Effects of a carbon price - debunking four myths

Carbon is shorthand for CO₂ and other greenhouse gases. These are the culprits in our atmosphere that are heating up our planet. If we do not cut down carbon emissions soon, it will become uninhabitable. In spite of this, there is continuing humbug from opponents of a price on carbon. The public don't know what to believe as unsubstantiated false claims from unions and corporations with vested interests come thick and fast. Four myths are debunked here.

Myth 1: 'A carbon price is a 'great big new tax' to extract more money from us'

To move to a clean energy, low carbon economy regulations must be changed and money raised to pay the substantial cost. Governments are the only institutions that can do this. A carbon price of up to $70 per tonne of CO₂ is the lowest cost means of reducing emissions. For example subsidies that pay a premium for renewable energy such as the current subsidies for rooftop solar systems cost over $300 per tonne of CO₂.

Like the GST, a carbon price is a long overdue economic reform. Whether it is by carbon trading or fixed price, polluters will pay Government for emitting carbon. At $25/tonne of CO₂, a price suggested as a likely initial rate, typical households would pay about $300 more annually for electricity and $200 more for fuel. However it is not simply a 'great big new additional tax' for two reasons. Firstly, as with the GST, increased energy costs will be offset by income tax reductions and rebates. The Government assures us that for the majority of taxpayers (low and middle income earners) the increased energy costs will be at least neutralized. Secondly, the main intention of a carbon price is to be an incentive for energy efficient lifestyles. People who do this can have more money in their pockets than they had without a carbon price.

Myth 2: 'It will destroy our manufacturing and the prices will go through the roof.'

Firms that claim price increases of more than a quarter of one percent due to the carbon price are likely to be 'gouging'. Energy comprises less than 2% of the costs of most service, manufacturing and retail industries. Electricity costs them around 18.5c per unit and fuel, about $1.50 per litre. For a firm with 2% energy costs, a $25 carbon price would:

• Increase the price they pay for electricity by about 2 c per unit or 12%.

• Add about 6c per litre to the price of fuel, increasing fuel costs by about 5%.

This computes to an increase in total costs of less than 0.25%. As one who has professionally assessed energy and emissions of dozens of companies, I know that most small - medium businesses could easily use 20% less transport fuels and 10% less electricity by implementing low or no cost efficiencies (<12 month payback time). In other words, most companies could pay the carbon price, implement energy efficiencies and still spend less on energy, which is precisely what the carbon price is intended to encourage.

Myth 3 'It will kill the golden goose of our resources sector'.

Mining and agriculture use more energy than other industries. For a typical mining operation, transport fuels may account for about 5% of its costs and electricity another 5% (total 10%). A 6c per litre increase in the current diesel price (it is excise-free and costs them less than $1.00/L) would add about 0.33% to costs. These industries pay close to wholesale price for electricity, 6 – 7 cents per unit. With a $25/ t CO₂ carbon price, their electricity price would go up 30% to 9c per unit adding less than 2% to total costs. With profits margins 10-25% common in the mining industry, a 2.5% increase in their cost of production is not going to break them.

From my experience in assessing energy use in mines, I know that most can save at least 10% on fuel and 5% on electricity by implementing energy efficiencies with payback times of less than 2 years. By radical redesigning of mines, replacing trucks and bulldozers with conveyor belts, slurry pipelines and cable skips, energy savings of 30% can be achieved. Such savings would more than negate the cost impact of a carbon price, as is the intention.

To do so would be to negate the price incentive to adopt renewable energy and energy efficiency. If compensation is to be provided, it should be by reducing taxes that are not related to energy, such as payroll tax and company tax.

Metal smelting, oil and gas industries produce commodities that are traded on world markets and are also emissions intensive. For example more than 20% of the cost of aluminium smelting is electricity. Petroleum industries have high fugitive emissions from flaring and fuel processing. These industries present the strongest case for compensation

The previous CPRS intended to provide compensation to these industries by exempting them from paying a C price on up to 95% of their emissions. This amounts to more than 20% of Australia's total energy emissions. Other manufacturing and electricity industries would have had to pay a higher carbon price to meet targets. This cost would have been passed on to the taxpayer, who would be paying more to subsidize large corporations, which are about 50% foreign owned. Hence it was no surprise when the Greens knocked it back.

Government should not be conned or coerced into making any industries exempt from paying all or even part of their carbon liabilities. Giving resource industries 'free permits to pollute' would remove the incentive for these most polluting of industries to reduce their emissions and may even encourage them to pollute more.

Partial compensation should be provided by granting scaled reductions in other taxes not related to energy, such as company and or payroll tax. Those firms adopting cleaner production could then potentially become more profitable than without a carbon price. Smelting industries such as iron and steel, which is crucial to the health and security of the domestic economy could be given additional protection by charging the carbon price as a tariff on steel imports.

Myth 4: 'Production will move to China; there will be worse emissions and huge job losses'

Non-ferrous metal refining uses enormous amounts of electricity. Aluminium smelting is by far the most energy and emissions intensive of our industries, accounting for a whopping 6% of our CO₂ emissions. With a carbon price, the dirtiest third of smelters are the only industries that may have to close down or move production to areas with cleaner electricity. There are only four countries with electricity as polluting as our own, China being the most notable. It is very unlikely that smelting capacity will be increased there when there are many more suitable locations with low cost hydro or nuclear capacity. Claims that 'carbon pollution will be exported' are unsubstantiated .

The claim that many thousands of jobs will be lost is greatly exaggerated. The smelting industry produces a whopping 6% of Australia's total emissions but provides only 0.6 per cent of manufacturing employment (or around 5,500 jobs). It contributes 1.3 per cent of the manufacturing sector's share of gross domestic product. Smelters include 3 of the 10 largest mineral corporations in the world and are about 50% foreign owned. For more than 25 years, smelters in Victoria have made enormous profits and paid less than 2c / kWh for off-peak electricity generated from brown coal and subsidized by the Government. It is the cheapest and dirtiest in the world, with emissions 45% higher than the grid average. This industry, more than any other needs a carbon price as an incentive to clean up its production.