Uncertain savings from axing the carbon tax
by Tony Wood
Published at The Conversation, Wednesday 13 November 2013
With the government introducing legislation to repeal the carbon price today, people might be wondering how much they will benefit from reduced cost of living.
The government has continued to claim that households will save A$550 each year, and has demanded that companies pass on the savings immediately. But how much can we really expect to save?
From July 1, 2012, the Labor government introduced a fixed carbon price of A$23 per tonne of CO2 on greenhouse gas emissions as the centrepiece of its climate change policy. The fixed price would increase by consumer price index for a further two years, to be replaced by a market-based price from July 1 2015. The fixed price nature of this policy allowed the Coalition to label it as a carbon “tax”, with fatal consequences for the Labor government.
The Coalition ran a successful campaign in which repeal of the carbon tax was a central pillar, and will this week introduce the legislation to implement this pledge. The carbon tax will be replaced by an emissions reduction fund, the centrepiece of the government’s Direct Action policy.
The Labor government under Kevin Rudd realised the fatal flaws generated by the fixed price and campaigned that it would also repeal the carbon tax and move to a market-based carbon price by July 1 2014.
The Coalition government is demanding energy companies pass through the cost savings immediately and in full when the carbon tax is removed. The government intends that this will be July 1 2014 at the latest.
It estimated that power prices will go down by 9% and gas prices by 7%, the average power bill will be A$200 a year lower and the average gas bill will be A$70 a year lower. The Prime Minister has referred to total savings for households of around $550 per year, and Minister Hunt estimated this would mean a saving of A$3,000 per family over the next six years.
The government has charged the Australian Consumer and Competition Commission (ACCC) with ensuring that this outcome is achieved and has given them further powers to do so.
Repeal of the carbon tax will remove a cost impost on the large electricity and gas companies. There will be a reduction in the wholesale price of electricity and gas that should flow through to customers in exactly the same way that the original carbon tax was passed through as a price increase from 1 July 2012.
The energy companies and others in supply chains that either pay the carbon tax directly or indirectly have not argued against the principle that there will be a cost reduction and it should be passed through. No contention so far.
Rod Sims, chairman of the ACCC, has made it clear that the task isn’t that hard and the energy industry should just get on with it. But the energy industry has argued that it will be difficult, if not impossible, to determine with any accuracy the savings that will be passed on.
The problem arises with quantifying the savings. If nothing had changed since 2011, then savings of around 9-10% for electricity, or A$180-200 per year on average, could be expected once the A$24 per tonne carbon price is removed. After all, that is how much electricity prices were estimated to have been impacted when the carbon price of A$23/t was imposed.
However, things have changed, with lower emissions intensity and higher network costs. Therefore the savings are likely to considerably lower in percentage terms and probably well under $150 per year. And remember that averages are very dangerous things.
A similar argument applies for gas, although the variability across states and consumers is much greater. For example home heating means that the savings for Victorians will be much greater than for Queenslanders who use gas only for cooking and hot water.
The savings beyond the first year will also be lower because the carbon price would have been expected to fall with the move from a fixed to a market-based price. So the removal of a price of A$10 per tonne or less generates much less savings.
So, the government and the ACCC are right that the savings can and should be passed through, and the companies are right that it will be difficult to prove that this has been done in full and may not be in line with the Government’s estimates. It sounds like a good old stoush for accused and accuser is on the cards.
Lost in this noise is the fact that we are still left with the climate change problem and there is a cost to addressing it. It’s a bit like saying that we are dropping a treatment for a disease because the current one has too many side effects.
The patient is still sick, and we don’t yet know whether the replacement treatment will be the cure.