Changing Behaviour

The price elasticity of household electricity demand is quite low, around -0.1, meaning that a 20% increase in price leads to a 2% reduction in demand. The addition of a carbon price into the cost of electricity is unlikely to have much impact on consumption unless carbon prices were to be very high. You might be wondering why are we doing this?

The point of a carbon price is not to lift energy prices so high that we turn down our consumption. The objective of a carbon price is to restructure the economy to lower emissions. Changes in household consumption of energy intensive goods may be a secondary and perhaps intended outcome but it is not the objective. It represents one source of potential abatement, but it would come at a relatively high abatement cost.

The emission reductions come from much lower abatement cost sources. The well-known McKinsey Curve showed some of these abatement activities, stacked in order of cost. When a carbon price is implemented, the abatement becomes viable. The “tax” we would be paying is the pass-through of some of these costs into the goods and services that we buy.

That being said, it’s important to preserve the price signals on emission intensive goods such as energy. That’s why the compensation package for households is not embedded as a subsidy in electricity prices; that would remove any incentive to reduce demand. Rather, it’s designed as a lump sum or income adjustment. So the incentive to reduce consumption (eg by installing solar panels, replacing end-of-life appliances with new energy efficient ones, improving insulation etc) is preserved.

This is not economic rocket science; when the US was designing their ETS, household assistance was also delivered as a fixed income benefit (as part of the fixed charges in utility bills) rather than impacting on the variable cost of energy … a different way of doing it but on the same economic logic.

Comments

  1. Yet there is still no evidence that man made CO2 emissions are doing any kind of damage whatsoever to the planet. Also, other countries have had ETS/Carbon taxes for years, why have they not developed the some magical base load renewable source of power? Why haven’t they even lowered their emissions?

    People in Germany pay exhorbitant prices for petrol, yet they are driving more than ever (I don’t trust your 10:1 elasticity ratio either, I suspect it is much smaller, although this is just my opinion).

    You are essentially putting the cart before the horse. Why not develop a renewable source of base load power THEN look to start moving towards a lower emission economy? What is the point of going through all this pain for absolutely no measurable gain at all?

    It’s all well and good to post graphs and theories, but when real world evidence doesn’t support them, don’t you think it’s time to go back to the drawing board? Wouldn’t you agree that is the logical course of action?

    • No evidence? Are you dreaming? There are mountains of evidence that excessive CO2 is having a detrimental effect on the planet.

      Even a cursory though experiment would show that there’s likely to be a problem: if we’re digging up CO2 that took a few million years to sequester and dumping it all back in the atmosphere in a few hundred years, it’s no great surprise that that things may end up out of whack.

      If AGW skeptics want to be taken seriously they need to start proposing viable alternate explanations for the already observed effects of increased CO2. Preferably ones that haven’t already been demolished (i.e: it’s not the Sun)

      At the moment, what they’re doing is the equivalent of having their fingers in their ears while shouting “isn’t, isn’t, isn’t”.

      • Define “out of whack”.
        Are you blaming earthquakes and flooding on man made carbon dioxide emissions ?

        Even the worst case IPCC scenario doesn’t expect more than 2 degrees warming and a few centimeters of sea level rise.

      • And one more thing. The burden of proof isnt on skeptics to come up with a better theory to show whats causing climate change, or find a data set that correlates with global temperatures.

        The burden of proof is on climate alarmists to actually prove that carbon dioxide levels are directly causing global temperature changes.

        Not just with elaborate computer modelling based on fixing of parameters and dozens of assumptions, using a handpicked proxy set as historical data.

        Right now, there are many skeptics who openly confess that we just don’t know enough about the planets climate and that no computer model in the world can accurately simulate the dynamics of the global system.

      • Sidamo I don’t think other causes have been “demolished” at all. Mars is also warming
        http://news.nationalgeographic.com/news/2007/02/070228-mars-warming.html

        Are you positing that CO2 on earth is also affecting Mars? Or is this more about planetary & solar temp fluctuations that have been occurring for billions of years.

        No planetary system is static, to blame fluctuations on arbitrary elements of human behavious is flawed to say the least.

