Retired geologist and engineer, Peter Lang, calculates what this tax, and the Emissions Trading Scheme to follow, will really cost Australians:

Introduction

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

Assume:

• average population to 2050 = 30 million
• average number of employed persons = 15 million

Therefore:

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. 

Assumptions

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.

Discussion

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.

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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.

Why is the government insistent on implementing a CO2 price, given that it will not make any difference to the climate, or to sea levels, and most certainly will not “lead the world by example” (as has been so clearly demonstrated at the Copenhagen, Cancun and Durban conferences)?

If the government had been given sound, objective advice it would realise that there is no point in implementing a CO2 price unless the whole world participates. Renowned world leader in all matter to do with CO2 pricing, Yale economist Professor William Nordhaus, says in his 2008 book “A Question of Balance” [1], p19:

“We preliminarily estimate that a participation rate of 50 percent, as compared with 100 percent, will impose an abatement-cost penalty of 250 percent. Even with the participation of the top 15 countries and regions, consisting of three-quarters of world emissions, we estimate that the cost penalty is about 70 percent.”

Treasury estimates [2] suggest the Government’s CO2 pricing scheme will cost about $1,350 billion cumulative to 2050 (undiscounted), or $390 billion (discounted at 4.35% per annum, the rate used in the Nordhaus Yale-RICE model (2012) [3]). This cost may be an underestimate; for example, the compliance cost for CO2 measuring and monitoring apparently has not been estimated.

However, the benefit of the Government’s CO2 pricing will be virtually nil.

Why is the Australian Government so insistent on damaging our economy (and our wellbeing) for no environmental benefit?

Peter Lang

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References:

1. William Nordhaus (2008) “A Question of Balance”, p19,
http://nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf

2. Treasury (2011) “Strong Growth, Low Pollution – Modelling a Carbon Price”, [Chart 5:13]
http://archive.treasury.gov.au/carbonpricemodelling/content/chart_table_data/chapter5.asp

3. Nordhaus, Yale-RICE Model (as of March 20, 2012)
http://nordhaus.econ.yale.edu/RICEmodels.htm

“The ABC 7:30 report has improved greatly since Leigh Sales and Chris Uhlmann took over from Kerry O’Brien.  However, there have been lapses.  Last night’s 7:30 report on solar power was atrociously biased.  ABC has been strongly biased towards renewable energy for over 20 years.  Last night’s program was unbalanced, lacked objectivity and presented wrong and misleading information.

They interviewed two of the extreme renewable energy proponents in Australia (Matthew Wright and Tristan Edis) but did not provide balance by getting a competent person to explain the cost of renewable energy and what the costs do to the price of electricity (and therefore to Australia’s economy).

Matthew Wright was the lead author of the Beyond Zero Emissions report which claims Australia could have zero carbon emissions from energy by 2020.  I’ll tell readers some more about that below.

Tristan Edis is the editor of “ClimateSpectator”.  He is a strongly biased proponent of renewable energy and of changing the electricity system to suit the needs of renewable energy advocates – including the changing the transmission system and the electricity companies which must remain profitable in order to provide a reliable electricity supply.

But no one was interviewed who could explain the costs.  So below I’ll explain the costs of Matthew Wright’s plan for Zero Carbon Emissions by 2020.  I’ll also explain the cost of Dr Mark Diesendorf’s (uncosted) plan for all eastern Australia’s electricity to be provided by renewable energy.

Tristan Ellis has frequently posted articles by Dr Mark Diesendorf on Climate Spectator, but he has refused to post an op-ed explaining the costs of Mark Diesendorf’s proposals.  Perhaps ABC would be prepared follow up last night’s 7:30 report with a report explaining the costs properly and without pro renewable bias.

