The Stern report and its associated intensified diplomatic push for carbon restraints is already having an effect on policy. In Britain the Opposition Leader has announced that if he wins government he will place a windmill on the roof of Number 10 Downing Street. In anticipation of the report, additional subsidies were announced in Australia for exotic and very expensive renewable energy. Australian total taxes, subsidies and other regulatory measures aimed at combating emissions of carbon dioxide will approach $1 billion a year by 2010 even if no further measures are introduced.
The Stern report is posited on assumptions of a considerable acceleration of global warming, some dire projections of its effects and some bold conjectures about cost reductions from new technologies in mitigating those effects. The report's credentials are economic, not scientific.
Stern is looking for reductions in global emissions of carbon dioxide by 80 per cent of current levels. He argues that the economic cost will be a total of 1 per cent of world gross domestic product, "which poses little threat to standards of living given that the economic output in the OECD countries is likely to rise by over 200 per cent and in developing countries by more than 400 per cent".
The real economic task involved is exemplified by the modest outcomes of changed energy policies that he cites. Among these are the very minor emission reductions achieved in the European Union under its Kyoto commitments; this is in spite of an existing carbon-trading program that has a tax equivalent at present of about $25 per tonne of carbon dioxide (enough to increase the Australian wholesale price of electricity by about two-thirds). The report also points out that France, having moved to a position whereby 75 per cent of its electricity is nuclear, has had overall emission levels fall only 15 per cent since the 1970s, with no reduction since 1990.
The report is realistic enough to realise that the heavy lifting of any carbon dioxide reduction would need to tackle fossil fuels. A key feature in this is a form of tax. Placing this at a current level of $US100 ($A130) per tonne of carbon dioxide -- which would increase Australian wholesale electricity prices 1½ fold -- it sees the cavalry arriving by 2030 when its median estimate is about $US35 per tonne.
This reduction in the tax rate needed is driven by assumed improvements in technology. These aside, there is also a great deal of small print in the estimates to maintain them on the cusp of credibility. These include an incorporation of existing energy-efficiency taxes, a considerable emphasis on energy saving at the production end, and voluntary energy saving (partly stimulated by education programs).
Australia has perhaps the cheapest primary energy in the world available in major quantities. Coal from Queensland and parts of NSW is abundantly available for conversion into electricity at $40 per megawatt-hour virtually forever. Brown coal in Victoria is available at a similar price. These prices are less than half of those in Japan and well below those of the EU and most of the US. $40 is half the price of wind energy (the costs of which are flattered by its inherent unreliability) and the cheapest nuclear option is about 30 per cent dearer, including the (relatively low) disposal costs.
A greenhouse tax would be a great equaliser. Here are the costs with a carbon tax or tradeable right set at $41 per tonne of carbon dioxide.
With such an imposition, natural gas becomes a bit cheaper than coal, though this might be offset by a rise in its price, which in Australia is less than half that of the US.
Wind on these assumptions becomes cheaper than coal in Victoria and NSW, though its role can never be to supply more than about 10 per cent of the load at almost any conceivable price and with the most heroic assumptions on future improvements.
Nuclear becomes the cheapest supply technology. Uranium is relatively abundant and comprises only a small share of costs.
So in a carbon-constrained world there is a means of abundant and reliable electricity supply that will allow existing consumption at only a modest increase in costs. Even this, is insufficient to provide the savings sought by Stern.
Moreover, Australia has no advantage in nuclear. Indeed, we have a lead weight in our strong anti-nuclear pressure groups. Our advantage is in cheap fossil fuel-based energy. Politicians of all parties are gradually introducing greenhouse-inspired measures to hobble this resource. In abandoning our advantage, even progressively, not only will this mean far higher capital costs but it will eliminate our comparative advantage in energy-intensive industries. It will therefore, at a minimum, entail a considerable industrial restructuring.
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