      • So Abdussamatov claims that “long term solar irradiance increases” are causing our warming, but also that solar irradiance has been decreasing since the 90s?

        Why are 2005 & 2010 tied for the hottest years on record then?

        Is he claiming that the Earth receives warmth from the Sun today, but doesn’t release the heat into the atmosphere as warming until 15 years later??

      • Probably couldn’t add much more to the two responses just reitterate. The burden of proof isn’t on skeptics to come up with an alternative. It’s on those with the hypothesis to provide evidence to support it. Something that simply hasn’t been done.

      • Carbon Bologny

        Agreed. Might I also add that I despise the fact that anthropogenic climate change advocates are labelling critical thinkers pejoratively as ‘skeptics’ or ‘deniars’. This is a breathtaking attempt to hijack the debate by throwing mud instead of examining facts and evidence. I’ve not seen this lack of respect for critical thought in other aspects of science which confirms my view that this is politically & economically motivated, not scientific.

      • all things considered we have a bigger problem with the global population, watering and feeding them than what we have with CO2….. the latter is also a necessity to this planet not a destroyer.

        wish everyone would put as much energy into the population debate globally (and the money) as what they do in climate control.

      • The IPCC has been examining facts & evidence for the last 30 years or so and revising its understanding & predictions based on the latest findings.

        To suggest there’s a lack of respect for critical thought is ludicrous.

        The majority opinion amongst scientists is that our emissions are negatively impacting our climate, as evidenced by the IPCC reports and position statements by all the major academies of sciences worldwide.

        If you are sceptical of that majority opinion, naturally you are a skeptic. What alternative word would you prefer?

  2. C E. C,

    I think what you are trying to say is that a carbon price is not targeted at changing household consumption, since our consumption patterns are not sensitive to energy prices. But you suggest that a carbon price should be high enough for energy producers to either find new energy sources or clean-up emissions from existing fossil fuels.

    So the next time we invest in energy generation the equation is skewed in favour of less polluting options. That’s fine.

    But I’m not sure that this really works.

    Consider the switch to wind generators. These turbines are made from various metals, shipped around the world and plonked on windy hilltops. Won’t the carbon tax also increase the price of all other sources of energy as well, since they have typically have high embodied energy?

    Of course, we can just buy them from China, in which case that defeats the purpose of the tax anyway.

    My second point relates to your graph. Do you really believe there are negative cost options to reduce greenhouse gas emissions? If they really were negative cost, wouldn’t that just mean households and businesses could spend their money on something else or increase their level of production, thus offsetting the proclaimed gain?

    Have you heard of the rebound effect?

    http://en.wikipedia.org/wiki/Rebound_effect_(conservation)

    Some more background reading

    http://ckmurray.blogspot.com/2010/09/energy-efficiency-flawed-paradigm.html

    http://ckmurray.blogspot.com/2010/09/too-good-to-be-true-environmental.html

    http://ckmurray.blogspot.com/2008/12/comment-on-fixing-floor-in-ets.html

  3. I agree with Matt, there needs to be some evidence-based policy here at two levels, namely evidence that anthroponenic CO2 can cause measurable harm and evidence that a carbon tax would make a measurable improvement (not just locally in Aust, but world wide – otherwise you’re defeating the purpose and having zero impact on aggregate emissions). As for the former, CO2 is a trace element in the atmosphere, a simple molecule, capable of only reflecting a tiny fraction of the vast spectrum of energy that bounces off the earth. As for the latter, Matt makes some good points. I dare say that decades from now people are going to look back on this antropogenic global warming stuff as one of the greatest all time scams on the people. Isn’t it amazing timing that carbon trading ramps up just as the last international banking venture in real estate winds down.

    • Carbon E Coyote

      For anyone genuinely and dispassionately interested in the science, refer to the Australian Academy of Science’s report entitled “The Science of Climate Change: Questions and Answers”, August 2010.

      • Carbon Bologny

        I’m not persuaded that the Australian Academy of Science, a body funded by government, is sufficiently motivated to provide a balanced view of the science where it would be at odds with clear govt policy to “take action on climate change”. The complete absence of any detailed discussion of mechanism is but one example of this lack of balance.

