Victoria’s electric vehicle tax and the theory of the second-best



Alexandru Nika/Shutterstock

John Quiggin, The University of Queensland

One of the central ideas in tax policy is the principle of the second-best.

Economic theory gives us a good idea of what an ideal tax system would look like, given our objectives. But in real life, things fall short.

It might be thought that piecemeal reform, moving some taxes closer to the ideal, would be a step in the right direction.

But it needn’t be, if other taxes aren’t moved.

Here’s an example. Imagine that the goods and services tax exempted health products, both mainstream and alternative.

An ideal GST wouldn’t exempt health products (though the government might provide subsidised access to some products, as it does through the Pharmaceutical Benefits Scheme).

Imagine is administratively possible to remove the exemption for mainstream health products, which would bring it closer to the ideal.

Now imagine that for jurisdictional reasons it isn’t as easy to remove the exemption for alternative products.

Second-best can make things worse

Removing the exemption for mainstream products, which can be done straight away, seems like a good idea because it would be one step closer to removing all exemptions.

But if it is actually done straight away, without waiting the removal of the exemption on alternative products, it would have unintended (and perhaps dangerous) consequences.

People would be encouraged to switch from mainstream to alternative health products.




Read more:
Think taxing electric vehicle use is a backward step? Here’s why it’s an important policy advance


The same sort of issues arise with the plans to charge electric vehicles per kilometre driven in order to treat them more like conventionally-powered vehicles (which are taxed per kilometre driven through fuel excise).

South Australia and NSW have announced plans to do so. Victoria has announced details, and will introduce the charge from July 2021.

It will charge electric and other zero emission vehicles 2.5 cents per kilometre travelled and plug-in hybrids at cents per kilometre travelled.

Victoria justifies the charge this way:

Australian drivers pay fuel excise when they fill up their vehicle with petrol, diesel or liquefied petroleum gas. Zero and low emission vehicle owners currently pay little or no fuel excise but still use our roads.

Conventionally-powered car typically pay about 4.2 cents per kilometre through fuel excise and fuel-efficient cars about 2.1 cents.

This means Victoria will be charging electric vehicles as much or more than fuel-efficient vehicles, even though (at least when charged through rooftop solar) they won’t contribute to global warming.

Not only that, but conventionally-powered cars generate health and other costs through air and noise pollution, for which they are not charged.

What first-best would look like

The ideal system would include charges to cover the cost of

  • building and maintaining the roads

  • congestion

  • the injury, death and damage caused by car crashes

  • the health and other damage caused by air and noise pollution

  • the global price of carbon emissions

Right now we charge through fuel taxes, registration fees and tolls (mostly paid to private firms, but this is irrelevant in economic terms) along with a variety of minor fees.

However, because fuel excise was frozen by the Howard government in 2001 (and only began increasing again in 2014) the revenue from it is barely enough to cover the cost of constructing and maintaining roads and grossly insufficient to cover the broader costs of conventional vehicle use.

Conventional vehicles get things for free

Although there is much debate about how carbon can or should be priced, any serious attempt to achieve the goals of the Paris Agreement is likely to require a carbon price of $100/tonne, which corresponds to 23 cents a litre.

Estimates for local air pollution costs (including the cost of deaths from cancer and asthma) start at 10 cents a litre. Noise pollution costs are extra.

Electric vehicles powered by renewable energy generate hardly of these costs.

Put simply, just as much (or more than) the owners of electric vehicles, the owners of conventional vehicles pay a mere fraction of what they should.

Second-best would be worse

Increasing what the owners of electric-powered vehicles pay is a second-best solution that might move us further away from first best.

It might discourage the takeup of vehicles that impose fewer costs on society.

To end on a positive note, the 1997 decisions of the High Court that effectively prohibited states from taxing petrol forced the Commonwealth to collect the tax and pass it on to the states, exacerbating the problems of an unbalanced federal tax system.




Read more:
Wrong way, go back: a proposed new tax on electric vehicles is a bad idea


There appears to be no constitutional impediment to a tax on kilometres travelled (and nor a privacy impediment, Victoria will implement it by asking for odometer readings once a year rather than monitoring where cars travel).

