental problem with the carbon price approach is that depends on “putting a price on dirty” to drive climate action. Unless the result is 100% emission reduction, the price increase for some emissions will be “unproductive” in the sense that it will result in little or no action. These unproductive price increases add to the price per tonne emission reduction. For example, if a $10/tonne carbon tax on all emissions reduces emissions by 10%, the carbon tax/tonne emission reduction will be $90/tonne, well above the carbon tax of $10/tonne. This is because 90% of the original tax will still be being paid and be part of the price per tonne emission reduction.
By contrast, alternatives that do not depend on changing the price of dirty avoid this unnecessary addition to the price/tonne emission reduction.
In theory, some of the money that goes into the higher prices associated with the carbon price approach can be recovered and returned to taxpayers. In practice, admin costs, compensation payments, etc. will reduce this return.
The other fundamental problem with “putting a price on dirty” is that the whole strategy depends on this price increase. For this reason the full price increase has to be imposed at the beginning of the clean-up process.
By contrast, alternatives that do not depend on changing the price of dirty avoid this need for any increase in prices at the start of the process. Even in cases where the clean alternative needs to sell at a higher price than dirty, the average price will only ramp up slowly as the proportion of clean increases.
A comparison of the carbon price approach with alternatives for driving investment in cleaner electricity and reducing the fuel consumption of cars is appended. To summarize:
Driving investment in cleaner electricity:
The alternative involved the setting up of contracts to supply cleaner electricity combined with regulations to ensure that the purchase of the cleaner electricity produced under these contracts would take precedence over the purchase of dirty electricity. It was calculated that, for a targeted carbon price of $30/tonne CO2:
The carbon price approach would result in an increase in the national power bill of $150/tonne emissions reduction by the time power related emissions had been reduced by 20%. In addition, the average price of power would have to rise suddenly to 3¢/kWh no matter how much emissions had been reduced.
By comparison, the alternative would have increased the national power bill by only $30/tonne emissions reduction no matter how much emissions were reduced. The average price of electricity would ramp up as the proportion of cleaner electricity increases. The average price increase would have reached only 0.6¢/kWh by the time emissions had been reduced by 20%.
Driving down car related emissions:
The alternative uses regulation to ensure the average fuel consumption per km of new cars stays below a target that ramps down with time. It was calculated that:
The carbon price approach would increase the national fuel bill by $870/tonne emission reduction when a carbon price of $30/tonne CO2 is introduced. This would drop to $170/tonne after several years. In addition, the price of fuel rises by 12¢/litre as soon as the carbon price is introduced.
By contrast, the alternative REDUCES the national fuel bill by $300/tonne emissions reduction. It does not require any change to fuel prices to work.
RECOMMENDATIONS:
It is recommended that:
1. The government puts a high priority on setting up the contracts required for the supply of cleaner electricity. (If we start now the government should be able to have enough contracts in place before the next election to at least bring emissions back on target by 2016.)
2. Serious consideration be given to setting up enough contracts to replace almost all coal fired power with gas fired CCGT and some renewables. (The figures I have seen suggest that this could be achieved without increasing the cost of power by more than 2¢/kWh - Would cost only 55¢ per person/day including cost to business.)
3. A system be set up to control the average fuel consumption of new cars. It is suggested that the initial target by set at 5.5litres/100 km. (Half the average consumption of the current fleet. There are many low cost cars available right now that consume less than this target. )
NOTE: Right now the coal and mining industries are in a very healthy state. So it is the right time to get on with the job of replacing coal fired power with something cleaner. At the moment, many of the coal mines that would lose power station contracts will be able to sell the coal elsewhere. However, there are some mines feeding power stations for which this is not an option. While it is never a good time for these miners to lose their jobs, it is better to do so while the demand for experienced mine workers is strong.
Regards
John Davidson
9 Pontefract St
Chapel Hill
Qld 4069
Australia
07 3878 9167
0408 727 486
davidson.john.robert@gmail.com
APPENDIX: DETAILS:
NOTE: In order to get a feel for the financial impact of various alternatives a carbon price of $30/tonne CO2 has been used where required. (This would add about 3¢/kWh to the price of dirty electricity and about 12¢/litre to the price of petrol.) $30/tonne was used because Michael Fraser, the managing director of AGL, has publicly stated that “his company will not start making investments in lower-carbon energy if the carbon price is below $30 per tonne CO2.” (1)
What should be done before the next election to regain climate action credibility?
I am engineer whose experience includes involvement in tender and bid preparation for large contracts in the mining industry. On the basis of this experience my guess would be that, if the government decided right now to set up the contracts required for the supply of clean electricity, the contracts would be finally signed some time in 2013 and the cleaner power would come on line sometime during 2016. This means that it is desirable to have enough contracts in place before the next election to ensure that the electricity clean-up program will be back on target by the end of 2016.
Setting up regulations to help reduce emissions may take less time. However, in the case of regulations to change the efficiency of new equipment, keep in mind that it takes time for old equipment to reach the end of its life. For example, if something last 20 years, halving the emissions of new units now will only result in a 25% reduction in average unit emissions by 2020.