        Also, some of the ‘projections’ in this paper are absurd. They are extremely unscientific and presented as actual data, when they’re not, they are pure guesswork.

        In science you can’t draw the target around the arrow, which is what these climate change advocates are doing.

      • Carbon Bologny

        I should also add they completely fail to address climate change on other planets, such as Mars.

      • Actually there’s little to no evidence to support the idea that Mars is warming, unless you’re citing the one NASA study which was discredited a few years later because they didn’t take into account the fact that Mars has seasons.

    • “As for the former, CO2 is a trace element in the atmosphere, a simple molecule, capable of only reflecting a tiny fraction of the vast spectrum of energy that bounces off the earth”

      Carbon Dioxide absorbs Infrared light from the Sun, that gives it the ability to increase temperature.

      CO2 does increase the temperature of the globe, anthropogenic or otherwise, it still does, we’re destroying carbon sinks such as plankton and rainforests, while increasing our use of fossil fuels in developing countries and in vehicles. If you can not honestly put the math together then I question your ability to interpret science in any sense of the word.

      Stick to something easier, like Liberal Arts.

  4. Have you dudes read Garnaut’s Update 5 on the science of climate change? It’s more than compelling on the case that CO2 and other gases are causing warming.

    Or, try Professor A Muller, the skeptic that hammered the UK scientists for distorting data. Then did his own study at Berekely and concluded exactly the same thing as the guys he’d smashed.

    Not that it helps the cause terribly but both political parties both accept the science as well…

    • All we have (as you can see from Garnaut’s paper) is a tiny & debateable increase in avg temps and a large increase in anthropognic CO2. The argument then, is that these two look like they correlate so it must be cause & effect. As a scientist (albeit medical, not climate) I find this a dubious approach. Having said that I accept that people will want to apply the precautionary principle. I’m just not sure carbon taxing/trading is the way to go. If it can be proven to work then I think that would be great for a different reason. Namely, by reducing CO2 emissions we must reduce our reliance on carbon-based fuels. This is a good thing because they’re finite and we want to avoid resource wars down the track by preparing our societies to live without cheap carbon-based energy. Anyway, its a fascinating issue and very interesting times we’re living in.

    • “Have you dudes read Garnaut’s Update 5 on the science of climate change?”

      Garnaut is an economist and is a chief advisor to the ALP. Hardly an objective source. But nonetheless I haven’t read it, so I can’t comment on it’s body.

      At any rate, whether or not increasing CO2 causing some sort of warming is not the issue at hand. The questions are:

      – Is there a positive feedback effect that will cause runaway global warming?
      – Would the warming have a net negative effect?
      – Is mitigation more cost effective than adaptation?

      I can’t get the link – Im at work. But google ‘catastrophe denied’ and watch the guys presentation. It’s a really good summary of all the evidence at hand.

      Essentially, if rising CO2 was dangerous and had a positive feedback, we would have had runaway global warming eons ago.

      At any rate, it should be crystal clear by now that the science isn’t settled. Not by a long shot. So why then are we doing anything at all, other than wait for more information?

  5. This has moved beyond ‘science’, it has become a pure political tool that does nothing to clean up environment (or change the climate???). However, it does create an other financial market instrument that we can sell and buy. Absolutely brilliant – just what we need… more derivatives.

    • Will they be. No. Why. Too few understand the nature of derivatives. Taleb:

      “6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.”

      Taleb’s Ten Principles: (an oldie but a goodie):
      http://www.fooledbyrandomness.com/tenprinciples.pdf

      • Carbon E Coyote

        A carbon permit is not a derivative, it is a physical spot commodity.

        In any event, while there is a fixed price (eg the first 3-5 years), there will be nothing to trade and therefore no speculation and no derivatives.

      • I agree with that other anti-hero of mine, Taleb – but note he states complex financial derivatives: i.e CDS, CDO etc. Complex doesn’t necessarily mean you need a PhD in mathematics to understand them, it also means not robust – i.e RMBS, with moral hazards.

        Plain vanilla hedging contracts (e.g commodity futures) are fine, particularly when the margin requirements are substantial (unlike CFD’s) and there utilization is capital productive in nature.

