What price carbon?

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.