Carbon facts in freefall

Free with the facts – The implicit price of carbon dioxide

Both Greg Combet and Bob Brown have been stressing how far China is ahead of Australia with carbon pricing. Brown quoted $15 a tonne of carbon dioxide while Combet was more modest at $8. The difference was whether you used purchasing power parity rather than market exchange rates.

The source of the politicians’ statements is a report from Vivid Economics issued by The Climate Institute and apparently funded at least in part by a $70,000 grant from the Department of Climate Change. This chain is interesting on its own.

The report estimates implicit carbon prices for select countries being Australia, China, Japan, South Korea, UK and US. Each of the countries is considered in some detail and the conclusions are given in units of US$ per tonne of CO2 calculated using purchasing power parity (PPP) and market exchange rates. This is an advance on the IPCC scenarios that used market exchange rates leading to some extraordinary economic growth!

The country that has been picked out as an example to us all is China. Using PPP Australia has an implicit price of US$1.68 and China US$14.22.

When you look at the detail for China 94% of the implicit price comes from one component, the ‘Large Substitutes for Small’ program. This program is the phasing out of electricity generators of less than 200 MW. Regional electricity supply was shared equally amongst all generators, an effective subsidy to small plants rather than dispatching the large lower cost plants. Evidently the number of small plants increased until the government intervened in 2006 with the ‘Large Substitutes for Small’ policy of shutting down the smaller generators and building advanced technology coal fired generators that are more efficient users of coal. At a World Bank Conference in March 2009 a senior Chinese engineer presented the program as ‘How does China reduce CO2 emissions from coal fired power generation’ while showing that coal will account for 90% of 1340 GW of power generation in 2020 when it was 78% of 792 GW in 2008! Like all other industrializing countries that expand their electricity supply, there is always the closure of small less efficient plants. This has even happened in Australia as local council plants were shut down as the economy grew.

So this is a case of fitting the facts to the storyline. The calculations may be correct but the policy of supplying more power, more economically to more customers has been taken to be the secondary benefit to reducing CO2 emissions. The price on carbon if you looked at the detail was in PPP terms $600 per tonne of CO2 for less than 3% of the installed generator capacity in China. The savings in CO2 emissions is a collateral benefit but not the reason for the policy. In the United Kingdom there might be a parallel with Mrs. Thatcher switching from coal to gas in the ‘Dash for Gas’ and the closing of the coal mines when battling the National Union of Mineworkers. The costs to the economy were great. Could that be equated to an implicit price of carbon?

So striking this element out of the sum of contributions to the implicit price of carbon in China leaves us with 87 cents ($0.87) per tonne of CO2. This puts Australia ahead at $1.68 per tonne of CO2.

It is remarkable that there can be a different interpretation of measured data but this is not the only field where this occurs. What is also intriguing is the financing of the study by the Department of Climate Change and Energy Efficiency who are gracefully acknowledged at the start of the report. The Department is clearly encouraging favourable reports. But why finance them through the use of third parties unless of course the third parties are rather more imaginative than the Department.