It would help redress the tax imbalance.The Conversation

John Quiggin, Professor, School of Economics, The University of Queensland

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Think taxing electric vehicle use is a backward step? Here’s why it’s an important policy advance


Jago Dodson, RMIT University and Tiebei (Terry) Li, RMIT University

The South Australian and Victorian governments have announced, and New South Wales is considering, road user charges on electric vehicles. This policy has drawn scorn from environmental advocates and motor vehicle lobbyists who fear it will slow the uptake of less-polluting vehicles. But, from a longer-term transport policy perspective, a distance-based road user charge on electric vehicles is an important step forward.

Superficially, a charge on electric vehicle use seems misguided. Road sector emissions are the worst contributors to climate change. Electric vehicles powered by clean energy offer the promise of near-zero emissions.




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As electric vehicle and renewable energy costs decline we can expect a shift to full electrification of urban vehicles over the next 30 years. Surely accelerating this transition is an urgent climate task?

The downside lies not in the carbon benefits of these vehicles, but in their use as private passenger transport in congested urban areas and the costs this use imposes on cities. As renewable energy becomes cheaper, the marginal cost of every kilometre driven is likely to decline. As driving becomes cheaper, more of it is likely to occur.

More driving means more congestion. Inevitably, that increases demand for increasingly expensive road projects, such as Sydney’s WestConnex, or Melbourne’s Westgate Tunnel and North East Link. It certainly will run against the recognition in urban plans such as Plan Melbourne that we must shift to alternative transport modes.

If we don’t have a pricing regime that accounts for the cost of car use in cities, the transition to electric vehicles is likely to work against the wider goals of urban and transport policy.




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How would distance-based charging work?

Many urban transport policy advocates have called for distance-based road-user charging to be imposed on all vehicles in cities. This sounds great in theory, but in practice is difficult for technical and political reasons of privacy and surveillance. Such concerns will diminish over time as cars increasingly incorporate automated telematics that necessarily track their movement.

Distance-based road-user charging efficiently matches road use to its costs – of infrastructure, congestion, noise, pollution and deaths. It improves on fuel excise, which drivers can nearly completely evade by using a highly efficient vehicle. It also goes beyond tolling to fund major roads, which typically apply only to specific links.

Second, road-user charging can be varied in response to demand that exceeds road capacities. Higher rates can be applied at peak times to ensure free-flowing traffic and shift travel to other times and modes. Various taxation reviews, including the 2009 Henry Taxation Review and Productivity Commission reports, have promoted such policies.




Read more:
Road user charging belongs on the political agenda as the best answer for congestion management


Exactly how big would the disincentive be?

Would imposing such charges on electric vehicles retard their uptake?

Based on our work with ABS Census journey-to-work data, in Melbourne the average daily round-trip commuting distance by car is about 25 kilometres. The proposed Victorian charge is 2.5 cents per kilometre. Thus, in Melbourne the average daily commuter’s road user charge is likely to be 63 cents – $3.13 for a typical five-day working week. Over a 48-week working year that totals A$150, hardly a large sum for most people.

By comparison, a commuter in a conventional vehicle with the average current fuel efficiency of 10.9 L/100km will use about 2.73 litres of fuel on which they pay 42.3 cents per litre in fuel excise. That’s about $1.15 a day, or $5.75 a week.

The average tax saving for electric vehicles compared to conventional vehicles will be about 2.1 cents per kilometre. Electric vehicle drivers will be taxed about 53 cents a day, or $2.64 a week, less for their car work travel. They’ll be about $126 a year better off.

Commuting trips make up about 25% of car use, so electric car users’ overall savings are likely to be even greater.

It is difficult to see how such savings on excise tax are a disincentive to electric vehicle uptake. Fears of a “great big new tax”, as the Australia Institute puts it, seem unfounded, as are concerns that road-user charges would “slam the brakes on sales”.

Let’s be clear, the big barrier is the upfront cost of electric vehicles, about $10,000 more than their conventional equivalents. Advocates for electric vehicles should focus on that difference, and the failures in Australian government policy, not state road-user charges.




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Why taxing actual road use matters

It needs to be recognised that, with lower marginal costs, electric vehicles are likely to be used more than conventional cars. That would increase pressure on urban road capacity. So while the new road-user charge of 2.5 cents per kilometre is flat across the time of day or the route driven, this will likely need to change.

