Thursday, March 3, 2011

Carbon price musings 1: Petrol should be included

Nobody likes petrol price rises but an effective carbon price should include transport fuels.

Carbon pricing creates many options, one is whether transport fuels should be included. In my opinion, they should be. There are multiple reasons for this, but they generally fall under preventing market "distortions".

1) Making emission reductions more expensive

Not including large segments of the economy in the carbon price means that more greenhouse gas emission reductions need to be squeezed out of a smaller section of the economy in order to meet your targets. The overall effect of this will likely be a higher cost for reducing emissions. The reason for this is that any low hanging fruit (ie: cheap ways of reducing emissions) in the transport sector will be essentially off-limits and you might be forced to make more expensive reductions in the sectors which are included.
The point of a market mechanism is to allow the cheapest emissions reductions to be made. To achieve this you want to include the largest amount of the economy possible.

2) Creating perverse incentives

Excluding transport fuels from the carbon price could have the perverse effect of actually promoting fossil fuel use (the exact opposite of what the scheme is trying to achieve). A good example of this is public transport by train. Electrified trains are mostly powered by electricity from coal (although they still produce less C02 per person than driving a car). Under a carbon price electricity rates will rise and so will train fares. If fuel is not included and does not increase in price, the net result will be to encourage driving and so more C02 emissions. In cities like Brisbane with over crowded roads the last thing we need is more congestion and more pollution.

No one like rises in petrol prices, but the rise being promoted by the coalition of ~6 cents a litre (although no one can be sure if this is at all accurate) is not extreme. In fact petrol prices in most capital cities have increased by significantly more than this in the last few months and the world hasn't ended.

So the government should include fuel in the carbon price and not cut other fuel taxes to prevent any actual rise in the price. Compensation either through rebate checks, cuts to income taxes (better to cut a tax for productive activity ie: work, than a tax for consumption ie: fuel excise) or benefit schemes would be better. This way compensated households can spend the rebate as they see fit and there will be an incentive for people to find ways to cut their fuel consumption.

A final note: Tony Windsor (one of the rural independants) has expressed concern that unlike city dwellers, people in rural areas don't generally have the option of public transport (although that doesn't mean there is no way for them to decrease their fuel use of course). I don't think I agree with him that rural regions should be excluded from a carbon price on transport because of this, but it might be worth looking at higher compensation for people in rural areas etc.

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