Cost of carbon cuts hidden in dark plume

REDUCING emissions of carbon dioxide (CO₂) presents the most difficult and costly task Australia has contemplated.

Most CO₂ is a by-product of fossil fuels -- coal, oil and gas.

Next week Ross Garnaut's climate change review is to deliver a draft report to the Federal Government.

The review's initial papers favour forcing lower emissions of CO₂ and other "greenhouse gases" using an auction-based tax.  This would allow the creation of tradeable carbon credits.  Garnaut opposes any free allocations to major existing energy producers.

The review recognises that reducing emissions means higher electricity prices.  One proposal is a get-out-of-jail-free card to reimburse "trade-exposed sectors" like aluminium smelters.  But this, like suggestions to exclude petrol, means other users pay more.

It is pointless to introduce an Australian carbon tax unless every country has a similar imposition.  Without that, industries discharging high levels of CO₂ would simply shift to countries with zero or low taxes.

Any international agreement would entail all countries being granted equal emissions per head of population.  To stabilise world emissions means adopting the world average of 4.5 tonnes of CO₂ per head.  Australia produces almost four times that much due to our prosperity and huge resource base.

It is virtually impossible to estimate the economic effect of measures that force lower CO₂ emissions.

We can confidently predict outcomes from taxes designed to bring about minor changes in supply of non-essential goods.  However, we are in uncharted waters in quantifying the costs of major reductions in carbon emissions.

This is because carbon emissions are intrinsic to energy production from fossil fuels, which are the backbone of our electricity supply and transport systems.  Nuclear power aside, no known technology can replace fossil fuels except at the margin.  And nuclear power was not even mentioned in the initial Garnaut Review papers.

Access Economics (AE) has analysed Australia's energy and income interactions in an attempt to estimate the costs of reducing CO₂ emissions.  AE examined reducing CO₂ by 11 per cent in 2020 -- an ask that's far short of the 70 per cent reduction necessary for CO₂ stabilisation at 4.5 tonnes per head.

AE's calculations used conservative assumptions, including a highly optimistic substitution of coal-based power by solar and wind.  These assumptions allowed a forecast of the electricity price increase of only 18 per cent.  Even so, they put the annual costs to the economy of this very limited step to reduce emissions at $18 billion -- almost $1000 per person.

Victoria faces a magnification of these costs.  Because the state's power supply is centred on brown coal, the tax rate necessary to bring about reduced emission levels hits Victoria with a higher cost.  A carbon tax means Victorian electricity suppliers pay 40 per cent more tax than those north of the Murray.

Outcomes of the impending new carbon regime are becoming evident.

Among these is the dismantling of the Latrobe Valley power industry.

Initial steps towards this are under way, with contracts for electricity beyond mid-2010 drying up.

This prevents any new investment and, if the process continues, will be followed by plant closures.

ADVERTISEMENT