Distance-based road-user charges have been politically controversial. Imposing a tiny charge on a minority vehicle type is an expedient way of introducing a needed reform. Fewer than 1.8% of vehicles in Australia are currently electric or hybrid. But as all cars become electric, distance-based road charges will become an increasingly powerful policy tool.

Thanks to advancing telematics, transport planners will eventually be able to impose variable road-user charging by time of day and route, similar to ride-hailing companies’ “surge” pricing. We could then apply novel approaches such as a cap-and-trade system. A city could allocate its motorists an annual kilometres quota, which is then traded to create a market for excess urban road use.

The private car could also be integrated into mobility-as-a-service models.

Road-user charges could be regressive for people with few alternatives to the car. But telematic tracking could allow for lower charges for less affluent households in dispersed outer suburbs with few other options.

Beyond fuel, private cars have high environmental costs in steel, plastic, aluminium, glass and rubber use. And about one-third of our increasingly valuable urban space is given over to cars in the form of roads and parking.




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To reduce this demand on resources and space, car use could be priced to shift travel to, and fund, more sustainable and city-friendly modes such as public transport, walking and cycling. We could even price the car out of cities completely. The most environmentally sustainable car, after all, is no car at all.The Conversation

Jago Dodson, Professor of Urban Policy and Director, Centre for Urban Research, RMIT University and Tiebei (Terry) Li, Research Fellow, School of Global, Urban and Social Studies, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Wrong way, go back: a proposed new tax on electric vehicles is a bad idea


Jake Whitehead, The University of Queensland

In recent years, false claims have circulated that electric vehicles are “breaking our roads” because they don’t use fuel and so their drivers don’t pay fuel excise.

Heeding such concerns, both the Victorian and New South Wales governments are reportedly considering a new tax for electric vehicles. It follows a report by Infrastructure Partnerships Australia which recommended a per-kilometre tax for electric vehicles.




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But this shortsighted approach risks killing the golden goose of our transport system. Such a tax would limit the economic, health and environmental benefits promised by electric vehicles which, together, far exceed any loss in fuel excise.

Instead, Australia needs a mature public discussion about holistic road tax reform to find a fair and sensible way forward.

Electric vehicle owners do not incur petrol costs.
ganzoben/Shutterstock

The problem is structural

Fuel excise is built into petrol and diesel prices, charged at around 40 cents per litre. For more than 20 years – well before the introduction of electric vehicles – net fuel tax revenue has been declining, largely due to improvements in vehicle efficiency, meaning engines use less fuel.

But if we take into account fuel tax credits – subsidies for fuel used in machinery, heavy vehicles and light vehicles on private roads – gross fuel tax revenue has actually increased in recent years.

This suggests the tax suffers from a structural problem. Simply applying a new tax to electric vehicles won’t fix it.




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It’s also worth remembering that while electric vehicle owners don’t pay fuel excise, they generally pay more in purchase taxes such as GST, because their vehicles tend to be more expensive to buy.

The federal government should encourage uptake of electric vehicles.
AAP

Benefits of electric vehicles

Electric vehicles help reduce our dependency on foreign oil and save owners over 70% in fuel costs by swapping petrol for electricity. Electric vehicles also lead to cleaner air, resulting in significant savings in health costs. They create new local jobs in mining and local energy, and importantly, are key to meeting global climate change targets.




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Clean, green machines: the truth about electric vehicle emissions


Comparison of annual road accident fatalities vs premature deaths due to vehicle emissions in NSW.
Asthma Australia/Electric Vehicle Council.

An electric vehicle tax would increase costs for motorists, curb sales and may even encourage the purchase of cheap, fuel-efficient vehicles, driving fuel tax revenue down even further.

Congestion is the bigger problem

The proposed taxes will do nothing to tackle the biggest problem with Australia’s transport system: road congestion.

Sweden, where I lived for several years, offers a possible way forward. In 2006, the city of Stockholm introduced a congestion pricing scheme which charged vehicles for driving in and out of the city centre at peak times.




Read more:
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The scheme meant normal weekday traffic was considerably lighter. Low-emission vehicles were also temporarily exempted from the charge to encourage sales.

