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.
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.
*******
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.
* This is total of the differences between the ‘SGLP core’ and ‘Medium world action’ scenarios: (Chart 5:13). 4.34% is the default discount rate for USA for the period 2005-2055 in the Nordhaus RICE model.
Jennifer Marohasy BSc PhD is a critical thinker with expertise in the scientific method.
If co2 is such a problem then why are we exporting increasing tonnages of coal, gas and iron ore?
The entire campaign is a total fraud and con trick that seems designed to punish Aussies, wreck our industries and destroy our jobs.
The rest of the world can buy our cheap energy, but we must reduce our use and rely on super expensive, unreliable, useless solar and wind.
The Gillard govt is encouraging the Vic govt to process our brown coal and export the desired back coal overseas and change the Latrobe valley into a new Pilbara.
Clearly this govt doesn’t have a problem with increased co2 emissions, their concern is to punish and wreck our industries and destroy our jobs.
This is the only conclusion we can draw, so why isn’t the MSM shouting out these contradictions to the Aussie electorate?
This idiocy only requires the powers of reasoning and logic of a 5 year old, yet it hardly rates a mention.
Of course reducing our emissions of co2 will not change the temp or climate by a jot, but a certain percentage of Aussies still thinks it will.
A small group of Aussies and our Gillard govt have become barking mad.
Alan Moran has also crunched the numbers http://catallaxyfiles.com/2012/05/24/carbon-charges-how-much-do-we-want-to-pay/
his conclusion:
The actual average annual costs in taxes from the carbon tax, the renewable energy requirement and the existing bevy of subsidy and grant measures to dozens of different green program’s, as of July, amount to $665 Per person. The Clean Energy Fund, planned at subsidising unviable green projects will, at $20 billion, mean a further $1000 per head. And these measures barely make a dent in the march to the 90 per cent emission reduction that the government is targeting.
On those figures the average weekly cost per person is $32
and what happens to the price of labour http://catallaxyfiles.com/2012/02/06/whats-in-tatters/
Update: The Coalition presser is here (emphasis added).
Real wages are expected to fall by almost one per cent than otherwise by 2020.
This means for an average worker a cut in salary of $600 a year.
By 2050, the cut in real wages is six per cent, which is equivalent to an annual pay cut of $6,000 a year.
Exactly consistent with the Treasury modelling.
Oh for some honesty from this Government and thanks Peter for another excellent post
Julia, Greg and Penny do not really believe their own spin about carbon dioxide, nor do they care. The primary aim of all these people ais to retain power and enjoy the perks that go with their positions of privilege. Just look at the air travel expenses by individual politicians and the staff of the Department of Climate Change in particular. Millions of dollars of taxpayers money spent on jetting around the planet to exotic places to discus the impact of carbon emissions. The whole thing is absurd. If they really believed that carbon dioxide was evil, they would stop all their ComCar Capers and airline junkets. Get a bike, stay at home, and use the internet if you want to talk to people in Rio or Bali or South Africa. If you want to tax something to improve the lives of Australians put a tax on fat, Julia. Th e population would be a lot healthier.
Peter L does not highlight the main assumptions in this horrible mess 1) that CO2 content in the atmosphere above the present level causes some harm and needs to be reduced 2) that there are no benefits from higher CO2 levels than present and 3) that reducing CO2 levels below the present to say levels in the year 2000 does not cause physical and economic harm (eg reducing GNP)
Each one of these basic assumptions are wrong or at least doubtful.
It is known that plant growth (food, timber etc) improve with increasing CO2 upto at least 1000pmm in the atmosphere and that this CO2 level has no harmful physical effects on all animals including humans. It is also known that there is a bottom limit for plants of about 200ppm when they get stressed. Secondly, there is no proven connection between CO2 levels and atmospheric temperatures. Even if there was warming could be a great benefit on a global scale. There is more land and human population in the northern hemisphere. Some warming would be a huge benefit for agriculture and population in Alaska, Canada, Russia, Finland and even North Korea where people are starving.
Finally, the inclusion of gases other than CO2 in calculations is complete nonsense. This particularly applies to methane which has a small fraction of the radiant absorption of CO2 and does not significantly oxidize in the atmosphere (see the cementafriend web site)
Singapore has at present one of the highest standards of living in the world. They live almost on the equator. I am sure that many of the freezing and starving people in North Korea would like to have a similar climate. Indonesia, also close to the equator has one of the highest density of population and has a rapidly growing economy.
