By Kenneth Davidson
Natural gas and new technology can wipe out dirty power alternatives.
Opinion polls show that Labor under Julia Gillard would experience a massive defeat at the hands of Tony Abbott's Coalition if an election was held now. But an election is still two years away and, as former British prime minister Harold Wilson famously said, a week is a long time in politics.
The simplest approach to greenhouse gas reduction is a tax on the production of coal.Credit: Rob Homer
In the minority Labor government's favour is that forcing an early election does not appear to be in the interests of any of the Greens and independents who keep it in power. But Gillard and the people who made her Prime Minister know that in order for her and her government to survive the next election, she will have to cut through to the electorate with a serious, saleable policy to deal with climate change.
Arthur Sinodinos, former political adviser to Liberal prime minister John Howard, has observed that Abbott has been able to ''wreak havoc with his mantra about a great big new tax … [so that] selling the carbon tax has become virtually impossible''.
I think his political analysis is right. But I think he is wrong to propose an increase in the GST as a means of funding measures to reduce emissions and compensate households for the additional GST.
The Sinodinos argument follows on from the proposal originally made by a co-founder of Access Economics, Geoff Carmody, and described on this page last week by Age economics editor Tim Colebatch. Carmody argues that the carbon tax, like the GST, should be applied to consumption, not production. The big plus in both proposals is that the carbon tax would apply to imports at the same rate as domestically produced goods. Exports would be zero rated, so that export and import-competing industries would be competing globally on a level playing field. This would remove the inexorable push for compensation by the biggest polluting industries, as occurred with the Kevin Rudd-proposed Carbon Pollution Reduction Scheme, fortunately rejected by the Senate.
The weakness of the GST proposal is that the tax does not discriminate between consumption of goods and services that generate greenhouse gas emissions and those that do not. The problem with the Carmody carbon tax on consumption is that it doesn't give an advantage to more carbon-efficient producers of the same product.
If the government adopted the Carmody proposal, working out the different carbon taxes for different classes of goods could become an administrative nightmare. A ruthless and obstructive opposition such as that led by Abbott could use this issue to obfuscate and extend the debate until the next election.
The simplest approach to greenhouse gas reduction is a tax on the production of coal. As I pointed out in my previous column (on May 16), this would directly tackle fossil fuel pollution from electricity power generators, which are responsible for about 30 per cent of Australia's greenhouse gases. At $30 a tonne, a coal tax would make gas-fired power stations price competitive with base-load fossil fuel generators. The latest gas-fired generators produce 60 per cent less greenhouse gas and use 90 per cent less water than fossil fuel generators, and they can be bought off the shelf.
Mining companies that export coal would pass on the cost of the tax to importers. Because the world export market is supply constrained, it would be rational for other exporting countries to follow Australia's lead.
The tax would yield $10 billion from exports and $4 billion from domestic consumption. The $10 billion could be used to finance a green infrastructure fund that could lend for investment at concessional rates of interest. The $4 billion could be recycled to households to compensate for higher electricity bills via tax cuts or welfare payments.
It makes no sense for Victoria to be building a new one gigawatt coal-fired power station for $1.3 billion when a similar capacity gas-fired station could be connected to the national electricity grid and pipeline network for a capital cost of less than $800 million.
GE has developed new turbines for gas-fired power stations that can vary output in line with fluctuations in demand and take account of variable supply from wind turbines and solar panels. The new generation gas turbines will improve the joint greenhouse efficiency of gas and renewable energy generation when they are available in 2014 - the same time as the onerous contract between Victoria and Alcoa to supply heavily subsidised and polluting fossil fuel to the Portland smelter finishes. Even with only four years to run, the net present value of this contract to Alcoa is on Victoria's books as a $900 million burden.
If Australia has the wit to exploit our near limitless supply of natural gas, combined with the latest technology, it would rule out nuclear power or the need to retain brown-coal-fired power stations (and obviate the need to pay compensation to keep them producing base-load power).
Australia has sufficient gas reserves. We would not have to exploit underground coal seam gas, the extraction of which requires a damaging process that endangers the ground water necessary for agriculture.
Kenneth Davidson is an Age senior columnist.