Oil: the real reason we need a carbon price
The carbon tax is intended to reduce greenhouse emissions, by encouraging us to buy less of those goods and services that cause emissions.
It should make low-emissions alternatives more economically competitive and stimulate investment and innovation in energy and transport.
But many people don’t believe this goal is worthwhile, either because they don’t believe that greenhouse gases will cause significant future harm, or because they don’t think Australia’s contribution is significant to the global problem.
There could be another reason why we don’t need to bother about weaning people off fossil fuels. Peak Oil, and the subsequent decline in world oil production, will do it for us. Not only the supply of oil, but also of natural gas and coal, will all peak before mid century, according to a range of independent projections.
These projections say that the business-as-usual emissions scenarios of the Intergovernmental Panel on Climate Change are not possible. There are simply not enough fossil fuels available to generate such emissions growth. This was the message given by Professor Kjell Aleklett, international chair of the Association for the Study of Peak Oil during a lecture tour of Australia last year. It is supported by a thorough review of fossil fuel supply projections published in January by University of South Australia’s James Ward and colleagues.
Comparison of various published projections for greenhouse gas emissions due to fossil fuel production (solid lines) and the six SRES marker scenarios used in the fourth IPCC Report (dashed lines). (Reproduced with permission from Ward et al. 2011)
The good news is that our worst fears of climate change may not be achieved. The bad news is that we’re going to have to change how we do things pretty fast, like it or not.
When supply of oil and other fossil fuels no longer meets global demand, the price will rise steeply, as steeply as needed to get our demand back in line with supply. The fewer alternative options we have in place, the faster prices will rise and the deeper the economic recession they trigger. High fuel prices will translate into substantially higher prices for food, construction, transport and just about everything else.
That is, it will seem to us much the same as if we had an escalating carbon price. Except that the extra money we are spending won’t be collected by our government, to compensate households or to fund renewable energy or public transport so that we won’t need emissions-intensive options so much. We’ll have to pay the higher fuel price without compensation, and find the money ourselves to build the alternatives.
The world’s poor won’t take this lying down. We can expect food riots leading to much greater political instability. Oil supply will be a major target for disruption. The escalated military expenditure, and the diversion of scarce oil to military use, will further squeeze our cost of living, even if we can keep the violence at a distance.
It might be much better to do at least some of the weaning before global fuel prices climb. The more we can harness the inevitable price rises to provide non-fossil alternatives, the less impact we will suffer when the global oil price rises. A carbon price could do this neatly. If we got it right.
It would help to have a carbon pricing system that doesn’t penalise Australian industry merely by shifting production to countries without a price, leaving us just as dependent on emissions-intensive products but without the income to buy them. It would help if our system acted as an example and incentive for others to follow suit, rather than rewarding them for recalcitrance.
The obvious option is a consumption-basis (user-pays) tax: one that exempts all exports and includes all imports, via WTO-compliant border adjustments just like the GST. Emissions consumption is increasingly recognised as the fairer system, and a recent study showed that Europe has wrongly claimed emissions reductions by not counting their imports. But the practical advantage is that it means we can set our own price, independent of the rest of the world, without trade impacts. There is no need to compensate any industries, as they simply pass the cost on to consumers without fear of unfair international competition. Consumers could be reimbursed with a portion of the revenue, enough to fully compensate low-income and energy-wise people, still leaving some revenue to accelerate the building of alternative transport and energy supply, and to contribute to international clean development. Higher (and predictable) energy prices will also stimulate private investment in alternatives. Countries exporting to us will not be discouraged from introducing their own carbon price (any levy they have not rebated at export would be deducted from our import tariff), and countries importing from us will have the benefit of the revenue they can levy on emissions in our exports – we even assist them by providing an accurate statement of embodied emissions in the whole supply chain, by way of the export rebate.
While such a model has been presented to Government, there is no evidence that it is even among the options being considered. Instead there is a commitment to taxing Australian production (including exports, but not imports), sending emissions and jobs overseas and devouring most of the revenue on industry compensation. If domestic producers are to be compensated so that they are can continue to charge prices comparable to untaxed imports, there is no incentive for consumers to change their behaviour. The price signal is destroyed, and with it the whole point of the system. This won’t prepare us for the post-Peak-Oil era. It will just create an expensive merry-go-round for money, and a lot of behavioural change to avoid the tax, not to avoid the emissions.
We also seem committed to an international carbon trading system, which is intended to enable compliance with minimal change in Australia, as our emissions would be offset elsewhere. We would pay needy countries to forgo development so that we can maintain a fool’s paradise until international oil prices rip the rug out from under us.
As someone who has long argued for a carbon price, I would say that the government’s proposal so far deserves to fail, as did Rudd’s CPRS. With the right tax system, we can greatly soften the impact of Peak Oil. If we happen to reduce climate change in the process, all the better.
Dr. Jane O’Sullivan is an Honorary Research Fellow at the University of Queensland
Topics: climate-change, environment, tax, government-and-politics, social-policy, globalisation---society, environmental-impact, environmental-policy, environmental-technology, environmentally-sustainable-business, business-economics-and-finance