Unfortunately, despite the proven benefits, Australia is unlikely to introduce such a scheme due to a lack of public and political support.

Towards a sustainable road tax

The transport sector faces massive disruption in the near future, from electrified vehicles, automated vehicles, and the shift to shared vehicles.

Focusing solely on electric vehicles misses the broader point: we need to proactively prepare for the transition to a new transport system. This means ditching our unfair, outdated and unsustainable road tax model while reducing congestion.




Read more:
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Instead of simply penalising electric vehicle owners, I suggest an approach where electric vehicle owners could voluntarily opt-in to a new road tax model. Here’s how it would work:

  • the tax would include a low per-kilometre fee for all travel, and an additional fee for inner-city travel during peak weekday periods

  • in exchange for opting in, owners would be exempted from the old road tax system, that is: vehicle registration, stamp duty, import tax, luxury car tax, fringe benefits tax, fuel excise, and road tolls.

  • to ensure a true financial incentive to opt-in to the new road tax model, a significant discount would initially apply. This discount would gradually be phased out as electric vehicle uptake increases, as has occurred with similar overseas schemes

  • the new road tax model could easily be extended in the future to apply to automated vehicles, and to more accurately reflect the burden transport poses in terms of congestion and pollution.




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This is just one example of a balanced approach that would encourage both local adoption of electric vehicles, and public support for fairer road taxes.

Such holistic reform would enable a future transport system with less road congestion, quicker travel times, cleaner air, lower costs and a sustainable road revenue stream.

Let’s be smart and not miss this golden opportunity.The Conversation

Jake Whitehead, Research Fellow, The University of Queensland

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Fresh thinking: the carbon tax that would leave households better off



File 20181120 161621 nh31d1.jpg?ixlib=rb 1.1
The UNSW climate dividend proposal will be launched on Wednesday by the Member for Wentworth Kerryn Phelps.
Shutterstock

Richard Holden, UNSW and Rosalind Dixon, UNSW

Today, as part of the UNSW Grand Challenge on Inequality, we release a study entitled A Climate Dividend for Australians that offers a practical solution to the twin problems of climate change and energy affordability.

It’s a serious, market-based approach to address climate change through a carbon tax, but it would also leave around three-quarters of Australians financially better off.

It is based on a carbon dividend plan formulated by the Washington-based Climate Leadership Council, which includes luminaries such as Larry Summers, George Schultz and James Baker. It is similar to a plan proposed by the US (and Australian) Citizens’ Climate Lobby.

How it would work

Carbon emissions would be taxed at A$50 per ton, with the proceeds returned to ordinary Australians as carbon dividends.

The dividends would be significant — a tax-free payment of about A$1,300 per adult.

The average household would be A$585 a year better off after taking account of price increases that would flow through from producers.




Read more:
Trying to measure the savings from the carbon tax is a mug’s game


If those households also cut their energy consumption as a result of the tax they would be even better off.

And the payment would be progressive, meaning the lowest-earning households would get the most. The lowest earning quarter would be A$1,305 a year better off.

Untaxed exports, fewer regulations

For energy and other producers making things to sell to Australians, the tax would do what all so-called Pigouvian taxes do — make them pay for the damage they do to others.

But Australian exporters to countries without such schemes would have their payments rebated.

Imports from countries without such schemes would be charged “fees” based on carbon content.




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This means Australian companies subjected to the tax wouldn’t be disadvantaged by imports from countries without it, and nor would importers from countries with such a tax.

The plan would permit the rollback of other restrictions on carbon emissions and expensive subsidies.

Our estimates suggest the rollbacks have the potential to save the Commonwealth A$2.5 billion per year.

It’s working overseas

Our plan is novel in the Australian context, but similar to one in the Canadian province of British Columbia which has a carbon tax that escalates until it reaches C$50 per ton, with proceeds returned to citizens via a dividends.




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Taxpayers will back a carbon tax if they get a cheque in the mail


Alaska also pays long-term dividends from common-property resources. The proceeds from its oil reserves have been distributed to citizens since 1982, totalling up to US$2,000 per person.

It could be phased in

We would be open to a gradual approach. One option we canvass in the report is beginning with a A$20 per metric ton tax and increasing it by A$5 a year until it reaches A$50 after six years.