        There will always be some speculators on the fringe (I provide size. I provide liquidity. etc), but these markets have been around for centuries.

        Dont lump in the derivatives that can bring down systems with those that keep those systems running both efficiently and robustly.

      • Just ‘cos you said you liked him(me too).

        Taleb:
        “…The ancients just made decisions in a more ecologically sophisticated manner than modern epistemology-minded people. They integrated skeptical Pyrrhonian empiricism into decision making. As I said, consider that belief (i.e., epistemology) and action (i.e., decision making), the way they are practiced, are largely not consistent with each other.

        Let us apply the point to the current debate on carbon emissions and climate change. Correspondents keep asking me if the climate worriers are basing their claims on shoddy science and whether, owing to nonlinearities, their forecasts are marred with such a possible error that we should ignore them. Now, even if I agreed that it was shoddy science; even if I agreed with the statement that the climate folks were most probably wrong, I would still opt for the most ecologically conservative stance. Leave Planet Earth the way we found it. Consider the consequences of the very remote possibility that they may be right—or, worse, the even more remote possibility that they may be extremely right.”

        Cheers

  6. There is another equally important element to this debate.

    Whether or not you accept the science of AGW, there has to come a point where we move from using finite energy sources to power our economy to renewable energy.

    If you allow consumption of finite energy sources to grow exponentially, then at some point you will reach the peak extraction rate of the resource, before its consumption must then decrease exponentially.

    When it comes to coal, oil and gas we have a tendency to use the easiest to access, most concentrated and largest resources first, because the energy returned on energy invested (EROEI) is the highest.

    That means these high quality resources will be used up first, before we move onto the more abundant but lower quality energy resources.

    Why is this relevant to carbon pricing? If you can accept that we will reach a peak extraction rate of fossil fuels, then it makes sense to invest some of this energy into setting up renewable energy sources BEFORE this peak extraction rate of fossil fuels is reached, otherwise it becomes increasingly difficult to switch to renewables as EROEI declines and energy becomes more expensive.

    Why is this relevant to today?

    Conventional crude oil production has remained on a plateau since 2005. According to the IEA, the production of conventional crude oil peaked in 2006 at 73mbd. You may be aware that all liquids production is currently around 83mbd oil equivalent, and this is set to decline by 2012-2015.

    Coal production in Europe and America has also reached a peak (if considered in terms of energy extracted). China is expected to reach peak coal production in 2012. However in the lucky country, we still have until 2040 when production of coal is expected to peak.Please see the paper ‘Peak Coal’ by T. Paztek and Croft.

    Australia can avoid the mistakes of the other developed countries and develop renewable energy sources well in advance in the decline of the peak of our energy production.

    • “If you allow consumption of finite energy sources to grow exponentially, then at some point you will reach the peak extraction rate of the resource, before its consumption must then decrease exponentially.

      When it comes to coal, oil and gas we have a tendency to use the easiest to access, most concentrated and largest resources first, because the energy returned on energy invested (EROEI) is the highest.”

      That’s all form of resources, not just energy.

      And if you’re looking at that vital point, as the prevailing sources of energy become more and more expensive to extract and distribute, the lack of price competitiveness of alternative energy sources becomes less acute.

      The cost of conducting a war to obtain these resources would also be factored into the ‘cost’.

      Once this cost are equal, nothing prevents a shift from carbon fuels to renewable energy sources.

      The only effective way however hasten this process it to add a tax to the price of the consumption of carbon.

      As far as an ETS goes, well if you posed the question to someone promoting the vested interests of the finance industry, an ETS is exactly the answer they would give you.

  7. I see it as a risk management issue – not an absolute right/wrong.

    Scenario one we do nothing – so we look at the risk of the climate scientists being right and the cost rising temperatures would entail.

    Scenario two – we mitigate carbon output and examine the cost of doing so vs the cost from scenario one.

    Thanks for the article Coyote – they’ve helped me understand the economic issues behind the current schemes much better.

    • Health care, life insurance, workers compensation are also forms of risk management.

      Do you propose that this risk is managed via a socialist method or user pays?

      I think I’ve seen enough here to known the answer.

