Gillard's stab in the dark

ENERGY prices are up, emissions are down and that's all ahead of the new carbon tax.

Power transmission towers

THE carbon tax, the most disruptive government-imposed change to the national economy since the GST 12 years ago, is neither the community wrecking ball of Tony Abbott's nightmare nor the environmental silver bullet of Julia Gillard's dreams.

It is not even a tax in the traditional sense of the term. Many businesses will be passing on the impost to consumers a year before the 400 or so big polluters have to hand over the first round of revenue to the government next June. Many other businesses will simply absorb the price on carbon, leaving consumers none the wiser about the massive churn between supplier and seller.

The household and industry compensation packages will also be delivered before the full costs and benefits can be calculated.

It is, in effect, a stab in the dark with one very surprising twist: the reform side of the equation -- the carbon tax's promise to change behaviour by moving the economy from dirty to cleaner energy sources -- can already be measured ahead of its official start on Sunday July 1 because we have been living with elevated energy prices for the life of this Labor government.

By coincidence, the increased cost of electricity and gas since 2008 has been identical to Kevin Rudd's first draft of his doomed carbon pollution reduction scheme, which assumed annual prices would rise by 16 per cent and 9 per cent respectively.

Here's the scoop: these higher costs have led to lower emissions of greenhouse gases and lower demand for electricity.

Emissions from electricity generation had been climbing without interruption for 20 years, from 1989-90 to 2008-9. This was accompanied by below average increases in prices with the notable exception of the 11.1 per cent shock that came with the GST in 2000-1.

Emissions first fell in 2009-10 and again in 2010-11, as electricity prices recorded two of their sharpest jumps on record -- 18.2 per cent and 10.7 per cent respectively. Price isn't the only explanation -- there are many factors, including the ending of the drought, the global financial crisis and the government-mandated renewal energy target. Yet price does clearly matter.

At the household level, families tightened their belts, but they couldn't do it fast enough to offset the rising cost. The share of household spending devoted to electricity, gas and other fuel began rising in mid-2009 -- just as public opinion was turning against the bipartisan emissions trading scheme.

Energy had accounted for no more than 2 per cent of total household spending between 2000 and 2009. By the March quarter this year, the figure had stepped up to 2.5 per cent -- the highest proportion in 50 years.

But offsetting this apparent gouge has been an almost equal fall in spending on communications products. Not because we have eschewed material possessions, but because technology has been dramatically cheaper over the past decade. In a nutshell, the personal computer and the plasma TV are easier to buy, but the cost of using them is hurting the hip pocket.

Electricity consumption in the national electricity market began to turn down in 2007-8 -- two years before emissions started to slow and households themselves began to feel the pinch of higher prices.

This is where the national mood played its part. Stung by the electoral backlash against his refusal to sign the Kyoto protocol on climate change, John Howard changed course in 2007 and promised an ETS -- before the rest of the world if necessary. Rudd, as opposition leader, outbid the Coalition by offering to place a price on carbon a year earlier, on July 1, 2010. Rudd also deployed the rhetoric of doom, describing climate change as the greatest moral and economic challenge of our generation.

Launched in July 2008, Rudd's CPRS Mark I contained what was then considered to be a low start price of $20 a tonne of greenhouse gas emissions. The inflation burden to the community was estimated at 0.9 per cent in the first year, 2010-11, driven mainly by a 16 per cent increase in electricity charges and 9 per cent for gas.

The average annual price rise, based on the consumer price index since mid 2008, has been 15.6 per cent for electricity and 8.5 per cent for gas.

Gillard's carbon tax commences at $23 a tonne, but the inflation effect is just 0.7 per cent because of the later start, and smaller coverage compared to the Rudd model. Electricity prices are forecast to rise by 10 per cent because of the carbon tax and gas by 9 per cent. Households and business will see roughly twice that amount on their final bills because energy companies will continue to push up charges for a range of other reasons as well.

The impact of the carbon tax on the real economy is unknowable in one respect because of the complexity of relationships between suppliers, sellers, the dollar and the taxpayer.

An example either side of the carbon divide is building material supplier D & R Henderson and wine maker De Bortoli Wines.

Both are national firms -- Henderson employs 265 people, De Bortoli just under 500 -- and both are in markets where profit margins are already unbearably tight. Neither are big enough emitters to be in the top 400 polluters who will be responsible for paying the carbon tax.

Henderson executive director David Henderson says the carbon tax will add 20-25 per cent to his firm's energy bill. He doesn't know whether he will pass on some of that cost because the construction industry he supplies to is in the doldrums. His competitors are also engaged in a game of "cat and mouse" to see who moves first, and by how much.

Henderson will deal with the impost by reducing output, which he worries may also involve laying off some staff. "The carbon tax is being introduced at the worst possible time," he says. "We are always trading pretty close to the bone. Now we will treat electricity like it's gold (and conserve its usage)."

The cost will come first. Later the firm will be eligible for clean energy credits from the government, which it expects to sell back to the market in February or March next year.

De Bortoli, by contrast, will get a grant up front. The government is kicking in $4.8 million to help fund a wider reinvestment program to reduce the cost of refrigeration, winemaking, packaging, and electrical and lighting systems. The group's wine operations manager, Rob Glastonbury, says it was a case of serendipity. The firm had just signed off on an $11 million refit. The federal grant that will bring forward what would have been phase two of the program, for which money had not yet been allocated internally.

Glastonbury says there is nothing scary in the carbon tax. Glass and aluminium suppliers have already informed him that costs will rise by just 2 per cent.

What extra power costs he and other winemakers face are unlikely to be passed on because the export market has been hurt by the high currency.

At home, the big supermarket chains have already said the carbon tax won't be passed on to consumers at the checkout. That means the supplier gets squeezed in the domestic market as well.

In the four years of the nation's dry run for the carbon tax, the manufacturing sector shed 125,000 jobs, or 11.6 per cent of its workforce. Agriculture lost another 28,000 jobs, or 7.3 per cent. These retrenchments have nothing to do with the cost of energy; they are part of a longer-term restructure in the economy. The paradox of the carbon tax is it may slow the restructure by giving manufacturers one more handout to cling to.

The emitter is potentially in a better place than the user of energy, while the household -- the voter -- has an exaggerated sense of what the change will mean for their standard of living.

The carbon tax, like the GST a decade earlier, is half baked, and its immediate future is uncertain because the Coalition is promising to rescind it. Interestingly, Labor only wanted to roll back the Coalition's GST by removing the tax from electricity and gas.

For all the political turmoil, and the attendant mood swing in the community from demanding action on climate change at the 2007 election to loathing the very idea of placing a price on carbon in 2010, something did shift in the nation's energy usage. It didn't save the planet, and it might not help the Gillard government.

But the dry run tells us that higher energy prices do help reduce emissions. Given that both sides are committed to reducing emissions, this may be the evidence a future government needs to persist with, or reintroduce some form of carbon pricing.