The Sun God of Australia's carbon tax

Many of us, possibly along with some of the staff of Australia's Commonwealth Government's Department of Climate Change and Energy Efficiency, will have enjoyed the SBS programme (21^st August 2011) on the Egyptian Pharaoh Akhenaten and his superb wife Nefertiti, and on how he built a new capital city to embody his vision of a single god, the Sun, that gave special favour to himself and Nefertiti, superseding all other gods. The DCC's "Clean (sic) Energy Legislative Package" with its carbon tax is a similar obeisance to the Sun God of Julia Gilliard and Bob Brown that they claim will deliver carbon-free power to Australia and the world provided the tax is enacted at $23 a tonne of emitted CO2, even though the actual tax level to achieve that with solar energy would be between $300 and $600. That means the Government's dream that the Sun can displace carbon-based energy will not likely outlast the 25 years Akhenaten's Sun City survived after his death before its total collapse and decay.

A meaningless tax based on misleading economics

The so-called Carbon Tax due to become effective next July is at a level that will have minimal climatic and probably detrimental economic effects. First, at $23 per tonne of carbon dioxide emitted, the tax is set too low to induce a switch in energy sourcing by any existing power generation plant from coal to "cleaner" gas, or even less plausibly, renewables like wind and solar, given the very large cost advantage of coal-fired electricity. Secondly, if the respective inelastic price and elastic income elasticities of demand for energy-intensive final demand goods and services are taken into account, as they rarely are, the proposed tax will in any case easily be passed on by energy producers, who will thereby have no incentive to switch from coal to other fuels.

In regard to the first point, it is evident from this Table (using data from the 2010 study commissioned from California's Electric Power Research Institute – EPRI - by the Department of Resources, Energy, and Tourism, and studiously ignored by DCCEE) that the proposed tax at $23 per tonne of CO₂ emitted is not nearly high enough to make wind or solar energy remotely competitive with coal-fired electricity. For example, the high cost wind power setup requires a tax of at least $157 per tonne of CO₂ emitted from a high cost black coal fuelled power station to be competitive, while even the low cost wind installation requires a tax of $76 per tonne of CO2 before a high cost coal-fired generator would feel impelled to switch from coal to wind, without it taking into account that it would still be taxed on its emissions while keeping its turbines spinning against windless or sunfree periods.

The tax needs to be as high as $640 for PV solar to be an option for installation by any existing black coal power station. The tax also needs to be much higher than $23 for Integrated Gasification Combined Cycle Gas (IGCC) to become viable, which in any case has the same level of CO₂ emissions per MWh as coal (800 kg of CO₂ per MWh). Combined Cycle Gas Turbines (CCGT) are already competitive with coal, but still have high CO₂ emissions, at around 50 per cent of those from coal-fired power stations. That means a complete switch to CCGT would not achieve the Government's long term 80 per cent emission reduction target.

Table 1

Levelised Cost of Electricity in Australia 2009

Notes: 1. The DRET's EPRI Report claims there are zero CO₂ emissions from wind and solar power, which is not quite true, as wind towers require significant recurrent injections of lubricating oil for their turbines' gearboxes, and there are also implicit CO₂ emissions during the manufacturing process. The estimates in this Table are from Zero Carbon Australia, Fig.2.26 (2010).

2. The US EIA (Wikipedia, Levelized Energy Cost, 28 August 2011) estimates the cost of solar thermal power at US$312.8/MWh by 2016, for which the tax would have to be $305 per tonne of CO₂ ($0.305/kg) emitted by a low cost black coal plant (=75+740*0.305) before such a power station would consider switching from coal to solar thermal power. For Gas IGCC the carbon tax would have to be in the range $45 to $93.6 for it to be competitive with SVCPC Black Coal (because the tax would be applicable to its own CO₂ emissions).

The EPRI study for DRET specifically (page 4.4) excludes the cost of the enormous land requirements of solar PV arrays, at 80 hectares for the 155,000 panels needed for a 10 MW plant, so a 2000 MW PV plant would require 16,000 hectares, a very large amount of costly farmland if the plant is located anywhere near Australia's cities. Right now, a Sydney generator if it moves fast enough could pick up almost 8 hectares within 50 minutes of the CBD (NSW 2178) for just $3.9 million, which is close to what it would cost per MWh for its maximum 1.5 MW capacity. The study similarly does not consider the cost of the extra transmission lines required if solar plants are located at any distance from the existing system in order to reduce land acquisition costs.

It is strange but true that the relative price and income elasticities of demand for electricity by industrial and domestic users are rarely considered, and not at all of course by DCCEE and most of the reports it has financed, such as those of the Australian Academy of Science (Allison et al., 2010), its own chief adviser, Garnaut (2011), Frank Jotzo (2011), and Will Steffen's The Critical Decade, 2011. Garnaut's final report (2011) does briefly (pp.162-164) discuss the price elasticity of household demand for electricity in Australia, and implies it will be relatively high for low income groups, but does not address the Government's very large income handouts from the carbon tax proceeds to apparently 80 per cent of all households which will in all likelihood offset the price effect.

Moreover Garnaut does not mention the evidence that Australian consumers are not particularly concerned when energy-intensive products rise in price, witness the ever-growing vehicle mileage they indulge in, despite the rise in petrol prices over the last ten years (from $0.80 per litre in 2001 to $1.40 today) and their fondness for all things electrical (as evident overseas in the targeting of electronics shops by the looters in London recently). In regard to the latter, the rise in electricity prices that will occur if the coal-fired power generators simply pass on the tax is partially offset by the falling prices of most electrical and electronic appliances. Moreover, as apparently around 80 per cent of Australian households will be compensated for the "carbon" tax by income tax reductions and other measures, any substitution effect there might be from the rising relative cost to those households of using such appliances will very likely be swamped by the strongly positive income effect on demand for such goods, as consumers are always quick to upgrade their computers, TVs, and the like when they can afford to.

Not only that. At $23, the tax works out at just $0.02 per kWh, which is about 12 per cent of the existing ACTEW tariff in the ACT ($0.1418). Given that electricity cost is still a fairly small proportion (less than 10 per cent) of average household expenditure, the tax clearly needs to be much higher to have any impact on total household demand, even without the income compensation via tax reductions.

Thus it seems very debatable whether the "carbon" tax will have any appreciable effect on either investment decisions by power utilities or on the consumption patterns of virtually all Australians. However, the passing on of the tax to final consumers will have an impact on the general price level, and thereby will have knock-on effects to the CPI and the general wage-level. In a later paper I plan to show that the carbon tax is a solution in search of a problem that does not exist, as there is NO statistically significant relationship between the undoubted rising level of the atmospheric concentration of CO₂ and the very slight observed rises in global or regional temperatures, including those in Australia.

To conclude, this paper has shown there is no basis for the Labor-Green government's claim (in Securing a Clean Energy Future, July 2011) that its carbon tax will "cut pollution (sic) by at least 5 per cent compared with 2000 levels by 2020", dependent as that is on its unproven estimates of the substitution effects from coal to renewable sources of energy when the tax is only $23 per tonne of CO_2.