Carbon Price and the Energy Sector

Ross Garnaut yesterday released his last paper of the Review Update, focusing on the energy sector. I paraphrase his main points as follows:
• Carbon pricing will result in switching away from high emission generation;
• It is highly unlikely that the lights will go out when we price carbon;
• Consumers can be compensated by household assistance in a way that preserves the price signals arising from a carbon price.

The main reason Australia is the highest greenhouse gas emitter per capita is our heavy reliance on coal-fired generation. This has made historic sense; Australian householders, businesses and heavy industries have required access to low cost power and our nation’s endowment of black and brown coal has made this possible. We will still required low cost power in a carbon-constrained world, yet in such a world such power will need to “internalise the externalities”.This will undoubtedly raise the cost of wholesale power; because cleaner energy almost by definition costs more than higher emission generation.

This graph (Chart 6.24) is from the Treasury modeling done in 2008, and it shows the emission intensity for new generation. Note that combined cycle gas turbine (CCGT) plant is significantly less emission intensive than coal, and there are other sources of power with even lower intensity. Not represented on this graph is that fact that our existing fleet of coal-fired power is more intensive than new plant, with older plants being less efficient and therefore more intensive. Hazelwood, for example, built in the 1960s and early 70s is around 1.6kgCO2e/kWh. There are therefore many opportunities for price-sensitive fuel switching, both for new and existing plant, in the electricity market.

This is one of the main reasons for pricing carbon: to facilitate a market-based and therefore lower cost transition from highly greenhouse-intensive energy supply to lower intensive energy supply. It is a wholesale effect that should be differentiated from the retail effect. The retail effect is the impact of higher cost electricity on demand. It is true that electricity demand is quite inelastic, and so you would need a very high carbon price to reduce emissions from lower demand. But the main point of a carbon price is not to choke off demand; that would be a very high cost abatement opportunity. The main point is to transition the energy sector to a lower greenhouse intensity, which can happen at much lower carbon prices (starting around the $20-30/tCO2e level)

The proposal for compensating low and middle income households for the impact of rising electricity prices is a change from historic approaches to the introduction of such mechanisms (although in Australia it was a feature of both Howard’s proposed ETS in 2007 as well as the CPRS in 2008/09). In Europe, for example, permits were freely allocated to the emitters, rather than auctioned. Presumably some economists would have warned policy makers about the concept of opportunity cost and that the emitters would pass on the cost of carbon regardless of whether they had been allocated freely or had to purchase at auction. So consumers and industry suffered the higher cost of power without compensation. This is one of the many lessons we, and Europe, have learnt from the EU ETS. Given that the generators will pass through the carbon costs to wholesale power prices, which then are factored into retail prices, it is the end consumers that will feel the impact. Compensating via income measures such as income tax cuts and/or the welfare system is a way of providing an offset while also preserving the price signal of higher emissions. It is not the case that compensating households removes the point of pricing carbon in the first place.

I am somewhat confused, or perhaps bemused, about the accusation that this is a “big tax merry-go-round”. Our taxation reform history is well-populated with instances where the taxation base has shifted, most noticeably from income to consumption with the introduction of the GST. The shift to a carbon price can be thought of as merely a shift in taxation base from broad-based consumption to one of consumption based on implicit carbon emissions.

Comments

  1. Why not somehow collect all that carbon and synthesize it into diamonds using a variety of methods, specifically detonation synthesis where nanometer-sized diamond grains are created in a detonation of carbon-containing explosives.

    Wikipedia has described variety of methods for synthetic diamonds.

    • Carbon E Coyote

      carbon is short for carbon dioxide; you can’t take CO2 and turn it into diamonds. if you could, we wouldn’t have this problem.

      • Yes you could do it it would just take heaps and heaps of energy…producing heaps more CO2 than what would be saved.

        Ie. Such a process would be net CO2 producing.

  2. Sorry but I have to say this. I dont know why Australia in general is crying about this. There were marchs years ago about global warming and the earth is going to go to hell and a high basket. I think I remember there was a march where 250k people in Sydney marched because the govt was not doing anything about global warming or climate change as it is called now. That in itself cracks me up that they are changing the name. TV specials about global warming etc. This is what all those marchers and the Aussie population wanted was some action. I cant tell you the number of arguments I had with people about GW. Well here it is and now no one likes it. I got to laugh that Australia has believed in this. I am all for better ways of energy and things that are cleaner. The problem is when companies come out with great things the govt lets them get bought out by the oil companies, etc. etc…….

    Cheers,
    LBS

  3. On a technical note, the graph is unreadable. Most sites which provide graphs allow the reader to rightclick and load full size in a new tab. Maybe you could look into doing the same?

    • I agree AlanR.

      A WP image popup plugin would make life so much easier.

      Look at NextGEN Gallery of Shadowbox JS for two reasonable options.

      • Click twice to see the full-sized image. Some of the bloggers here seem to know how to post images correctly, others don’t.

  4. The shift to a carbon price can be thought of as merely a shift in taxation base from broad-based consumption to one of consumption based on implicit carbon emissions.

    Yeah, I’ve always thought of a carbon tax as a “GST on carbon”. Howard managed to push through the GST (just) but then he began with a huge majority.

    Compensating via income measures such as income tax cuts and/or the welfare system is a way of providing an offset while also preserving the price signal of higher emissions. It is not the case that compensating households removes the point of pricing carbon in the first place.

    Another very good point that is lost on many people. So, how can we design an efficient compensation scheme that doesn’t burn money in government bureaucracy?

    This is getting very close to James Hansen’s “Fee and Dividend” scheme.
    http://en.wikipedia.org/wiki/Fee_and_dividend

    • “how can we design an efficient compensation scheme that doesn’t burn money in government bureaucracy?”

      Go & ask the Department of Financial Deregulation, just behind the Treasury building in Canberra.

      They should be well versed in how a bureaucratic apparatus regulates deregulation without burning money, so may have some solutions to your conundrum.

  5. As Gar-nut (As I like to call him) says “Carbon pricing will result in switching away from high emission generation;”

    Thats all well and good BUT what are the alternatives? Frankly for base load there is only 1. But Aussies will not even talk about this evil father of power generation. I think Aussie Govts know nuclear is the only way to solve this problem, if reducing CO2 is their main objective. All states have built DeSal plants, even the ones which didnt need them, which make me think, they are a precursor to Nuclear power in the future.

    I did a quick calculation on replacing coal with wind. Cost was $300B for turbines only. Plus Land of 12,500sqkms also needed in coastal windy area’s.

  6. <>

    But of course it is going to cause most pain to households and industries that are sensitive to energy costs. That is the poor and those employed in manufacturing (also tend to not be that well off).

  7. The picture heading the thread here illustrates the problem in trying to discuss Carbon tax. Every illustration of the problem, including ‘expert’ ABC supposedly neutral commentary on the Carbon Tax has something like it. Mostly they show 3 or 4 such stacks.
    Not saying it is deliberately the case here but these pictures are deliberately used to portray the whole ‘big polluters’, we’re destroying our world overnight scenario.
    What is coming out of the stack that is front and centre is STEAM.