So what is wrong with putting a price on carbon?
Let us start answering this question by looking at two specific cases.
Case 1: Driving investment in cleaner electricity:
Potential investors will decide to invest on the basis of the price they expect to receive and their confidence that consumers will buy their product. They will not be concerned about the price of dirty electricity as such unless this is going to affect their price or sales.
Option 1: Carbon price orthodoxy: The carbon price is used to drive up the costs of dirty electricity by 3¢/kWh. If we assume that all this cost increase will be added to the price, the average price of electricity has to rise by at least 3¢/kWh no matter whether we are replacing 1% or 100% of the dirty electricity. What this means is that by the time we have replaced 20% of dirty electricity the increase in the country’s power bill will have dropped to $150/tonne emission reduction.
NOTE: In reality, dirty electricity suppliers will absorb some of the cost if the alternative is to lose sales. The carbon price may have to be set higher in anticipation of this response.
Option 2: Use competitive tendering to set up long term contracts for the supply of cleaner electricity: In this case the price of dirty electricity can remain unchanged and a series of long term contracts for the supply of cleaner electricity set up. Regulations would be needed to ensure that the purchase of the cleaner electricity produced under these contracts would take precedence over the purchase of dirty electricity.
Because the price of dirty electricity remains unchanged, the increase in the country’s power bill will stay at $30/tonne emission reduction no matter how much dirty electricity has been replaced. The average price of electricity would ramp up slowly as the proportion of more expensive, cleaner electricity increases. Thus the average price of electricity would only have risen to only 0.6¢/kWh by the time emissions had been reduced by 20% - A far better result than what would have been achieved under option 1.
NOTE: In practice, these figures understate the advantages of option 2. Competitive tendering should give a lower cleaner electricity price than what would result from the government trying to set a high enough carbon price to be sure that investment would follow. In addition, competition amongst dirty electricity producers competing for a declining market should drive down the dirty electricity price as well.
A contract approach has the added advantage of allowing much better control over the rate of investment as well as issues such as location, technical details etc.
Case 2: Reducing the fuel consumption of cars:
Option 1: Carbon price orthodoxy
The $30/tonne carbon price is used to drive up the price of fuel by 12¢/litre (10% for a base fuel price of $1.20/litre.) This increase in price will only have a limited impact on emissions. Reviews of numerous studies in both the UK(2) and the US (3) found that a 10% increase in the price of fuel reduced car related emissions by about 2.5% in the first year and 6.0% in the longer term. This is in line with our own experience of negligible cuts in fuel consumption during fuel price surges.
On the above figures, a $30/carbon price would increase in the country’s fuel bill by $870/tonne emission reduction for the 2.5% reduction in fuel consumption dropping to $170 when the 6% reduction has been achieved.
NOTE: The smallness of the emission reduction should not be surprising. ABS data for 2007(4) indicated that the average car consumed about 1500 litres of fuel a year at an average consumption of 11.4 litres/100km. An increase in the price of fuel of 12¢/litre would add only 49¢ a day to the cost of running this average car. Hardly enough drive most people to make inconvenient changes.
Option 2: Use regulations to control the average fuel consumption of new cars
The proposed alternative consists of the following elements:
Firstly, a target that ramps down over time is set for the average fuel consumption of new cars. An initial target of 5.5litres/100km is suggested. (50% of 2007 figure.)
Secondly, an offset trading system may be set up to allow for the buying and selling of offset credits. (Ex: A new car consuming 3 litres/100km below target might obtain 3 credits. A car consuming 2 litres/100km above target would require the purchase of 2 credits.)
Thirdly, regulations would be introduced to ensure that importers and manufacturers keep the average fuel consumption of what they sell below target unless they buy sufficient offset credits from others to compensate.
This alternative does not require any changes to the price of fuel. It will actually REDUCE the national fuel bill by $300/tonne emission reduction for the base fuel price of $1.20/litre because of the reduction in average fuel consumption per car.
It is harder to say what effect this alternative will have on the new car bill. If enough people react by buying smaller, cheaper cars the new car bill may actually fall.
NOTE: Reducing the average price of new cars is only one of the things that have to be done to reduce car related emissions. However, the average car lasts for something between 10 to 20 years so there is some urgency in bringing down the average fuel consumption of the new cars entering the system.
In terms of national fuel bill reduction it is worth noting that transport group Linfox has managed to achieve a 28% reduction in emissions per km since 2007 without a carbon price. Climate Spectator (5) reported that: “Linfox argues that a carbon price would be ineffective in the transport industry, but is pushing for regulation instead”. Quite so.
REFERENCES :
1. Climate Spectator 24 Dec 2010:
2. PHIL GOODWIN, JOYCE DARGAY and MARK HANLY ESRC Transport Studies Unit, University College London, London, UK: “Elasticities of Road Traffic and Fuel Consumption with Respect to Price and Income: A Review (UK)” Transport Reviews, Vol. 24, No. 3, 275–292, May 2004
3. Espey, Molly (Energy Journal. Vol. 17, no. 3, pp. 49-60. 1996)
5. Climate Spectator 14 Oct 2010
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