Climate Change Australia – The Tax Solution

Posted on Tue 06/07/2011 by

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While this Post ‘seems’ to refer only to the situation in Australia, it is the same in every Country where there is legislation or proposed legislation to place a cost on Carbon Dioxide (CO2) emissions.

Australia is currently in the process of trying to introduce that legislation on those emissions, and it has been given the title of ‘Placing a Price on Carbon’.

The Government is trying to make this palatable to the general public, and to do this, they have employed an Economist, Professor Ross Garnaut to make a series of reports, supposedly independent, but in fact virtually saying what the Government wants said.

Garnaut has suggested that a starting price of $26 per ton be placed on those Carbon Emissions, and he doesn’t even refer to it correctly as CO2, but just as Carbon.

The generation of electrical power is the main source of those CO2 emissions, and they come mainly from those coal fired power plants, and this accounts for 35 to 40% of those emissions, so this new Tax, and that’s all it is really, is aimed squarely at those coal fired power plants, which have been referred to as ‘The Big Emitters’.

Needless to say, the imposition of this Tax on those power plants will be passed down, and in full, to every consumer of electricity in the form of increased costs for that electrical power. That will be felt in every sector of consumption, the Residential Sector which consumes 38% of all electricity being generated, the Commerce Sector (37%) and the Industrial Sector (24%).

Garnaut passed down the most recent of his reports in the last week, and now the Government hopes to have a set price with a view to proceeding to Legislation by the end of this Month, June.

In the process of ‘selling’ his report to the public, Garnaut did the rounds of Radio and TV interviews, (well the ones carefully selected that would not ask him any difficult questions anyway) where he detailed some of the basics.

In one interview, he was in fact asked some difficult questions, and as is the way of those leaning to the left, the questions were either not answered or the subject was changed.

So then, let’s look at some of things that Garnaut has recommended.

He was asked how much, in total, that this new Tax might raise.

Garnaut suggested that it was ‘around’ $11 Billion, and that it might rise in later years.

Let’s look at that in isolation then.

Incidentally, I would have thought that being an economist, he would have modelling that would give him the exact total.

Also, keep in mind that the proposed main purpose of the imposition of this Tax is to drive those emissions down, and secondly, to facilitate the move to non emitting electrical power generation, Renewable Power.

Look now at this chart, which details the largest of those so called ‘big emitters’. If you click on the image, it will open in a new and larger window, so you can read it a little better.

This shows the ‘Top 20’ of those ‘big emitters’ in Australia. For the sake of recognition, I have placed a small black square to the left of 14 of those names shown there.

Those black squares indicate that this Company is a supplier of large scale electrical power, and in each case, each of those Companies are owners of large scale coal fired power plants, and notice straight up that the top 4 are Electricity providers.

Now, the number at the right shows how much money that Company will have to pay at that $26 per ton for CO2 emissions.

When you add up the total amount to be paid with this new Tax, that total comes to just slightly under $5 Billion, and remember, this is only for those 14 largest power producers, and there are many many more Power plant owners emitting CO2, as these are just the largest ones.

Remember I mentioned above that the main purpose is to lower those emissions, drive the move to renewable power, and in doing that the end result will be that those CO2 emitting plants will close down.

As those emissions lower, and end up at zero with all plants closed, then that means no incoming money for the Government, and as emissions lower in areas other than electrical power generation, then that Tax slowly diminishes to nothing.

Well that is the aim I guess, but gee, I wonder if the Government thought that the end result would be no income from CO2 emissions.

My guess is that they actually have thought of that, and Garnaut himself alluded to that in his answer to one of those questions.

He was asked what would happen if those large scale coal fired power generating Companies was to ‘go to the wall’ because of the introduction of this Carbon Tax.

His reply was that from this Tax, an amount would be set aside for loans to those Companies in difficulty to secure the delivery of that electrical power.

That was all that was said, and it would go right past nearly everyone in the general community, so it requires some explanation.

With the introduction of this Tax, those power generating companies now are owners of what is virtually a useless asset, that being the Power Plant itself.

Why worthless?

The purpose of the Tax is eventually to close the plant down. So now, those owners cannot sell the plant because it is virtually worthless. That Companies bottom line is now considerably lower, and the bottom drops out of their share price because of that, hence less money.

You say, well the plant makes a ‘motza’ from the sale of electricity.

True.

That income comes ‘after the fact’, after that electricity is consumed.

Before the fact, to produce that electricity, they need to purchase the coal to feed the furnace that boils the water to steam to drive the turbine that drives the generator that produces that electricity.

Thermal coal costs currently around $130 per ton, so a large scale plant that burns 8 million tons of coal a year, as Bayswater does needs $1.05 Billion ‘before the fact’ to purchase that coal.

So, they need loans to raise the money to buy that coal.

Those loan providers need collateral, and the plant itself becomes part of that collateral.

So, now if the plant is worth less or even worthless, then it becomes difficult for the plant to raise money to buy that coal in the first place.

So, the power generating Company now finds itself in a position where it cannot operate.

Problem solved you might think, as, if the plant closes, then there are no more emissions, which after all is the end result of this whole exercise of imposing a Tax on CO2 emissions.

However, the Government knows that removing huge chunks of electrical power from all consumption areas would be absolute suicide, because of the chaos it would cause, so they absolutely NEED those plants to keep producing the power that they do.

Also, removing those huge chunks of power means that because of no emissions, then there is no income from the CO2 tax, and just one plant in that top 4 from the list closing down removes anything up to half a billion dollars from their Tax.

So, in effect, they require that those plants stay operating, because that’s the source of their money.

So, that’s why Garnaut says that there are loan provisions in that Tax for plants that do come into difficulty, or as he says, to secure the supply of electricity.

In effect, the Tax has provisions that will ensure that the  income from that Tax is secured, and not to actually lower the emissions.

Garnaut also says that most of what is raised will be returned to those families most affected by the imposition of this Tax, those average families, and those from lower socio economic incomes who might feel the brunt of this new Tax.

If that is so, then where is the incentive for them to consume less electricity, meaning not as much need be generated, meaning less emissions.

Garnaut also makes provisions for trade exposed Companies to also be compensated, also meaning that they can continue with business as usual, thus not lowering their emissions either, be it direct emissions or emissions as a result of consumption of electrical power.

When asked about how the imposition of this new Tax would drive the move to Renewable Power, Garnaut mentioned that there would be provision in the Tax for a diversion of around $1 Billion for that renewable Power. As I have explained in earlier Posts, this amount will only be enough for the construction of part of one renewable plant which will supply less than 2% of the power produced from one large scale coal fired power plant. So, while $1 Billion may ‘seem’ a lot, it actually takes no steps towards providing any electrical power to take over from that large scale coal fired power generation sector.

So, while everyone talks of how this is something that is desperately needed to lower CO2 emissions, it is in effect not a mechanism for that at all.

Professor Ross Garnaut has done exactly what the Australian Government put him in place to do. If the real intent of the Tax was to lower those emissions, then it is a Tax whose end result is to do away with itself, because, as emissions fall away, eventually hopefully to zero, then the incoming money also falls away with those lesser emissions.

He has designed a Tax that does not lower CO2 emissions in any way.

What he has designed is a Tax specifically to ensure that the Tax stays in place at its full amount, and he even said in that same interview that it was going to raise more over the years.

Have you ever known a Government to introduce a Tax designed to do away with itself.

No! The Government knows exactly what it is doing here, and it is using the Science as an excuse.

Again, as I have so often said, this has nothing whatsoever to do with the environment.

It’s just about the money.