Matthew Wright is the lead author of the Zero Carbon Australia by 2020 report.  The report has been critiqued and discredited by many people including by Martin Nicholson and Peter Lang:

The Matthew Wright analysis assumes that Australia’s domestic air transport would cease, people would move by train, bus and some electric cars by 2020.  Electric trains would run all over our grain growing areas collecting wheat stalks and transporting them to the solar power stations to burn them to produce heat for when the sun doesn’t shine enough.  There are many other highly optimistic to completely unrealistic assumptions underpinning his analysis.   Here are the conclusions from our critique are:

• The ZCA2020 Stationary Energy Plan has significantly underestimated the cost and timescale required to implement such a plan.

• Our revised cost estimate is nearly five times higher than the estimate in the Plan: $1,709 billion compared to $370 billion.  The cost estimates are highly uncertain with a range of $855 billion to $4,191 billion for our estimate.

• The wholesale electricity costs would increase nearly 10 times above current costs to $500/MWh, not the $120/MWh claimed in the Plan.

• The total electricity demand in 2020 is expected to be 44% higher than proposed: 449 TWh compared to the 325 TWh presented in the Plan.

• The Plan has inadequate reserve capacity margin to ensure network reliability remains at current levels. The total installed capacity needs to be increased by 65% above the proposed capacity in the Plan to 160 GW compared to the 97 GW used in the Plan.

• The Plan’s implementation timeline is unrealistic.  We doubt any solar thermal plants, of the size and availability proposed in the plan, will be on line before 2020.  We expect only demonstration plants will be built until there is confidence that they can be economically viable.

• The Plan relies on many unsupported assumptions, which we believe are invalid; two of the most important are: A quote in the Executive Summary “The Plan relies only on existing, proven, commercially available and costed technologies”;  Solar thermal power stations with the performance characteristics and availability of baseload power stations exist now or will in the near future.

Matthew Wright was sent a copy of our critique and invited to post a reply and/or to participate in online discussion and/or debate. He did not reply to any of the offers and invitations.

Tristan Edis, editor of Climate Spectator, frequently posts articles by Dr Mark Diesendorf, Matthew Wright and other renewable energy advocates.  But he was not prepared to post a critique of Dr Mark Diesendorf’s articles.  Below is a critique I offered.  It provides some insight into the costs of proposals like those presented on ABC 7:30 last night.  I suggest, these costs should be made clear to your viewers for proper balance to the highly biased program on solar power presented last night.

Summary of: Renewable electricity for Australia – the cost

Researchers at the Centre for Energy and Environmental Markets (CEEM), University of NSW, did a desk top study called “Simulations of Scenarios with 100% Renewable Electricity in the Australian National Electricity Market” (Elliston et al., 2011).

The authors claim their study demonstrates that renewable energy could supply 100% of the Australian National Electricity Market’s electricity and meet the demand with acceptable reliability.

However, they did not estimate the costs of the system they simulated.  I have critiqued the paper and made a crude estimate of the cost of the scenario simulated and three variants of it

Using costs derived from the Federal Department of Resources, Energy and Tourism (DRET, 2011), the costs are estimated to be: $568 billion capital cost, $336/MWh cost of electricity and $290/tonne CO2 abatement cost.

That is, the wholesale cost of electricity for the simulated system would be seven times more than now, with an abatement cost that is 13 times the starting price of the Australian carbon tax and 30 times the European carbon price.  (This cost of electricity does not include the costs for the existing electricity network).

Although it ignores costings, the study is a useful contribution.  It demonstrates that, even with highly optimistic assumptions, renewable energy cannot realistically provide 100% of Australia’s electricity generation.  Their scenario does not have sufficient capacity to meet peak winter demand, has no capacity reserve and is dependent on a technology – ‘gas turbines running on biofuels’ – that exist only at small scale and at high cost.

http://bravenewclimate.com/2012/02/09/100-renewable-electricity-for-australia-the-cost/

An Excel file is provided which you can download, change the inputs and do your own sensitivity analyses.”

[end of complaint submitted to ABC (text slightly modified and hyperlinks inserted)]

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A version of this text was first posted by Peter as an O/T comment.  Earlier today I moved it quickly to this spot.  The above text has changed since then as Peter asked I post the above formatted version with inserted hyperlinks.   Jen at 9.22 pm on Wednesday.