Some critics of carbon pricing have pointed out that, over time, the carbon price will increase to a much higher level and devastate the economy. Indeed, the image of a python squeezing the life out of the economy has been painted to describe this. However, this view is based on a misunderstanding of how carbon pricing works, and confusion over the difference between the price per unit of carbon and the overall impact on household and business costs.
Most analysts expect the carbon price to increase over time as the “low hanging fruit” of abatement options is captured and we have to adopt more expensive ways (such as carbon capture and storage and coslty forms of renewable energy) to make deeper emission cuts. By 2050, many estimates indicate the price might exceed $150 per tonne.
However, at the same time, the greenhouse intensity of energy, goods, and services will decline as businesses and households act to cut their emissions. This will reduce the impact of a higher carbon price per tonne on total carbon costs experienced by consumers. For example, Treasury expects the greenhouse intensity of Australian electricity to fall by over three-quarters by 2050, as renewable energy and gas replaces coal fired power. On top of this, we will be more energy efficient, so we will use less electricity to deliver each service such as lighting, comfort, refrigeration, and so on.
Emissions down, efficiency up: carbon price will be offset
So if the greenhouse intensity (emissions per kilowatt-hour) of electricity falls by three-quarters, and we use, say, 30% less electricity per unit of service by becoming more energy efficient, the carbon price could increase to almost six times today’s price while having no more impact on a consumer’s overall electricity costs than today’s carbon price.
Industries can not only reduce their fossil fuel use, but also their use of greenhouse-intensive materials. For example, a “low-embodied emission” timber high-rise building is now proposed for Docklands in Melbourne. Low-emission concrete is being increasingly used. The most efficient brick-kilns already use less than half of average brick-making energy. Many recycled materials, especially metals, have much lower greenhouse gas emissions associated with their production than new materials. And many products can be designed to use much less material: compare the weight of an old video-recorder against that of a modern DVD player.
The more rapidly we cut our emissions, the lower the carbon price will be, as there will be less competition to drive permit prices up. One 2007 IPCC study looked at the carbon price trend with and without “accelerated innovation”, using nine different models. It found that, for a 450 parts per million (ppm) scenario, the price of carbon dioxide emissions in 2050 would fall from around $140 per tonne to around $60. So the harder we work to cut emissions creatively, the cheaper the carbon price will be, and the less carbon we will have to pay for: a double benefit. That’s what the carbon price and associated measures are meant to encourage.
Falling demand is depressing wholesale electricity prices
We have some evidence of this effect. According to Melbourne Energy Institute’s Mike Sandiford, over the past two years, the decline in electricity demand has reduced typical wholesale electricity prices from $47 per megawatt-hour to under $30. Much of this reduction has been attributed to energy efficiency improvement and renewable energy. That means electricity prices today are 1.7 cents per kilowatt-hour cheaper than they would have been if past trends continued. That almost offsets the carbon price on electricity. So, even though electricity prices have increased dramatically, it could have been worse without the kinds of actions the carbon price encourages.
According to the Department of Climate Change, between 1990 and 2005 Australia’s greenhouse emissions per unit of GDP declined by around 37%, while energy emission intensity declined by around 17%. So we are already emitting less carbon per unit of economic activity as we work smarter and the structure of economy changes. The cost of a given carbon price per unit of economic activity is already on the decline.
So the carbon price may increase, but its impact on overall costs for Australians won’t increase. If we get serious it could even decline. Our python seems to look more like a lolly snake.
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