Exactly, Phil. Nobody believes it. Just as one can prove in a flash that everybody believes it’s dangerous to lie down in the highway, one can demonstrate easily that nobody believes in the dangers of GHGs from human activity. People may like a belief, and express a belief with passion, but that does not mean they actually hold the belief.
It’s crazy, but it’s not the first time in history that a mass of people have subscribed at great cost to a futiile notion in which they have no belief. For some, there are material and tactical advantages in subscribing, for others it’s a way of belonging, of being in-the-know and above the common herd. One thing that strikes me about most of the warmists who comment here is their colossal snobbery. It oozes out of them.
I do like the rice analogy:
http://www.youtube.com/watch?v=BC1l4geSTP8
But you have to marvel at the quirks of fortune that allowed such a mad green minority to impose their madness on what was until fairly recently a sane world.
Maybe it is all for the best and the lesson learned t/w the soon-to-be-revealed political backlash will prevent our youth from going down even worse pathways.
One can only hope.
They would first need to establish a Department of Obesity, with a budget of say $100 million a year. Then the tax comes in to make sure people eat less because they have less to spend on food. Then, of course, they would need to send out “Eating Assistance for Starving Families” coupons that give you $100 to spend each week, but only at Kentucky Fried Chicken. Net result – more obesity, more bureaucracy, more ministers and assistant secretaries of pointless policies. Yes, the carbon tax and the Department Change is the perfect model for stupidity in the 21st century.
Good one Phil,
I find it amazing that we have a prevailing mindset that believes that putting a tax on it and allowing a government bureaucracy to run it (and therefore almost entirely dependant on the taxed to keep doing the same thing) will magically fix the problem.
You have created a very clever analogy.
http://stevengoddard.wordpress.com/2012/06/30/the-gillard-effect-sets-in/
“With Oz in the deep freeze and experiencing record skiing conditions, Julia says it is time to pay the global warming tax which she promised not to create.” And more.
http://stevengoddard.wordpress.com/2012/07/01/per-capita-sm/
“Julia (the pasty Welsh girl) says that Australians need to be punished because their per capita CO2 emissions are high. (Unlike Mexico, which has the highest per capita methane emissions – due to Pinto Beans.)
The fact that Australia’s total CO2 emissions are relatively about the size of a gnat on a hair on an elephant’s ass – isn’t important. It also isn’t important that her tax will have no effect on the climate. What is important is that per capita emitters are duly punished.” And more
“
Bolt asks Albanese by how much our reduction in co2 emissions will change the planet’s temp.
Albanese can’t/won’t answer the question,says it’s the wrong question and there can’t be an answer?????
So we’re trying to reduce our emissions just to play silly buggers I suppose. Just a pity it’s costing us countless billions $ for decades into the future for an abosute zero return on that investment and ruination of the OZ economy thrown in just for fun.
Even when Bolt offers the IPCC estimate that the change in temp would only be X thousandths of a degree this clueless fool doesn’t even know whether to agree or not. How is it we are governed and represented in parliament by these stupid pig ignorant numbskulls?
http://blogs.news.com.au/heraldsun/andrewbolt/index.php/heraldsun/comments/the_bolt_report_today15/
Neville,
Thank you for your comments and for the link to the Bolt Report. What a joke the politics of CO2 pricing is. What a joke the Labor minister will not answer the very clear question: what effect will the CO2 tax have on global temperatures?
What a clear example of obfuscation.
Chart 5.1 here http://archive.treasury.gov.au/carbonpricemodelling/content/chart_table_data/chapter5.asp shows Treasuries projected carbon price. Treasury projects the carbon price will nearly double by 2030 (to $53) and more than double again by 2050 (to $131).
However, it is likely to grow much faster than this for the reasons explained in the lead article.
Chart 5.13 http://archive.treasury.gov.au/carbonpricemodelling/content/chart_table_data/chapter5.asp shows the projected net cost the CO2 tax and ETS will cause (according to Treasury estimates. Treasury projects the net cost would be $21 billion per year in 2030. If my (admittedly crude) estimate of the ultimate compliance cost is correct ($23 billion per year) that alone would double Treasury’s estimated cost of the ETS in 2030. Implementation of ever more stringent regulations, capturing more emitters and increasing the measurement requirements will inevitably lead to much higher rate of cost growth. For the cost to be double in 2030, we could assume as a rough guess it will be double the Treasury estimate in every year from 2015 to 2030.
