A carbon-copy of the great era of reform?

STONE the crows! The debate over why everybody who forgot to turn off the outside light last night should pay for global warming is morphing into an argument over economics.

And a good thing to. Certainly we pump out a poultice of greenhouse gas per capita, 18.75 tonnes of C02 per person, compared to an OECD average of around 11 tonnes. But as there are not many of us, Australia only emits 1.4 per cent of the world’s output. [i]

It is hard to see a carbon tax and subsequent trading scheme having much environmental impact on a global scale. So, if we are to have them, they need to deliver other benefits.

Professor Garnaut all but argued this at the National Press Club last week:

It’s partly a struggle about carbon pricing, but it’s also a struggle over policy between special interests and the national interest. And when we look at the struggle from that point of view, it’s a struggle between the old political culture of Australia – the pre-reform political culture. The old political economy and political culture that gave Australia the worst productivity performance of all developed countries between 1900 and 1980. [ii]

So encomiums for economists. The more hard numbers in the debate the harder it will be for opportunists to use a carbon price to push other agendas.

Like the Greens, who hope we will think evil capitalists are responsible for our greenhouse gas output, rather than everybody who insists on using ever-more, and increasingly expensive, electricity. As the Bligh Government admits, “a significant driver contributing to the increasing cost of electricity is the expectation by customers that the distribution network will meet demand at all times.” [iii]

The Crows are not bright birds and they struggle to see the sense in plans to subsidise low and middle income earners to pay their power bills when reducing greenhouse gasses requires us all to use less coal generated electricity, which will account for the majority of Australian power for a long time yet.

Jessica Irvine sets out the unconvincing orthodoxy that people will cut their power use, and bank the compensation payments:

Raising the price on a particular good gives households the signal to reduce their consumption of that good. And here’s the happy news for those households: because the government has decided to assume no change in household energy consumption in response to higher prices, paying people for their current consumption levels, households that reduce their energy use after a carbon price is introduced will end up financially ahead of where they would be with no carbon price.”[iv]

This ignores one fundamental. Electricity is not easily substituted, what with candles and kindling being the price they are and people with big houses and a pool still needing to heat, cool and clean them – as well as see what they are doing after dark. As the RBA points out, peak electricity consumption is growing much faster than overall demand. [v]

Then there are the electricity generators who warn a carbon price will push up electricity bills, hoping nobody will notice that power is already getting more expensive, largely due to under-investment in infrastructure.

The increase in Australian gas and electricity prices has “outpaced” other developed economies, according to the RBA. [vi] And, carbon price or no, we are paying for the need to expand supply and keep aging infrastructure ticking over. According to Annabel Hepworth, energy inflation is occurring, “after a nationwide phenomenon in the 1990s of under-investment in infrastructure and below-average price increases.”[vii] In 2008, NSW provider Transgrid warned that 40 per cent of its transmission lines and 35 per cent of substations had “either reached or exceeded their expected service lives.”[viii]

Then there are the rent-seekers who are using pricing carbon as a way to make a case for protectionism. As Professor Garnaut puts it:

In the 1990s our productivity growth was the highest of the developed countries. Well, I’ve been saying for a while that we’ve slid back into the old political culture and so this struggle over climate-change policy is a struggle over economic policy as well. It’s a struggle between the old political culture of Australia and the reform political culture of Australia. It’s a struggle between the influence of vested interests on policy and the influence of the national interest. [ix]

Of course, buying this argument involves accepting a price on greenhouse gas is as economically essential as it is environmentally beneficial. But, even if you don’t, there is certainly something unsettling about industries arguing for government subsidies to pay for changing business conditions.

Garnaut is right to warn us that Australian living standards fell relative to the now developed world in the first two thirds of the twentieth century as we disconnected ourselves from the global economy. [x]Once again, this involves a stretch. Important global traders, notably the US and China, are not committed to carbon pricing. But the idea that we are again rejecting reform is sufficiently scary to make his argument important.

The greenhouse gas pricing debate may not be a carbon copy of the great reform battles of the 1980s. But even if all Professor Garnaut does is get the need to kick start reform in general back on the agenda he will have done the country a great service – whatever the rent-seekers and green zealots say.


[i] Australian Bureau of Statistics, “Australia’s Environment: Issues and Trends, January 2010,” May 2 2010 @ http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4613.0Chapter50Jan+2010 recovered on June 4

[ii] Ross Garnaut, “Garnaut Climate Change Review update, 2011” Australian Associated Press News Centre, May 31 @ www.newscentre.com.au recovered on June 4

[iii] Queensland Government, “Queensland Energy Plan, May 2011” 4 @ www.cleanenergy.qld.gov.au/zone_files/Demand_side/110524_6167_qemp_final.pdf recovered on June 4

[iv] Jessica Irvine, “Jokes on us if we don’t read the fine print on carbon tax,” National Times, April 6 @ http://www.smh.com.au/opinion/politics/jokes-on-us-if-we-dont-read-the-fine-print-on-carbon-tax-20110405-1d2s7.html#ixzz1ONSzEhBR recovered on June 4

[v] Kate Davis, “The price of power: recent drivers of retail electricity prices,” (in) Reserve Bank of Australia, “How are electricity prices set in Australia,” 2010 @ www.rba.gov.au/about-rba/foi/pdf/31032011.pdf

[vi] Michael Plumb et al, “Developments in Utility Prices,” (in) “How are electricity prices set”, op cit

[vii] Annabel Hepworth, “Burn-out for populist power plays, The Australian February 7

[viii] Davis, ibid

[ix] Garnaut, ibid

[x] Ross Garnaut, “Climate change and Australian economic reform,” March 27 2008, @ http://www.melbourneinstitute.com/downloads/conferences/Garnaut,%20Ross%20conf%202009.pdf recovered on June 4