What price carbon?

A price on carbon? Over my dead body, declares Tony Abbott. Certainly not unless the rest of the world does it first. On the other hand, Julia Gillard admits a need for pricing carbon but has resisted the urgings of the Greens to “do it now”.

If carbon is not priced, there will be penalties, namely the very serious effects of CO2-e emissions on global warming and ocean acidification - costs we shall all have to pay. During the present century these will include:

• on-going and accelerating rise in global surface temperatures;
• continued, faster melting of the polar ice caps and sea-ice;
• dangerous sea level rise and coastal flooding;
• melting of land based snow and ice; contributing to
• shortage of water in densely populated areas;
• loss of capacity to produce food for rapidly growing populations;
• extinction of flora and fauna dependent on cooler climates;
• increased risk of fire and flood destroying valuable assets;
• spread of potentially fatal diseases into areas now free of them;
• ocean acidification endangering marine life forms;
• increased incidence and severity of climate events;
• increased water vapour in the stratosphere causing further warming; and
• melting permafrost releasing methane, making global warming faster.

To varying degrees these effects have already become evident but they do not pose an obvious danger - yet. This is because their development is prolonged and slow but it is inexorable. As the years of this century pass, the dangers posed by them will increase. Sooner or later a price must, and will, be put on carbon in a bid to limit these dangers by reducing CO2-e emissions.

Australia, the world’s largest per capita emitter, has proposed reducing its emissions by partly compensating major emitters to dissuade them moving overseas, causing “carbon leakage”. This is deemed “economically responsible” since it supposedly protects our comparative advantage. However, government has had its proposals, embodied in Carbon Pollution Reduction Scheme (CPRS) legislation, rejected by the Senate for two basic reasons.

First, the Opposition includes a majority who rejects the science, disputes that global warming is occurring, or at best are sceptical. They have called on government to compensate emitters for the cost of licenses to continue emitting CO2-e, largely negating the effectiveness of the CPRS. Then, they propose a scheme of voluntary emissions reduction encouraged by financial rewards, a proposal deemed to be costly and ineffective.

Second, the Greens rejected the CPRS legislation on several grounds, primarily because it proposed compensating emitters to a level perceived as negating effective reduction. It set a price for carbon deemed too low and an inadequate emissions reduction target of only 5 per cent by 2020. It also failed to apply proceeds of license fees to stimulate development of clean energy technologies or promote their adoption.

ClimateWorks report on a Low Carbon Growth Plan for Australia (PDF 2.05MB) shows that a 25 per cent reduction in CO2-e emissions by 2020 is possible at a cost of less than $5 a week per household. Those findings, combined with shortcomings mentioned above may have been as instrumental as Senate opposition in the government decision to abandon reintroducing the more costly proposals in its CPRS legislation.

That legislation was also criticised for the perception that it unreasonably aimed to protect the economy from carbon leakage and loss of comparative advantage.

Industry has asserted that if charged an emissions license fee of more than $20 per tonne of CO2-e, many businesses would move overseas where such charges were not levied. Others would become unprofitable and close. Both outcomes would result in significant unemployment, contraction of GDP, loss of public revenue and increased public expenditure to assist the unemployed.

Government responded by offering increasing the number of free emission licenses and the ability for companies to claim offsets, including some of very dubious repute.

CPRS legislation is perceived as protecting the production and use of fossil fuels, notably coal, oil and gas, to provide comparatively low cost energy. Low cost energy is perceived by some as vital to Australia’s comparative advantage, particularly in the area of exports and domestic manufacturing.

Are the dire warnings of industry and the need to protect the economy valid and is governments’ response appropriate? Largely, no.

If energy costs rise because a price is placed on carbon, that rise effects all users of energy produced from fossil fuels - at present the cheapest source of electricity. Some businesses will suffer reduced profitability. Others may be faced with an unprofitable future. All will be encouraged to reduce electricity consumption.

Rather than close down, wouldn’t the rational response of businesses be to remain open and seek to remain viable by passing-on increased operating costs to their customers? They would remain competitive by seeking to reduce those costs, by using less energy or clean energy - and so contribute to a reduction of CO2-e emissions.

Would businesses pack-up and move to countries where emission license fees are not charged? This is not an entirely rational threat and is easier said than done. To avoid paying for a CO2-e emissions license, for example, would an industry like aluminium smelting pack-up and move to China, a process which would involve them having to write-off capital assets in Australia, abandon a source of raw material on their door-step and throw open their Australian market to competitors? Unlikely.