Great analysis, but long overdue. The Governments of the Western World should have done similar research decades ago before accepting green myths and spending vast sums on renewables and other pointless CO2 reduction measures. It beggars belief that only in the last year or so is cost to benefit analysis being done. If such high expenditure for such poor effect was made in any other area of government the press would be heartily condemning the Government and even the ABC would have noticed. But this still hasn’t happened, even though there is overwhelming evidence that the Carbon tax and RET will have no effect whatsoever on the climate for two reasons:
1. we now know that the influence of CO2 on climate has been greatly exaggerated and even a doubling (which would take centuries) would raise the Earth’s temperature by only a degree or so, and
2. Nothing little Australia does will stop China from building a coal fired power station every two weeks or so – and thus increasing its CO2 output every 4 months by more than our total production. In other words, if we shut down Australia completely atmospheric CO2 levels would be the same as now in four months time, thanks to China alone.
Well done Peter. The job now is to tell the world what Peter has proved. So if you have read this article and agree with it, don’t just nod wisely and get angry at Julia and the duplicitous mob, get out there and tell everyone who will listen how pointless and stupid this green tax is.
Doug Hurst
Well, it has certainly started! My gas supplier has kindly informed me that this year’s price will be 11.6% higher than last year’s — it could be more. But extra costs of supply and infrastructure seem to amount to only a 0.6% increase. Most of the rest is the carbon tax, and my support for wind and solar, which somehow I didn’t agree to (was never asked).
I happily await the new electricity price and the new water price, to see how I can further help my grandchildren. Oddly, they tell me they are also paying — I don’t know why. I thought it was my duty.
Everything about the carbon tax is patently fraudulent.
‘Climate science’ as presented by the IPCC is neither rigorous nor settled.
Gillard’s famous pre-election lie will be remembered by the electorate in due course.
The political architects of the carbon tax have failed to carry out due diligence as is patently clear from Peter Lang’s analysis of the costs of compliance, and the ridiculous assumptions underpinning the whole scheme – these will never be realised and that alone makes the carbon tax unrealistic.
The unilateral imposition of the world’s biggest carbon tax will have absolutely no effect on climate. It will, however, have very deleterious effects on inflation, the cost of living, and increased unemployment as our manufacturing industries confront the disadvantage of operating in Australia in competition with overseas enterprises.
Chinese CO2 production shows the amount of industry (and jobs and wealth) that has moved from the developed world to China. It also shows that regulation has not reduced CO2 production, it has simply moved the source, and created economic hardship for displaced workers.
Consider for example what is happening in Australia. They have introduced a tax on CO2, which will reduce coal use in Australia. This will reduce the price of coal in Australia. China will benefit greatly from this, as it will make Australian coal exports to China that much cheaper. The coal the Australians are not using will then be available for the Chinese at a lower price.
The net effect? The Australians will be paying a tax that will make everything made in Australia more expensive and therefore less competitive, which will result in job losses in Australia. While at the same time driving down the price of energy in China, making Chinese exports to Australia that much more competitive, further increasing job losses in Australia.
And the CO2 reduction in Australia? This will be mirrored by a CO2 increases in China, which may exceed the CO2 reduction, depending on the relative efficiency of Australian versus Chinese coal plants. The net result, less jobs in Australia with no overall change in CO2 worldwide.
It almost makes one wonder if the Australian government is being paid by the Chinese to enact these policies. They certainly appear to benefit China at the expense of Australia. All paid for by the Australian taxpayers.
ferd berple,
You said:
And, wow, haven’t China’s CO2 emissions increased! This chart shows China’s CO2 emissions.
You want to see a ‘hockey stick’? This is a ‘hockey stick’ !
Source, EIA: http://www.eia.gov/countries/img/charts_png/CH_co2con_img.png
There is an interesting comment on Judith Curry’s web site about issues with carbon pricing:
http://judithcurry.com/2012/08/19/week-in-review-81812/#comment-230912
stevepostrel | August 20, 2012 at 8:46 pm |
Robert has caught up to 1930s economics (Pigou) but not 1960s and later (Coase). The fundamental problem with all externality arguments is that who is trespassing on whom, and whether the trespass is welfare maximizing, is exactly what is at issue in the first place. Should polluters pay to pollute, should bystanders pay polluters not to pollute, or should bystanders adapt to pollution? Pigouvian taxation methods completely fail to address these questions; they assume that the first answer is correct, even if in fact it is not Pareto optimal or even second-best. So the idea is fundamentally misguided absent proof that adaptation is not socially preferable.
Other real-world problems with carbon taxes:
1. Any carbon tax will also have to be coupled with a carbon tariff to prevent imports produced untaxed from inefficiently displacing domestic taxed products. That will create endless opportunities for protectionist mischief and foreign policy crises.
