Writing on The Drum last week, Jane Shaw saw the carbon tax as a Trinity comprising an ideological touchstone for the Greens, a political weapon for the Opposition and a millstone around the neck of Labor.
The new carbon tax advertising campaign featuring Cate Blanchett aims to turn the Liberals' weapon into a suicide pill and convert Labor's millstone into a bright red ruby and transform the ideological touchstone to an emerald. On the heels of Cate's crucifixion comes Malcolm Fraser and John Hewson's endorsement of the carbon tax, and as if on cue, Tony Windsor vocalising the wait-for-the-rest-of-the-world policy that most in the Coalition want.
Shaw set out to illustrate that a price on carbon is not sufficient to bring about a carbon-lite industry. While recognising that electricity wholesale prices can range between -$1,000 and $12,500 per megawatt hour (MWh), she took as her starting point a wholesale market price for electricity set by the highest cost bidder at $90.
On this basis she defined as windfall profits the sums other suppliers earned in excess of marginal costs. So a brown coal generator with costs at $25 per MWh would earn $65 and a black coal generator with costs at would earn $55.
The specified price juncture of $90 pre tax would become $96 post a carbon tax of $20 per tonne on the basis of the higher costs incurred by marginal generators (Combined Cycle Gas). Even at that particular price juncture, the margin of the brown coal generator after having paid the carbon tax is reduced from $65 to $45; the black coal generator sees its profit cut from $55 to $41.
Moreover, a price of $90 per MWh is a relatively rare excursion in the National Electricity Market where the average spot price is under $40 per MWh. A consistent $90 per MWh price would convert the coal-based generators into rivers of gold for their owners.
But existing suppliers actually earn very low profits. Thus Loy Yang Power (32.5 per cent owned by AGL) according to the latest AGL accounts earned an annualised profit of about $135 million. That is on an asset with a replacement cost of over $4 billion. Loy Yang Power's latest profits mean it yields a return of a little over 3 per cent.
This wafer-thin profit margin is earned notwithstanding massive improvements in productivity of the coal-based power stations. Twenty years ago there were over 10,000 workers in the Victorian brown coal stations. Today, in spite of output increasing by one third, and massive improvements in reliability, the number (including contractors) is under 4,000.
An important matter raised by Shaw's article is that a tax alone is unlikely to force the substitution of low for high carbon dioxide-emitting plants. It may well be that a carbon dioxide price of $20 per tonne would have no effect in forcing an existing generator out of the market. At some price one or more would be forced to close -- estimates are that a major brown coal generator might exit at a tax of $80 per tonne of carbon dioxide.
An $80 tax would add mean a trebling of the wholesale electricity price. But it is unclear how even that level of tax would attract significant new entry from low-emitting generators (presumably gas). An investor would need to be certain that the impost on carbon dioxide emissions would remain. If the tax were to be dropped (either because the global warming scare had abated or because no other country was implementing such a regime) gas fired base load stations would see their value shredded. Accordingly, the investors would require a government assurance that they would be reimbursed for such an eventuality.
This returns us to the pre-1995 situation of government ownership or power purchasing agreements. That in turn nudges us towards the central planning regime that we escaped with the national market, and with it the onset of all the inefficiencies that we had escaped. Canberra has embarked on a War Against Electricity, at least against the carbon dioxide-emitting electricity generators that account for 95 per cent of supply.
If success in the war means closure of some coal fired capacity it will be bought at the cost of a steep rise in prices to households and to producers. Shaw erroneously suggests that only 12 per cent of demand comes from industry.
In fact the large industry consumers alone account for 26 per cent of demand. Households and small business together comprise around 50 per cent of demand. Whatever the industry/household share of electricity, contrary to the Government and other ads presently running, costs will not be carried by the ''big polluters'' but by the consumer.
There is no possibility of carbon-free generation like wind playing a significant role except at considerable expense, while nuclear, the other carbon-free source of electricity, is demonised. And the possibility of failure in Canberra's War Against Electricity prevents less efficient alternatives, like gas generators, playing a major role in filling a gap from closing down coal generators.
This is because the failure to force existing closures and the prospect of new coal generators leaves these high-cost alternatives vulnerable. Ideological touchstone or green emerald, a carbon tax will leave its indelible mark on the economy and on the body politic.
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