An ill-fated foray that never made much sense

Guest opinion by Phillip Hutchings

With perhaps a few more grandstanding shenanigans in our Federal Senate this week, Australia’s two-year experiment with a Carbon Tax will soon end. Legislation to kill the tax, which was brought in by the left-leaning Labor-Greens coalition in mid-2012, is now being finalised by our one year-old conservative Government.

That carbon tax has cost three prime ministerships, confused the voting population, and achieved pretty much nothing. Other market dynamics have been far more important in changing Australia’s greenhouse emissions, yet it’s politically insensitive to mention them.

The sanctimoniousness of such a tax in Australia is breathtaking. We are an energy heavy-weight, the world’s largest exporter of coal. Soon we will also be the world’s largest exporter of liquefied natural gas. At the same time as our Labor prime ministers were being successively culled by infighting over the carbon tax, the world’s biggest oil & gas companies were directing more than two-thirds of global investment in LNG production into Australia, the biggest investment boom ever in this country.

We are an economy built on the world’s hunger for fossil fuels. Yet with our gas and coal sources being either offshore or in remote locations, these vital export industries are mostly hidden from Australian voters.

The carbon tax itself was a lightweight. The theory underlying a carbon tax is to provide a long term price signal to drive a change in the industrial and consumer behaviour. On this score, the Australian tax was doomed to failure. After all, politically it had to appeal to the latte-sipping lefties, but without affecting their wallets.

The outcome – a watered-down policy that was all noise and no effect.

To minimise the economic fall-out, the Labor-Green Government limited the carbon tax to large industrial emitters (more than 25,000 CO₂e/yr). Road transport and agriculture was exempt. Put together, that meant only about 185 companies in Australia’s US$ 1.5 trillion economy had to comply. And even those few were only lightly touched.

Industries which are “trade exposed” such as cement or aluminium smelting were mostly excused. They got either 66% or 94.5% of their carbon cost covered by the award of free units.

Just over one-third of Australia’s carbon emissions come from coal-fired electricity generators. And the dirtiest electricity comes from the aging brown-coal plants in Victoria – with almost double the emissions of modern gas-fired plants. Yet being located in a Labor-voting union heartland, they too got off lightly with the first half of their emissions effectively carbon- tax free. Nice.

None of which gave much incentive at all for carbon reduction. It’s hard to see any evidence at all of industries making long term investments in lower carbon-emitting factories or generating plants.

The domestic airlines got slugged with an extra 6 c/litre fuel excise, surely as crude a carbon tax as you can get. How was that supposed to reduce emissions? Yep, sure, aircraft fleets get renewed over time, and you bet, fuel efficiency is a factor when selecting alternative aircraft. But a surcharge on fuel itself was not going to change Qantas’ emissions.

So as a policy instrument, Australia’s carbon tax was never going to change emissions itself. It was a neutered program, raising Government revenue but not effective in changing behaviour.

Source – Quarterly Update of Australia’s National Greenhouse Gas Inventory: December 2013 Australia’s National Greenhouse Account

Yet, Australia’s greenhouse emissions have been declining for almost eight years. After decades of steady increase, that pause in carbon emissions since 2007 is striking. And it started six years before the carbon tax was implemented. It’s pretty easy to find the main reason for that – a steady fall in national electricity consumption. Latest figures show that Australia’s electricity use is at the lowest level since 2006. And with three-quarters of Australia’s electricity coming from carbon-intensive coal-fired sources, the fall in electricity use has led directly to a pause in carbon emissions.

But what caused Australian consumers to wind back their power use over the past eight years? Simple price elasticity, that’s what. There’s been huge investment in the network, the poles and wires to deliver (as opposed to generate) electricity. In most states, that led to a doubling of retail electricity prices. And yes, consumers did respond to that price signal, changing from electrical profligacy to parsimony. Nothing to do with the carbon tax, it was the regulated electricity supply industry recouping their capital investment.

What did we learn from this? The theory behind a carbon tax works fine – provide a price signal, and the consumer responds. It’s just that in this case, it was nothing to do with the carbon tax and all to do with regulated utilities doubling power prices as they caught up on network investment.

Here’s another little perverse change. Some years ago, I helped a fledgling gas producer negotiate a long term gas sales contract for electricity generation. The customer was a state Government-owned electricity generator, then setting up a new flagship and clean gas-fired generation plant. That helped shift the state’s generation sources ten years ago away from dirty coal, and into cleaner gas.

Yet earlier this year, that generator announced the closure of its gas generation in favour of dirtier coal generation. The reason? With three large export LNG plants now being commissioned for export, that gas is worth more for sale to China than for powering my fridge. In effect, a state Government snubbed its nose at the intent, let alone the price signal, from the Federal carbon tax.

So as a policy instrument, Australia’s carbon tax has been a failure. It never could have worked. And politically, it’s been a graveyard. Let’s hope politicians and bureaucrats from more enlightened jurisdictions study it and learn.

Australia’s carbon tax – no wonder it’s about to be buried.