      Would it be fair to then say those that do believe in AGW, or are prepared to partake in a risk management exercise of it, can be those that opt-in for the cost of this, and those of us that are not convinced of AGW theory do not pay anything?

    • Rusty, isn’t that how health risk/workers comp is managed today?

      A pseudo/hybrid system of markets and government support.

      Result: higher costs, lower delivery, lazy capitalism (check out your local allied health business that relies upon Medicare)

      • That’s a not a direct answer.

        What is being offered right now isn’t even a hybrid, it’s an outright socialist method.

        A certain line of thought would have it as the laziest, the lowest delivery and highest cost.

        Now I am an outright disbeliever of AGW, I want to opt-out. It’s not a risk I am prepared to manage.

        As a side issue;

        “Result: higher costs, lower delivery, lazy capitalism (check out your local allied health business that relies upon Medicare)”

        The US health system consumes twice as much of GDP as ours, one of, if not the biggest rent-seekers on the planet and is unable to deliver to around 40 million Americans.

        I’m not one to be so dogmatic about the virtues of private sector ‘efficiency’.

      • I’ll clarify here, I looked at my first response, i.e.

        “Health care, life insurance, workers compensation are also forms of risk management.”

        I see the ambiguity, however there is no edit function.

        The second line;

        “Do you propose that this risk is managed via a socialist method or user pays?”

        Was meant to frame the ‘risk-management’ of carbon, as iterated by QC, not framing my three examples.

  8. The main difficulty that I see with either a carbon tax or an ETS is that they are predicated on the assumption that they will result in a switch to alternative, lower carbon sources of baseload power. This may happen eventually, but not until the carbon price is a lot higher than the figures currently being mooted. In the meantime, we will have to put up with rapidly increasing energy costs and uncertainty of supply because the electricity generation industry is not willing to invest in more expensive power generators until they have more certainty. There is also the spectre of coal generation facilities being rendered uneconomic because of higher carbon prices, being sold off to new owners for a song, then being restarted by the new owners as a profitable enterprise, because the capital cost to the new owners is negligible compared to actual construction cost. Net result of this process – a lot of disruption, disgruntled shareholders who have done their dough, and no reduction in carbon.

    Of course, the difficulty of all this is further compounded because of the unwillingness of successive Australian governments to grasp the nuclear nettle. Australia is the only G20 nation without nuclear power, despite having around half the world’s known uranium reserves. Canada, the G20 nation perhaps most comparable to us in size, population and resources, has 20 nuclear power stations. Time to wake up, Australia.

  9. But will current nuclear technologies actually reduce CO2 emmissions? It seems that the energy required to set up current nuclear power stations is prohibitive, which would mean it could take almost a decade before a nuclear power station would result in a net reduction of carbon emissions.

    Of course the potential for nuclear is much better if we could start with fast nuclear reactors, which supposedly extract 25 times more energy from the same lump of uranium and leave fewer radioactive waste products.

    However if you want clean, proven renewable energy that can deliver baseload power, offshore wind, solar thermal or geothermal are much better options that offer much quicker returns.

    We are amongst the world leaders in solar thermal research, but this can hardly be said for nuclear power.

    Why not consider the Solar Updraft Towers about to be installed in Arizona by Enviromission (an Australian company)? While granted there will significant construction challenges in building such a tall tower, solar updraft towers require no water to operate, so can be installed in arid environments that recieve alot of son. Why doesn’t Australia have the balls to try this out ourselves?

    • Dave, it’s largely a question of bang for your buck. At this stage, all the technologies you mention are more expensive on a levelised cost of electricity (LCOE) basis, except wind. Wind is approximately comparable to nuclear, but only if you ignore the additional costs of grid connection, transmission and standing reserve costs (all of which are much greater for wind because it is, by definition, a much less concentrated and less reliable electricity source than a nuclear power plant). The Department of Energy, Resources and Tourism has a lot of analysis of this sort of thing – for a brief summary check out this http://www.ret.gov.au/energy/Documents/facts-stats-pubs/EPRI%20Fact%20Sheet.pdf. (small pdf file)

      • More a political stunt, as I’m guessing this only amounts to a 15MW plant(44000Mhr/365days/8hours useful sunlight a day). In comparison one turbine of a Eraring is rated to 600MW, and there are five turbines at Eraring.

