Carbon margin battle is joined

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CarbonTax

The ACCC this morning declared that it would pursue 9% price reductions for electricity from providers and 7% from gas providers as the carbon tax is cut.

I’ve argued previously that will be difficult to engineer, not least because the costs of “direct action” will be even higher as new low carbon capacity must replace cheaper shuttered coal-fired power.

Nonetheless it appears likely the admirable “take no shit” ACCC of Rod Sims is going to drive the price reductions hard, even if they will have to rise soon afterwards (assuming direct action is not a complete farce).

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This afternoon it get’s a little more complicated as the AIG has come out arguing that the higher energy prices were never passed on by its members:

“The repeal of the Carbon Tax will lead to some very welcome price reductions for consumers and business but the ACCC should tread carefully in its price monitoring role,” Australian Industry Group Chief Executive, Innes Willox, said today.

“Electricity prices were the main source of carbon costs for most businesses and most households. The removal of the tax will flow through to lower electricity bills, ultimately lowering prices by around two cents per kilowatt-hour. The timing will depend on the retailers’ hedging arrangements; terms in individual contracts; and in some cases on State price regulators. These savings will be welcomed by energy users.

“Gas prices should also benefit from the removal of the tax, though this will be lost in the much larger price rises driven by LNG exports from Queensland.

“However, we reiterate that there are unlikely to be significant price reductions for most goods and services apart from energy and certain refrigerants. There is a very simple reason for that: those prices never incorporated the carbon tax in the first place.

“Ai Group surveys of businesses in the manufacturing, construction and services sectors have shown that those businesses were largely unable to recover their carbon costs from customers. 70 per cent of respondents did not pass through any carbon cost at all; the average across the sample was a cost pass-through of just 6 per cent.

“This was not unexpected. Ai Group and others have consistently highlighted the difficulty for industry in passing on costs not faced by competitors overseas. Indeed, the whole basis of the partial compensation arrangements for some emissions intensive industries was the expectation that those sectors were too exposed to international trade to pass on carbon costs.

“In short, most businesses outside the energy sector have simply absorbed the costs of the carbon tax, in the face of intense international competition and powerful customers. That has had an impact on their ability to employ and reinvest, but not on consumer prices.

“The ACCC consulted with business and behaved reasonably and professionally in monitoring the initial introduction of the tax, and we expect they will do so again as the tax is removed. But there should be no illusions that there will be big falls in prices beyond electricity charges.

“It is important to industry that the repeal legislation is passed as soon as possible to add certainty and allow for the benefits to flow through more quickly,” Mr Willox said.

It’s fair to say that the inflationary impacts of the carbon tax were lower than anticipated which might support the AIG’s case though its impossible to disaggregate the various margin pressures suffered by these businesses at the time. The AIG might be right or it could be engineering a margin grab. I’m not sure the ACCC will be able to determine the difference.

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It will be interesting to see if the other big carbon tax payer in the tradables sector, the mining sector, makes the same arguments. That wouldn’t do anyone’s credibility any good.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.