What the Carbon Tax and ETS will Really Cost: Peter Lang
Tomorrow, July 1, Australia gets the carbon tax the Prime Minister, Julia Gillard, promised she would never introduce. The nation’s 500 “biggest polluters” will start paying a $23-a-tonne carbon price.
Popularly called the ‘Carbon Tax’, the CO2 tax and ETS will cost us more than the government claims. Initial costs will be relatively small – a ‘honeymoon rate’ – but an accelerating rate thereafter will soon create much higher costs. Some people will be partly compensated for a while, but after that we will all pay the full costs.
Actual costs are not easily derived – much depends on assumptions and estimates. From Treasury estimates, for instance, the cost will be more than $13,000 per person (every man woman and child), or more than $26,000 per worker, total to 2050 (in today’s dollars).
However, the costs will most likely be much higher. Firstly, while the ‘honey-moon rate’ includes only the 500 largest emitters, all CO2 emitters will eventually be brought into the ETS to make the scheme work as planned.
Secondly, emissions will eventually have to be measured, not just crudely estimated as is done now. Not only CO2, but all the other twenty-three Kyoto gasses, from all sources, will have to be included. The compliance costs are not included in Treasury’s estimates (see The ultimate compliance cost for the ETS). Therefore, the actual costs the ETS will impose on us will inevitably be higher than we are being led to believe.
Below I explain the calculations of:
- the benefit (total to 2050)
- the cost (total to 2050)
- the benefit to cost ratio
- the cost per capita and per worker
Lastly, I list the assumptions that underpin the estimate of the benefits.
The cost and benefit analysis figures I used as inputs are chosen from sources well respected for reliability and credibility. The figures and subsequent analysis tell us, in effect, that Australia is planning to spend $10 dollars for every $1 of benefit it hopes to derive – provided the assumptions about the consequences of AGW are correct. This suggests that our climate policies are flawed and need major change.
The estimated benefit (to 2050)
The benefit of a CO2 price is taken here to be the same as the cost of not having a CO2 price. That is, the benefit derives from preventing things that otherwise would have happened from happening.
World authority on carbon pricing, Professor William Nordhaus estimated the net cost of delaying implementation of a world CO2 price until after 2050. He estimated the net cost for the whole world at $3.5 trillion for the period 2005 to 2055; he says:
“Given the importance attached to this question, I recalculated this figure using the latest published model. When put in 2012 prices, the loss is calculated as $3.5 trillion, and the spreadsheet is available on the Web for those who would like to check the calculations themselves.”
I converted the $3.5 trillion world damages avoided to the Australian proportion on the basis of Australia’s share of world GDP, i.e. 1.17% (IMF, 2011). So Australia’s share of damages avoided is 1.17% x $3.5 trillion = $41 billion.
This figure assumes an optimal CO2 price and the whole world implements an economically efficient CO2 price in unison. It also assumes Australia’s share of world GDP remains constant. The assumptions are listed below. If the assumptions are not achieved, the estimated benefit will not be realised.
The estimated cost (to 2050)
The net cost (costs minus benefits) is the reduction in GDP. The Australian Treasury estimated the loss of GDP that the CO2 tax and ETS will cause. [However, it seems they may have underestimated because they, apparently, have not estimated the compliance cost]. The cumulative loss of GDP to 2050 is $1,345 billion* (undiscounted) (Chart 5:13), or $390 billion (discounted at 4.34% pa)*.
This is the net cost, not the cost. The cost is net cost plus benefits. I don’t know Treasury’s numbers for costs and benefits, so I’ll assume the benefit is the $41 billion I calculated above. Therefore, the cost would be $390 billion + $41 billion = $431 billion. (This is rough, but sufficient for this ball park estimate).
Benefit to cost ratio?
From above, the benefit to Australia of a globally optimised CO2 price (if the world implements an economically efficient CO2 pricing scheme in unison) would be $41 billion. The cost (reduced GDP) would be $431 billion. Therefore, the benefit to cost ratio is 0.1. [Benefit/cost should be greater than 1 to justify the policy].
Cost per person and per working person?
The estimated net cost is $390 billon. Australia’s population is 22.5 million. Australia’s number of employed persons is 11.5 million
- average population to 2050 = 30 million
- average number of employed persons = 15 million
Cost of the ETS per person = $13,000
Cost of ETS per employed person = $26,000
As mentioned above, the costs are likely to be higher than estimated by Treasury.
The assumptions that underpin the Nordhaus analysis are (in my words):
- Negligible leakage (of emissions between countries)
- All emission sources are included (all countries and all emissions in each country)
- Negligible compliance cost
- Negligible fraud
- An optimal carbon price
- The whole world implements the optimal carbon price in unison
- The whole world acts in unison to increase the optimal carbon price periodically
- The whole world continues to maintain the carbon price at the optimal level for all of this century (and thereafter)
If these assumptions are not met, the net benefits estimated by Nordhaus cannot be achieved. As Nordhaus says, p198:
“Moreover, the results here incorporate an estimate of the importance of participation for economic efficiency. Complete participation is important because the cost function for abatement appears to be highly convex. We preliminarily estimate that a participation rate of 50 percent instead of 100 percent will impose a cost penalty on abatement of 250 percent.”
In other words, if only 50% of emissions are captured in the carbon pricing scheme, the cost penalty for the participants is 250%. The 50% participation could be achieved by, for example, 100% of countries participating in the scheme but only 50% of the emissions in total from within the countries are caught, or 50% of countries participate and 100% of the emissions within those countries are caught in the scheme (i.e. taxed or traded).
Given the above, we can see that the assumptions are theoretical and totally impracticable. To recognize this, try to imagine how we could capture 100% of emissions from 100% of emitters in Australia (every cow, sheep, goat) in the CO2 pricing scheme, let alone expecting the same to be done across the whole world; e.g. China, India, Eretria, Ethiopia, Mogadishu and Somalia.
The actual costs are likely to be higher than the Treasury estimates and, therefore, higher than stated above. Firstly, realistically the CO2 tax will have no measurable effect on the climate or sea levels, so the benefit will be negligible or nil.
Secondly, the compliance costs will increase enormously as more and more businesses are included in the scheme (e.g. many small and medium businesses, every farmer, every hospital, school, shopping centre, etc.), and as emitters will eventually be required to measure emissions, not just estimate them.
Thirdly, the CO2 price will cause deindustrialisation of Australia as some industries that emit CO2 are forced to move to other countries with lower costs of production and weaker environmental laws. Therefore, GDP will be reduced by more than Treasury estimates, but with no reduction in global emissions.
The analyses above are intentionally a ‘ball park’ estimate and, therefore, simplified.
I recognise I’ve cumulated to 2050, not to 2595 which is what the Nordhaus RICE model does. This is a contentious issue. I and others, however, do not accept that policies made now will last even a decade, let alone to 2595. We can point to the life span of the Kyoto Protocol and many other examples to show that most policies made at a point in time do not have a long life and have little influence on subsequent policies.
Peter Lang is a retired geologist and engineer with 40 years experience on a wide range of energy projects throughout the world, including managing energy R&D and providing policy advice for government and opposition. His experience includes: hydro, geothermal, nuclear, coal, oil, and gas plants and a wide range of energy end use management projects.