        All the same the Solar Flagships program is a start, but it was still a pitiful $1.5billion in an industry that is going to need the tens of billions to really get going. Imagine if negative gearing on housing was removed and that $25billion a year went into something as game changing as solar thermal or fast nuclear could be for Australia?

        What would be inspiring is to see Enviromissions 200MW Solar Updraft Tower installed. This is not included in the EPRI factsheet as none of this scale have yet been built. They have a massive advantage that no water is required, this makes them stand above nuclear and coal as it takes demand off our precious water resources.

        There would also be plenty of jobs in construction, and you could stick them near places like Broken Hill, Mt Isa and Mildura without needing to build out the network.

        Also I noticed that fuel costs are not included in the EPRI fact sheet.

        Do you think coal will become cheaper as the America and China move to extracting less energy dense brown coal, and Australia seeks to profit from this?

        And finally according to ‘US Army Energy Trends’ published in 2005, the world has just 40 years of uranium left at current consumption levels. As nuclear is only used to supply about 10% of world primary energy, is nuclear really a sustainable option?

      • According to CS Energy’s website, the $104 million cost is provided by a $35m contribution from the Federal Government, $35.4m from the Queensland Government and the remainder from CS Energy. This gives some idea of how economical it is.

        Another way of looking at it is the output compared to cost. This one costs $104m and generates 44,000 MWh a year. That’s $2363 for 1 MWh a year. Assuming a plant life of 40 years gives a cost of $59 per MWh. This is not counting maintenance costs or the cost of the generator itself, which is already there.

        The 750 MW nameplate capacity coal fired power station next door (that’s why the generator is already there) would generate around 5.6 million MWh in a year, assuming 85 per cent capacity utilisation, and probably cost around $1 billion to build. That’s $179 for 1 MWh a year, or $4.48 per MWh over a 40 year plant life. Of course, this doesn’t include maintenance costs either, or the cost of coal, but as you can see the capital cost of solar is an order of magnitude higher.

      • Carbon E Coyote

        Yes, that’s right.

        Renewables like solar pv and solar thermal are not the cheapest way to reduce emissions, as I have opined before. They imply quite a high carbon abatement cost.

        The lower carbon cost opportunities are switching to natural gas CCGT for baseload, shutting down old inefficient power plant and improving energy efficiency.

      • I still don’t quite get how a carbon permit – a cost – is an incentive, per se.

        Wouldn’t a more proactive solution be:

        “hey – company or individual – if you CREATE zero emission power (solar, wind, geothermal etc) – you pay no TAX on the sale of that power”

        Wouldn’t that start a rush to everyone (both businesses small and large, and homes) to generate as much power as possible?

        To me, that’s an incentive. Imagine a power station that doesn’t pay corporate tax? Where do I and a million other superannuants line up to sign the PDS and invest????????????

      • You could make that argument about a lot of things. The capital value of my house is higher than my neighbours because I tend the garden and maintain upkeep. Do I get a prize for “beautifying ” the local environs – nope – I just pay more in council rates.

        Who said a weeds reduce productivity? Not here!!!!!!

  10. “Australia is the only G20 nation without nuclear power, despite having around half the world’s known uranium reserves.”

    Yes that is true, and Australia isn’t likely to run out of coal for the next 60 years.

    Give a miss to nuclear power, there is no technology to dispose of the radioactive waste. Of course, the nuclear industry never bothered to calculate the total cost of the technology – starting from mining, ending with safe disposal and everything in-between.

    I thought the aim of an environmental policy is to ‘apply’ safe and clean technologies. Where is the the proof that nuclear is safe, clean and cheap? But if you really insist – put a few nuclear plants in Canberra :-).

  11. Alex,

    Are you aware of the ‘protests’ in Germany and EU against the nuclear industry?

    No, i don’t think you seriously want to leave to your kids the spent rods as your environmental footprint.

    • Yes, I am aware of the protests, particularly in Germany. I am also aware that the regions in Germany where the protesters have been most vocal also protested about the MMR vaccine, resulting in a recent widespread measles outbreak due to low vaccination levels. Prosperity and education are no barrier to prejudice and irrationality.