The dividends would grow with the tax rate, but the bulk of households would immediately be better off in net terms and much better off over time.

And it would be simple

Our plan doesn’t create loopholes or incentives to get handouts from the government, as have previous plans that directed proceeds to polluters.

It will not satisfy climate-change deniers, but then no plan for action on climate change would do that — other than perhaps the governmment’s direct action policy, which provides a costly taxpayer-funded boondoggle to selected winners.




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But for those who understand that climate change is real, our plan balances the important benefits we gain from economic development and associated carbon emissions against the social cost of those emissions.

It does it in a way that provides compensation to all Australians, but on an equal basis, making the lowest-income Australians substantially better off.

It is the sort of policy that politicians who believe in both the realities of climate change as well as the power and benefits of markets ought to support.The Conversation

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW and Rosalind Dixon, Professor of Law, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Tax and dividend: how conservatives can grow to love carbon pricing


Andrew Hopkins, Australian National University

In some political circles, hostility to climate policy has become a way of showing off one’s conservative credentials. But a suggestion for pricing carbon, grounded in classic conservative principles, has now emerged in the United States. The Conversation

It has come not from the populist Trump administration, but from an eminent group of Republicans with impeccable conservative credentials, several of whom served as cabinet secretaries in previous Republican administrations.

Last week they published a manifesto entitled The Conservative Case for Carbon Dividends. In a nutshell, the proposal is for a carbon tax – yes, a tax – with the proceeds to be returned to all citizens as a “carbon dividend”, every quarter. More details in a moment.

The group accepts that climate change is real and that, regardless of whether it is human-induced, a human response is urgently needed. Moreover, they say:

Now that the Republican Party controls the White House and Congress, it has the opportunity and responsibility to promote a climate plan that showcases the full power of enduring conservative convictions.

Tax and dividend

The plan envisages a tax on fossil fuels at the point at which they leave the refinery or coal mine and enter the economy. It would start at US$40 a tonne and increase over time. This would force up the price of many commodities – most obviously petrol – and might be expected to anger consumers, were it not for the dividend strategy.

The dividend would be paid to all Americans, via the social security system. A family of four might expect a dividend of US$2,000 in the first year, rising over time in line with the tax.

The manifesto’s authors include eminent establishment Republicans, including James Baker, Secretary of the Treasury under Ronald Reagan and Secretary of State for George H. W. Bush; and George Shultz, Secretary of State in the Reagan administration and a former member of Richard Nixon’s cabinet. They are certainly sensitive to the political unpopularity of new taxes.

Their response is that this is not a tax that will accrue to the government, because it will be “revenue-neutral”: all of the money will go back to citizens. The carbon-pricing scheme introduced in Australia under former prime minister Julia Gillard was also revenue-neutral but returned money to consumers partly through income tax relief, which is less visible than a direct dividend.

The high visibility of a carbon dividend to the consumer arguably makes this a more politically palatable policy. For this reason the manifesto’s authors call their proposal a carbon dividend rather than a carbon tax. They calculate that the dividend would leave 70% of the population financially better off, particularly among working-class taxpayers. As they put it:

…carbon dividends would increase the disposable income of the majority of Americans while disproportionately helping those struggling to make ends meet.

The group argues that this proposal is consistent with conservative principles in various ways.

First, it is a market-based solution to the problem of climate change which maximises freedom to consumers and producers. Second, it will facilitate the rollback of Obama-era regulations such as the Clean Power Plan, which conservatives regard as the epitome of heavy-handed regulation. As the Congress has discovered with relation to Obamacare, it cannot simply repeal unwanted Obama legislation without replacing it with something widely seen as better.

Finally, they argue that the repeal of heavily bureaucratic regulations would eliminate the need for a bureaucracy to enforce them. This would facilitate smaller government, one of the abiding aspirations of conservatives.

Apart from these matters of principle, the group points to several other political advantages – not least the chance to bring the Republican Party back into the mainstream on climate change:

For too long, many Republicans have looked the other way, forfeiting the policy initiative to those who favor growth-inhibiting command-and-control regulations, and fostering a needless climate divide between the GOP and the scientific, business, military, religious, civic and international mainstream.

