Rudd, Carbon and the Price of Petrol

Power StackAustralia’s Prime Minister, Kevin Rudd, triggered waves of protests from environmentalists this week when he annouced that Australia’s target for emissions for 2020 would be a mere 5% reduction from the levels in 2000. With substantial commitments to emission reductions from other countries around the world, this target would be increased to 15%. The Government was at pains to point out that Australia’s population growth makes this target more ambitious than it sounds. However, by world standards Australia’s emissions are very high, whether measured per capita or by gross domestic product. This means that Australia should have more scope for relatively inexpensive emissions reductions than many other countries.

So 5% does seem to be a very unsatisfactory target. If you are a climate-change skeptic, even a 5% target is a needless waste of time and money, while if you take forecasts of climate-change seriously it seems woefully inadequate. However, rather than focusing on the target itself, in this post I will look at the implications that the Government’s plan will have where consumers will see it most directly, on the price of petrol.

In their White Paper on the carbon reduction scheme, the Government proposes a cap on the price of carbon of $40 per tonne for the next 5 years while, for their financial impact modelling, a price of $25 per tonne has been assumed. In an earlier post I calculated the impact of the price of carbon on the price of petrol. Here are the results for a range of carbon prices.

Cost of

Petrol Price
10 2.4
20 4.8
25 6.0
30 7.2
40 9.6

So, if the Government’s assumption is correct that the price of carbon will initially be around $25 per tonne, we can expect an increase in petrol prices of 6 cents per litre. Even if the price of carbon reaches the $40 cap, the impact on petrol prices will only be around 10 cents per litre. I say “only” because that 10 cents is small compared to extraordinary moves in petrol prices seen over the last year due to movements in the price of crude oil. From July to November, the price of petrol in Sydney fell by almost 40 cents per litre, according to prices published by the Australian Automobile Association, and based on my observations has fallen another 20 cents since then. Even compared to the 38 cents per litre fuel excise, 10 cents seems a modest figure. The chart below shows the dramatic moves in petrol prices along with projected prices based on the daily price of Singapore 95 refined oil, based on a regression model I have used in a number of posts in the past.

Petrol - Dec 2008

Introducing an emissions trading scheme for carbon will eventually affect a wide range of consumer prices, but based on the relatively small increase in petrol prices that it will produce, the scheme is not likely to have a significant impact on consumer behaviour. The scheme will do all its work on the behaviour of businesses and, given the dire financial straits we find ourselves in today, this is presumably why the Government has been so unambitious with their target. But this does also highlight that there is a lot more that the Government could be doing to reduce consumer carbon emissions beyond the trading scheme itself.

Photo Source: Foto43 on flickr (Creative Commons).

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