2. A carbon tax, even one that is set correctly using the best technocratic estimate of the marginal benefit of reducing greenhouse forcing, may well end up not significantly reducing greenhouse emissions. It all depends on the empirical elasticities, which may be pretty low. (Severin Borenstein, a CAGW-believing economist at Berkeley’s energy institute, has pointed out, for example, that much of the market price of coal includes a scarcity rent well above unit cost that could absorb even fairly high emission taxes or permit prices.) In that case, the tax would create a huge new government revenue pool suitable for looting by all the rent seekers out there without changing emissions much at all. At the same time, environmental zealots would lobby and litigate to keep raising the tax until emissions went down, even if the correct market signal from the tax were that they should not.
3. The theory of the second best tells us that fixing one putative market distortion–in this case an alleged negative externality from greenhouse gases–without fixing others can make matters worse. In this case, that is not merely a generalized fear. We know specifically that nuclear power is subjected to much higher standards of expected deaths per kilowatt-hour than competing energy sources, distorting investment away from nuclear technologies. A carbon tax that might hypothetically be rational if nuclear power were not constrained in this way could easily turn out to be welfare destroying if the existing regulatory and legal regime were unaltered.
Those are just the most obvious problems with the pat blackboard Pigouvianism espoused by Robert.
Hi Peter
Two corrections
1) Australia’s population by 2050 will be between 37 & 38 Millions. I have done full modelling work. Australia now has highest population growth in Western World.
2) Currently Worst Air Quality are Saudi Arabia,UAE, India, Mongolia & China. None of them has CarbonTax and three of them has highest Population Growth
In total CO2 level in those country will continue to rise at alarming rate and will make no difference what so ever.
Shane
What is has already cost has not been taken into consideration – the destruction of basic science teaching in the general population world wide.
Climate scientists, CAGWs and AGWs both, have never ever produced any physically process for their claimed Greenhouse Gases warm the Earth 33°C from the -18°C it would be without them..
What Greenhouse Effect?
From real physics:
Temperature of Earth with voluminous real gas atmosphere with mass therefore weight under gravity, mainly condensable nitrogen and oxygen: 15°C
Temperature of Earth without atmosphere: -18°C
Compare with the Moon without atmosphere: -23°C
Temperature of the Earth with real gas atmosphere of mainly condensable nitrogen and oxygen, but, without water, think deserts: 67°C
Which is the real “thermal blanket” around the Earth?
Where is the physical process of the Greenhouse Effect claim that “greenhouse gases warm the Earth 33°C from the -18°C it would be without them?
At best this is mass delusion, at worst, this is “scientists” without even an elementary grasp of the physical properties and processes of matter and energy:
who cannot tell the difference between real gases and the fictional ideal;
who have not noticed the whole of the Water Cycle is missing from their models;
who have not noticed they have no rain in their Carbon Cycle;
who have zilch capacity for sense of scale and cannot tell the difference between their claimed trace gas carbon dioxide which is practically 100% hole in the atmosphere “thermal blanket” and the real gas air nitrogen and oxygen with mass therefore weight under gravity which weighs down on us around 14lbs per square inch, a ton on our shoulders;
who think our Sun is a cold star of 6000°C, which is around the temp of the Earth’s innards;
who think our real millions of degree hot Star the Sun therefore radiates insignificant amounts of longwave infrared heat, which they have, it has to be said, idiotically calculated by some ‘planckian’ method based on the thin 300 mile wide visible light atmosphere around our millions of degree hot Sun;
or, who claim there is some “invisible barrier like the glass of a greenhouse at TOA preventing direct thermal infrared from the Sun entering”, unknown to real physics;
who have not noticed the Solar Constant, which is the measurement of how much direct longwave infared heat energy from the Sun arrives at the surface by the amount it heats matter at the surface, has been moved in their GHE energy budget to TOA and misattributed to visible light from the Sun;
who claim it is visible light from the Sun which heats matter, which is a physically impossibility, etc., etc.,
Do the rest of us in the world who rely on you for accuracy as you claim to be scientists a favour – stop your posturing. You have no knowledge of physics basics.
The Greenhouse Effect is an Illusion, it is not physically possible, it does not exist, it is hoax to promote AGW.
It is the biggest science fraud to date and the longer you continue to promote it in any shape or form the longer the fraud will continue to the detriment of real science, and real scientists.
There is no physical process to get the “33°C warming by greenhouse gases”, its an illusion created by the science fraud of misappropriating the minus 18°C and applying it where it does not belong..