An emissions trading system, unlike a straight carbon tax, has merit for governments. For it makes it harder for industry and consumers to see the costs that are being imposed upon them.
Will your carbon dioxide quota drive you into solar power generation?
The major purpose of an emissions trading scheme is to impose a quota on emissions of carbon dioxide, in much the same fashion as Australia used to impose quotas on clothing imports. The normal effect of a quota is to reduce the supply of what is subject to the quota and drive up prices as a result. That is why clothing prices dropped in Australia when quotas were removed.
Another result is that those who are given quotas (or emission permits) obtain a valuable licence and can sell it (rather like taxi licences). If the holders of quotas have not paid for them, they obtain a windfall, which is what the major European energy producers received when emissions trading was introduced there. There is no guarantee that those who are given free quotas will use them to supply consumers more cheaply. On the contrary, there is every reason to expect a commercial entity to revalue its licence as an asset and demand a rate of return on it. Some electricity generating companies under financial pressure may simply sell their quotas to help pay off debts and go out of business, much like hard-pressed farmers who sell off water rights to pay off banks and then exit the industry.
From a consumer point of view the key things to understand about quotas or emissions permits are –
1. The fewer emissions permits allocated by government, the greater the upward pressure on prices; and
2. The checks on upward pressures can only come from falling demand or cheaper substitutes.
For example an import quota on red sweaters, but not on other clothing, would likely not cause a great price rise for all sweaters, as many people might switch to other colours. But with essential commodities like electricity it is not so easy to find alternatives.
Whatever one thinks about the theory that human emissions of carbon dioxide may cause catastrophic global warming, the question would not matter much if electricity could be cheaply produced without producing carbon dioxide. and if electricity could be stored easily for future use. Limiting the use of coal burning for “24 hour a day” electricity would not matter if solar energy could be used as cheaply to produce electricity on demand.
So it is natural to ask the question “Can solar electricity cheaply replace electricity produced from burning coal?”
As a consumer with a very sunny North-facing flat roof, I had often wondered about whether I could use solar electricity to cut my electricity bills. My interest sharpened when the ACT introduced a feed-in electricity tariff which would guarantee me nearly 4 times the normal cost of electricity for the gross amount of solar electricity I could produce from my roof. Surely, I thought, with a Federal subsidy and a guaranteed 4-times price per kilowatt hour, I can make a decent profit.
Accordingly, I started doing my sums on a spreadsheet. To check them, I made inquiries of a colleague at the University who is a keen advocate of solar energy, and was kind enough to send me his own similar spreadsheet.
Unfortunately, even with the Federal subsidy and the ACT feed-in tariff of 4 times the normal price, the return on investment seemed to be only about 8% after depreciation and subsidies, Without any subsidies, it seems the rate of return on investment is negative (that is, you would be paying for the privilege of losing money). The most interesting result from the spreadsheet was that to earn a 10% rate of return without any subsidies, the price per kilowatt hour would have to rise from around 15 cents per kilowatt hour to around $1 per kilowatt hour.
To put that in perspective, it would mean our household electricity bills would have to rise from around an already high $3,500 per annum to something like $22,000 a year for unsubsidized solar electricity to become economic. Obviously, an economist must wonder how Australian industry and workers are going to survive an electricity price of $1 per kilowatt hour, while still having to maintain a base-load coal powered electricity system to provide power at night and on cloudy days.
Of course, no Australian Federal or State Government could contemplate overtly pushing electricity prices and household bills up to such levels. For one thing, Australia’s exports would collapse under such costs of production. Nor would consumers contemplate paying them. Houses would be triple glazed and burning wood or gas long before prices got to such a level.
However, the basic question remains. How much would it cost to shift the Australian community off coal-fired electricity and onto other sources? Who is to bear these costs? Subsidies for solar electricity do not come like manna from heaven: they come from taxpayers’ or consumers’ pockets.
From this point of view, an emissions trading system, unlike a straight carbon tax, has merit for governments. For it makes it harder for industry and consumers to see the costs that are being imposed upon them. But if my excursion into trying to work out the economics of solar electricity contains any general lesson moral, it is that the costs of implementing an emissions trading system are going to turn out to be rather larger than most people have been told, or are anticipating.
Dr Terry Dwyer is an economist and lawyer in private practice, and a Visiting Fellow at the Crawford School of Economics and Government at the Australian National University.