The manifesto’s authors point out that climate change concern is greatest among under-35s, as well as Asians and Hispanics – the nation’s fastest-growing ethnic groups. A carbon dividend policy would enhance the appeal of the Republican Party to all of these groups.

They acknowledge that it may be an uphill battle to win over the anti-establishment Trump White House. But, they say:

…this is an opportunity to demonstrate the power of the conservative canon by offering a more effective, equitable and popular climate policy based on free markets, smaller government and dividends for all Americans.

Back in Australia, many conservative politicians such as Senator Cory Bernardi – who this month defected from the government so as to promote more freely his conservative principles – still decry carbon pricing. Bernardi described the idea of returning to carbon trading as “one of the dumbest things I have ever heard”. This is hardly a conservative response given the ramifications for our climate.

Conservatives like Bernardi continue to equate carbon pricing with socialism. Yet for these establishment US Republicans, taxing carbon is entirely consistent with their conservative principles. Bernardi and his like-minded colleagues in Australia would do well to consider the possibility that there is indeed a conservative case for a carbon tax.


Former Republican congressman Bob Inglis will speak about the conservative response to climate change at Australia’s National Press Club on February 22.

Andrew Hopkins, Emeritus Professor of Sociology, Australian National University

This article was originally published on The Conversation. Read the original article.

Carbon taxes, emissions trading and electricity prices: making sense of the scare campaigns


Dylan McConnell, University of Melbourne

Yet again, electricity prices are set to be a key point of contention in an Australian federal election.

The Coalition responded quickly to Labor’s election commitment to an emissions trading scheme (ETS), with Prime Minister Malcolm Turnbull warning of “much higher electricity prices” and a “very big burden” on Australians.

Other ministers joined in. Treasurer Scott Morrison labelled the plan a “a big thumping electricity tax” and Environment Minister Greg Hunt branded it “Julia Gillard’s carbon tax on steroids”, warning of “even higher electricity prices for Australian families”.

The centrepiece of the Coalition’s climate policy, meanwhile, is the A$2.5 billion Emissions Reduction Fund. An important element of this scheme is the “safeguard mechanism”, which is due to kick in on July 1 this year. This has implications for the electricity sector and may also affect electricity prices.

National summary of retail electricity cost components
2015 Residential Electricity Price Trends

These policies will affect the wholesale electricity market, in which electricity is bought from power generators and sold on to retailers and consumers.

As you can see from the figure to the right, the competitive component of the retail prices makes up about 50% of the typical household electricity bill, and the wholesale component typically makes up half of that. The other major cost is poles and wires.

So how exactly will the different climate policies affect electricity prices?

The safeguard mechanism (Coalition)

The safeguard mechanism will require Australia’s largest emitters to keep emissions below a baseline. This will prevent emissions reductions under the ERF being offset by increases elsewhere. Businesses that go over the baseline will have to pay.

The safeguard is based on the high point in annual emissions from the whole electricity sector between 2009-10 and 2013-14. Generators’ individual baselines and associated penalties only come into play if the whole sector goes over the baseline.

As you can see in the figure below, emissions have fallen by almost 20 million tonnes per year since the first baseline year (2009-10), partially in response to years of declining demand.

Electricity Sector Emissions
Quarterly Update of Australia’s National Greenhouse Gas Inventory: December 2015

Current projections for electricity growth suggest that the baseline won’t be breached for some years. As such, individual generators are unlikely to be penalised, and wholesale prices would not be expected to change dramatically.

Electricity sector emissions trading (Labor)

Labor’s electricity sector ETS is a “baseline and credit” scheme, based on a model proposed by the Australian Energy Market Commission (AEMC), which actually submitted the proposal to consultation on the safeguard mechanism.

This also places a baseline on the electricity sector, but it is calculated on the basis of emissions intensity (tonnes of emissions per unit of electricity generated) rather than overall emissions. Generators with emissions intensity below the baseline (for example, gas generators) would earn credit, so “cleaner” power plants would generate more credits.

Power plants that go over the baseline (for example, brown coal) would have to buy credits for the amount they go over. “Dirtier” plants would thus have to buy more credits.

This is substantially different to a carbon tax or the previous emissions trading scheme. Under these policies, all generators are penalised, some more than others, as you can see in the figure below.