Steel and cement producers might seriously consider the prospect of doing so. They might think twice if Australia proposed imposing a carbon tax on steel and cement imported from countries that did not impose a tax on their own CO2-e emissions.

As for protecting Australia’s comparative advantage, imposing a price on carbon is unlikely to have any effect on export trade. By value and volume, the most important Australian exports are commodities including food stuffs, minerals, coal and gas with little or no domestic value-adding.

A carbon tax will not affect the ability to produce or export these goods, though the increasing cost of oil-based fuels due to diminishing availability of oil may well reduce profitability.

Coal-fired power stations, particularly those in the La Trobe Valley, are the worst polluters in Australia. Their ultimate fate is gradual extinction, probably by the year 2030, though there is no good reason why it should not be sooner. They could be converted to gas, with which Australia is well endowed, or by partly replacing coal with solar-thermal.

The proposal to offer power stations increased subsidies in the form of free emissions licenses is ill-advised. It does little to extend their life and nothing to reduce CO2-e emissions. A more pragmatic approach would be to offer financial assistance in the form of tax concessions, borrowing guarantees, or interest subsidy, to assist coal-fired power stations convert to using cleaner fuels.

The blandishments of CO2-e polluters and their dire warnings of economic damage resulting from an emissions trading scheme such as the CPRS are not to be believed. They ignore the fact that unemployment arising from business closures in one area (e.g., Vehicle parts due to adoption of electric propulsion) will be largely off-set by new jobs in the newly emerging clean energy sector (e.g., vehicle batteries and electric motors).

Their claims that transition to a more sustainable, cleaner economy must proceed slowly and with the utmost caution are aimed at protection of their profitability and reluctance to change. They are at odds with the outcomes experienced by countries which have already abandoned the use of coal to generate electricity - France and Sweden for example.

France is in the process of completely replacing fossil fuels to generate electricity. More than 90 per cent of its electricity is now produced by nuclear, hydro and other clean energy sources. Despite the lack of mineral wealth, like we have in Australia, France’s economy is more diverse, much larger and continues to grow, resulting in US$32,800 per capita GDP in 2005.

Sweden produces all of its electricity from nuclear and hydro sources and during its transition from coal, it managed to grow its economy. Swedish per capita GDP was US$37,300 (2005) compared with Australia US$36,700. The damage predicted by major Australian polluters did not occur in Sweden and there is no reason to assume it will occur in Australia.

The governments of both countries have shown what should be expected from the Australian government - the ability to manage the transition from fossil fuels to renewable, clean and/or nuclear energy sources and grow the economy at the same time. Sweden, Denmark, Germany, France, the UK and several other developed countries are in the process of doing this or have done so.

It is argued that none of them are as highly dependent on exports of fossil fuels as Australia. Australia, it is argued, can not simply close coal mines which yield businesses such attractive returns on capital, which produce so much export wealth, and are the source of so much income for federal and state governments. Wrong. Australia can, and ultimately will, be forced to do so by the emergence of technology offering cleaner, cheaper electricity and the demands of the international community that they be adopted.

Anticipating this and seeking to continue production and use of coal for electricity generation, Australia has unwisely invested heavily in developing carbon capture and sequestration (CCS) technology, expected to be commercially available by 2025. Unwisely? Yes, because it assumes that more cost-efficient technologies for generating clean electricity will not be developed during the next 15 years and because CCS is so expensive to use, at least in its present form.

Until the price of carbon reaches $65-$70/tonne, it will not be possible to use CCS technology now being trialed. Prudent business practice is to opt for the cheapest alternative. At a price below $65/tonne, it would be cheaper for electricity generators and others to pay the penalty for CO2-e emissions, rather than the marginally higher cost of using CCS technology.

In effect, what government is telling us is that over the next 15 years the price of carbon will rise from a possible initial $25/tonne to $65-$70/tonne.

The problem for coal use, at least in Australia, is that at $65/tonne or more, the application of CCS technology makes base load electricity generated from hot rock sources significantly cheaper. In other words, the use of CCS technology prices coal out of the market.

Further, major advances in the areas of electricity storage (battery technology), improved performance in photovoltaic cell efficiency (nano technology) and in solar thermal technology (heat storage) are all expected to occur over the next 10 years. These developments will put further pressure on use of fossil fuels to generate electricity.

In conclusion, the prospects for reduction of CO2-e emissions are considerable, continued use of fossil fuels to generate electricity will diminish, and the physical and financial price of carbon is known or predictable. Governments need to plan the transition to a clean, sustainable economy as France and Sweden have done, or risk the economic damage caused by having to play the costly game of catch-up.