Australian opposition leader Tony Abbott has launched a new climate policy. The plan states on page one:
Our policy will cost $3.2 billion over 4 years, while the ETS costs $40.6 billion over the first four years.
This is comparing oranges with apples. It is referring to the their policy spending $3.2 billion, and the ETS raising $40.6 billion from sale of permits (much of which will go back to households or polluters), but they are completely different things. And the “cost” of a policy is how much is spent on emission reductions, be it by firms, the government, or whatever. This has nothing to do with the amount of auction revenue in an ETS.
The Coalition does not appear to understand the difference between price and cost. Professor Ross Garnaut spelled out the difference at a public lecture at the ANU in November 2007:
Finally, it is worth differentiating between the price of carbon and its cost to the economy. The cost to the economy is not, as some have suggested, the carbon price set for emission permits. The “price” is not the cost – this has been a fallacy of the Australian discussion to date.
The cost to the economy is the expenditure on substitutes net of existing higher costs imposed through mandatory schemes. While carbon prices will rise over time, the cost of mitigation does not rise at the same rate. It could be more or less depending on expenditure on substitutes such as renewable energy development, increased costs of structural industry adjustment and improving energy efficiency.
But over time, the incremental cost of new energy sources applies to a smaller part of the economy; and continued technological and institutional improvement in supply of the new substitutes for the old high-carbon activities may bring down their cost, even when the carbon price is rising.
February 2, 2010 at 3:53 pm
Peter,
It is wrong to say that the CPRS has no cost because all of the receipts are handed back. The funds to be collected from the energy distributors are achieved through higher electricity prices which have been scheduled by IPART. But the price increases are higher than that which would cover the CPRS. They are higher by the amount that IPART estimates that the energy companies are going to need to spend in order to operate within the dwindling emission permits. That other amount is significantly larger than the CPRS collections themselves. And then there is the issue that it is only households under $160,000 annual income who are refunded. General business is not refunded. They have to absorb the CPRS increase and recover that through sales. Those price increases eventually fall on households. So whereas the the increase in electricity prices is (in theory anyway) compensated for with the refund, the general increases in prices is not refundable. So the public pays the bill eventually.
So the real issue is which system is the most efficient.
February 2, 2010 at 4:12 pm
The coalition is devoting $100 million a year to putting solar on peoples rooves – one of the more expensive ways to reduce emissions. That alone should tell you which scheme is going to be more efficient (at reducing emissions).
On top of that, when govt hands out money, it runs the risk of:
- poor setup of rules meaning that money is squandered via loopholes on dodgy enterprises
- poor setup of rules means that loopholes are minimised, but it becomes very onerous and bureaucratic to actually apply for funds.
- pork-barrelling (lets fund project A but not B because A is in a marginal, and B is in a safe seat). This will be inefficient.
- susceptibility to lobbying/ideology (lets fund project A and not project B, because A is clean coal which we have been told we should like, while B is wind power, which we have been told we should not like)
- susceptibility to corruption (lets fund project A because they gave us something)
- encouragement of the white shoe brigade (govt is handing out billions, lets all start a treeplanting / solar business and do the bare minimum to be eligible for a handout!)
IMO, handing out money as the coalition proposes is likely to be more of a “money-go-round” than the ETS, with potential for wastage, red-tape, and misdirected efforts. We have had 15 years of experience with such schemes, because the Howard Govt was so fond of them. Look at the litter of big-grant funding schemes they left behind that cost billions but didn’t actually reduce emissions by much, nor significantly advance a new technology.
February 2, 2010 at 10:31 pm
I’m sure Greg Hunt at least understands the difference. It’s all pure political propagnada/lies/spin. I havn’t got a clear idea yet of the Coalition’s proposal as Abbott said a lot more than appears to be on their website and it really wasn’t clear.
February 2, 2010 at 10:55 pm
Yes, I noticed this outrageous comparison as well and was rather angry at its deceptiveness. But I was somewhat happier when Kerry O’Brian hit him with it on his very first question on the 7:30 report – and repeated it again when Abbott predictably avoided answering the question. I wish there were more journalists like him.
February 2, 2010 at 10:56 pm
BilB, I do not claim that the CPRS has no cost, but I do claim that these costs are different to (and probably much less than) the amount of permit revenue. I do not know what methodology is used when the government estimates how much the CPRS affects prices for households, but it should be possible to do this for goods other than electricity.
David, I agree about Greg Hunt. But surely the Coalition wouldn’t engage in political propaganda/lies/spin?
February 3, 2010 at 11:39 pm
Hi Peter,
The whole CPRS thing was a rhetorical meaningless mess until IPART announced its direction to the electricity industry in NSW for pricing to accommodate the requirements of the CPRS. This is stage 1 of a 4 stage process of price increases to 2013 when the CPRS is proposed to come into effect
http://www.tta.com.au/energybusiness/electricity/ipart-increases-electricity-prices-by-20/
If you study the information you will see that the price increase has 2 parts. One part is an amount to cover the cost ofbuying permits, the other is to provide the funds to the industry to invest in the alternative electricity infrastructure (be it CCS in the governments mind or nuclear in some other minds or CSP/wind/geothermal/wave in everybody elses mind…stop press…tidal in the LNP mind), in order to meet the requirements of a declining availability of permits.
This is what Garnaut is refering to when he says
“The cost to the economy is the expenditure on substitutes net of existing higher costs imposed through mandatory schemes”
,”expenditure on substitutes” is the “other” part of the IPART price increase. This is the cost to the economy. The CPRS is collected and handed back to the average individual as a sort of progressive revenue distribution exercise, and it covers both parts of the IPART increase for them. Business on the other hand, SME’s largely, get no compensation and must pay all of the increase in electricity prices. As they are covering the cost this way for both their own electricity responsibility and the funding the entire CPRS emission permit cash flow, they will have no choice but to increase prices.
So where you say
“I do claim that these costs are different to (and probably much less than) the amount of permit revenue”
I have to point out that you are still caught in the misconception that the government has been happy for everyone to be immersed in, and that is that the money for the industry invest in alternatives will somehow magically appear via some economical miracle that people should not try to understand. Not so. The money to reshape the industry will come out of the consumers pocket via price increases, plus interest, plus profit^2.
Industry and agriculture are both much more difficult emissions problems to solve. But solve them we must, it will just take a lot more thought and research.
March 12, 2010 at 4:55 pm
Peter,
It is wrong to say that the CPRS has no cost because all of the receipts are handed back. The funds to be collected from the energy distributors are achieved through higher electricity prices which have been scheduled by IPART. But the price increases are higher than that which would cover the CPRS. They are higher by the amount that IPART estimates that the energy companies are going to nwed to spend in order to operate within the dwindling emission permits. That other amount is significwntly larger than the CPRS collections themselves. And then there is the issue that it is only households under $160,000 annual income who are refunded. General business is not refunded. They have to absorb the CPRS increase and recover that through sales. Those price increases eventually fall on households. So whereas the the increase in electricity prices is (in theory anyway) compensated for with the refund, the general increases in prices is not refundable. So the public pays the bill eventually.
So the real jssue is which system is the most efficient.;