Impact of carbon price and baseline and credit scheme on different generation technology in the electricity sector. A carbon prices increases all prices, relative to emissions intensity. A baseline and credit scheme increases the price of high-emissions-intensity generation, but lowers the price of low-emissions-intensity generation.
Author

This difference is important for electricity prices. Dirtier plants would be expected to increase their selling price to cover the financial penalty on their emissions. But cleaner plants, earning revenue from selling credits, could afford to sell their electricity more cheaply.

This is important, because cleaner plants (typically black coal or gas) set the price. Gas in particular would probably be significantly cheaper under this proposal. As such, the impact on wholesale prices would be small, or negative.

In fact, as the AEMC itself noted, the impact on the wholesale market could be an increase or decrease in prices (depending on where the baseline is set).

The brown coal exit (Labor)

Another component of Labor’s climate platform is a plan to finance the closure of brown coal power stations, an idea first proposed by ANU climate economists Frank Jotzo and Salim Mazouz.

In this proposal, brown coal plants would bid for the payment they would require to finance their own shutdown, with the cheapest bid being selected. The remaining plants would pay this cost, in line with their emissions.

Similar to the ETS, it would be expected that this cost would be reflected in increased offer prices to the market from the remaining generators. The direct costs would be temporary (a one-off payment) and small, relative to the overall wholesale price.

Indeed, Jotzo and Mazouz estimated it could cause a one-off rise of 1-2% in retail power bills. Analysis company Reputex found the impact could be between 0.2% and 1.3%.

However, Danny Price of Frontier Economics has suggested that the scheme could push up retail power prices by between 8% and 25%, as the result of a short-term price shock. But given the significant excess capacity in the market, and assuming that the market is indeed competitive, it is hard to see how such a increase would happen.

This point aside, the price argument misses the point of the scheme, which aims to deliver an “orderly transition” away from brown coal. The longer-term effects on supply and price of a brown coal exit will be similar, regardless of how the industry closes.

In fact, if it were left entirely to the market, the sudden retirement of an entire power plant might create even more of shock. This proposal is chiefly about ensuring an orderly, predictable transition.

50% renewable energy target (Labor)

The final element of Labor’s climate platform is a 50% renewable energy target by 2030. At this stage, not much detail has been unveiled other than shadow environment minister Mark Butler’s pledge that it will be “designed in a way that does not disturb investor sentiment around the delivery of the existing Renewable Energy Target” – something that a sector beset by uncertainty would welcome. As such, it is quite difficult to speculate on how electricity prices might react.

The current Renewable Energy Target is a certificate scheme that requires retailers to buy a certain amount of renewable energy. The cost of these certificates is passed on through electricity bills. However, as shown by the government’s own modelling, the interaction with the wholesale market results in a net saving to consumers.

Interestingly, and as the AEMC points out, the electricity ETS is designed to be flexible and integrate with a renewable energy target. Indeed, such an ETS could drive investment in renewable energy, replacing current subsidies through the Renewable Energy Target. The 50% target could theoretically be achieved through the ETS alone, if the baseline was set at the right level.

A bipartisan approach?

As it stands, the government’s climate platform is unlikely to have any impact on electricity prices. However, it will also not have a major impact on the electricity sector’s emissions.

Labor’s policies will have an impact, but as the AEMC notes it may occur “without a significant effect on absolute price levels faced by consumers”.

The government’s current polices will require strengthening to further reduce emissions. To achieve this, the Grattan Institute and others including the Business Council of Australia have supported ideas that would turn the Liberal platform into something very similar to Labor’s.

Indeed, modelling commissioned by the government itself assumes that Direct Action will eventually morph into a similar baseline-and-credit ETS, in order to meet long-term climate commitments.

Political slogans aside, perhaps a bipartisan approach is possible, without a significant effect on power bills.

The Conversation

Dylan McConnell, Research Fellow, Melbourne Energy Institute, University of Melbourne

This article was originally published on The Conversation. Read the original article.

Australia’s Carbon Tax and the World


The link below is to an article reporting on the carbon tax in Australia and the world’s view of it.

For more visit:
http://bigthink.com/think-tank/the-carbon-tax-is-it-time-to-follow-australias-lead.