  12. I read something about an idependent politician saying that he will not support the “cabton tax” if the end result is going to achieved “nothing”.

    Question. Top 100 top CO2 “generators” pay the carbon levy annually. This carbon levey payment is then passed on to their customers and so on. “Us” consumers then pay for that in terms of the products and services. The Government then in return compensates us (if that is where it is heading). The top 100 CO2 generators are willing to pay for the levy because it is passed on to their customers BUT they do not want to spend any money is reducing the amount of CO2 that they generate annualy.

    So, what has been achieved by this Carbon levy?

    • Carbon E Coyote

      If faced by a higher cost of doing business, companies will try to avoid doing so. Basic pforit maximising behaviour. There are many different ways of avoiding emissions, it’s just that we don’t bother doing any of them when carbon costs zero. If emitting CO2e costs something, there are many ways of doing things differently (see McKinsey curve) to avoid emitting.

      That’s the point of a carbon price.

      If there were no ways of avoiding emissions, then I agree it would be just a tax and not much would be achieved.

      • “If faced by a higher cost of doing business, companies will try to avoid doing so. ”

        Such as moving to jurisdictions that don’t impose a cost on carbon?

      • Possibly, although moving aluminium smelters doesn’t come cheap. My reading of what’s proposed so far is that it is unlikely to lead to dire outcomes.

      • If the entire discussion related only to Aluminium smelters, then there would be little to worry about.

        But I would suggest that Aluminium smelters would be an outlier of what is affected, not the norm.

        The issue will relate to the entire baseload generation of a prescribed jurisidction. In our case, our entire economic, sovereign mass.

        And this is coming from someone who does like the idea of a flat tax on carbon, and a carbon tax that also will be applied to imports coming from non-compliant jurisdictions.

        As long as there is a reduction in income and company tax, and net government receipts are zero, I have no problem with the idea.

        Making it a scrip with a dynamic price that the finance industry takes clip off however is something I think is absurd.

  13. Spinning Magnets

    Households account for about a quarter of electricity consumption. I suspect that business and industrial demand is more elastic than the figure you quote.
    And of course, demand is more elastic in the long-run. I assume your figure is a short-run elasticity.

    However, only 50% of a households electricity bill is actually for the energy consumed. (The rest is for transmission, distribution and retail.) So the effect of a higher energy price on a household’s final bill is diluted.

    • Carbon E Coyote

      That’s not correct….

      Most of a household bill is variable cost of energy, which comprises a charge per MWh for the wholesale energy, transmission, distribution and retail components. There is also a fixed cost component (typically 60-80c/day) which is less than a quarter of the total bill. For example a house on 70c/day charge pays $255 in fixed costs annually and pays around 6MWh * $200/MWh = $1200 in energy charges annually.

      On elasticity, it’s more elastic in the short term. 0.1 is a long term figure.

  14. “You might be wondering why are WE doing this?”

    Who are “we”? Do you mean you and the Labor Party?

  15. As for the issue of switches to the fuel mix in generation (the overwhelmingly main aim of the tax), the most simple of details have been overlooked in this discussion (although they were rightly implied as being common knowledge in C.E.C’s article). The system for electricity dispatch and distribution in the NEM is a pooled market. Generators (no matter what fuel type) place bids to supply at half hour intervals into the system. These bids are allocated a preference by the market to meet system demand (i.e. for the whole NEM) for the particular interval. The lowest cost bids are allocated first, followed by the next lowest, until the market is cleared at the last bid to meet the system’s requirement (i.e. the marginal cost of the last unit to balance the market becomes the wholesale price on the NEM). With, say, a $30/t cost on emissions from generators, suddenly a CCGT generator slips into the market to supply baseload power ahead of a brown coal fired generator (as the CCGT unit’s bid will be lower than the brown coal unit’s supply price once the cost of their respective emissions are factored in). That’s how the carbon tax works on changing the fuel mix. As for the higher cost at the other end, some of this would be absorbed into operating costs of the generation/transmission/distribution firms, while for consumers, that’s where this compensation stuff comes in.