Sunday, June 01, 2008
It may already be too late.
To understand why ordinary Australian households are actually at risk from the petrol-price posturing that’s going on in Parliament it is necessary to look at the other energy debate taking place in the government at the moment – the one about climate change.
The Department of Climate Change is weeks away from completing the green paper that will outline the workings of the government’s emissions trading system – the one that’s due to start in 2010...
The scheme will work by setting a target for the amount by which Australia’s carbon emissions need to be cut - most likely 60 per cent by 2050 with interim targets along the way.
It will auction an increasingly limited number of permits every few years in order to ensure the targets are achieved.
The more severe the targets that are chosen, the more limited will be the number of permits auctioned, and the higher will be their price and the resulting prices of gas and electricity (and the products made from them).
But it isn’t only more severe targets that have the potential to increase the ultimate energy prices faced by consumers as a result of the scheme.
It is also narrow coverage. If for instance the oil industry were to be shielded from the trading scheme, the other industries that were left in the scheme would have to have their permit allocations cut back even harder in order to meet the emissions target, pushing up energy prices further.
That’s the little-spoken-about prospect opened up by the past fortnight’s bitterly-fought “me too” debate about petrol prices: that the government will decide to exempt petrol from the trading scheme and as a result further push up the price of electricity.
The Coalition’s Treasury spokesman Malcolm Turnbull has already made the case. Although the official Coalition policy supports “bringing transport fuels into the Australian emissions trading system” Mr Turnbull told the National Press Club a fortnight ago that he was “very sympathetically inclined” to push for their exemption.
If that happens it wouldn’t just be a case of electricity prices being higher than they otherwise would have been while petrol prices were lower. The total household energy bill would be higher.
Here’s why. The beauty of an emissions trading scheme is that it ensures that the cheapest means of cutting emissions are tried first, those that economists call “low hanging fruit”.
This keeps the total cost of meeting any given emissions target as low as possible.
Among the “low hanging fruit” for cutting carbon emissions are walking and cycling instead of driving, avoiding unnecessary trips and switching to cars that use less petrol.
With petrol excluded from the emissions trading scheme and with these low-hanging fruit not fully exploited, the price of electricity would have to increase by more than it otherwise would have as more expensive methods are used to cut emissions.
Petrol is responsible for about 10 per cent of Australia’s greenhouse gas emissions. Exempting it from Australia’s emissions trading system would be likely to push up the prices on other forms of energy by more than an extra 10 per cent.
And yet exempting petrol from the scheme is an obvious political response for a Prime Minister who has cowered and attempted to match a completely irresponsible promise by his opposite number to cut the price of petrol.
Brendan Nelson’s proposed 5c per litre cut in the petrol excise would cut the price at the pump by 5.5c per litre because it would also cut the Goods and Services Tax take.
The Government responded on Sunday by suggesting that it might axe the GST it charges on top of the fuel excise – the so-called “tax on a tax” that adds 3.8 cents per litre to the of petrol price. It referred the idea to its tax inquiry.
And then it promoted FuelWatch; its planned national version of the scheme in Western Australia that the Competition and Consumer Commission says has cut the price of fuel there by 1.9 cents per litre.
As revealed by the Canberra Times this morning the 1.9 cents per litre average saving quoted by the Prime Minister is an overstatement, caused by a misuse of the word “average”. The typical saving resulting from FuelWatch would be smaller.
But FuelWatch is popular. An astounding 86 per cent of West Australians say they use it to help them buy petrol. By letting them know ahead of time exactly what each station will be charging for the next 24-hours they get certainty and a sense of control.
These feelings are about as important to consumers as the price of petrol itself. Research conducted in Canberra, Sydney, Melbourne, Brisbane and Adelaide for the ACCC has found that the biggest concern motorists have about fuel prices is not their absolute level but the way in which those prices are changed ahead of long weekends and holidays. Other very high concerns include price movements over different days and price movements within days.
The results for the Perth survey suggest that by eliminating price movements within each day and lessening them between days FuelWatch has made Perth motorists less anxious.
FuelWatch has also squeezed retailers margins in Perth, if by less than the Prime Minister has claimed.
The ACCC regards this as a good thing because it suspects that petrol retailers tacitly collude. Its December report found that while there was “no obvious evidence” of price fixing or collusion, the petrol industry operated in a “comfortable oligopoly”.
By freezing prices for 24-hours each 24-hours Perth’s FuelWatch scheme makes tacit collusion difficult. Price-setting becomes an auction in which each retailer is unable to see what the other is bidding.
At the moment in Sydney, or even in somewhere like Braddon in the ACT, each service station needs to merely look out of its window to see what its neighbour is charging. It knows that if it cuts its price, that cut be matched.
In Perth, FuelWatch rewards service stations that strike out on their own and cut prices by preventing instant retaliation. As a result Perth margins are (slightly) lower than they used to be.
They are unlikely to be lower Australia-wide if the only part of FuelWatch that Australia adopts is the price reporting; as the Opposition and three government departments reportedly want.
The temporary price freezes make the system work, just as they make Australia’s wholesale electricity market work.
There each Australian electricity generator is required to freeze its prices for 30 minutes at a time in order to prevent collusion.
There is no particular reason why the national FuelWatch system should freeze prices for 24-hours at a time as does Perth’s. It could do it for six hours, or two and achieve the same effect, and such an idea might form the basis of a compromise that might get FuelWatch through the Senate.
That’s assuming that Kevin Rudd wants to get FuelWatch through the Senate. He might reasonably decide that the Opposition can either accept the scheme as it is or wear the opprobrium that will come from rejecting something demonstrated to (slightly) reduce prices.
He gave a hint of this on Thursday when he challenged the Opposition to either “vote for consumers, or vote for a cosy deal with big oil companies”.
The companies that have opposed FuelWatch include Caltex, Coles, Woolworths, Mobil, and BP.
“That's the choice,” the Prime Minister declared. “Why do you think all the big oil companies are opposed to what we are proposing?”
As worthwhile as it would be to take perhaps one cent per litre out of the hands of petrol retailers and put it back into to the pockets of motorists, by continually speaking about the topic this week the Prime Minister has created difficulties for himself.
Calculations performed by the resources economist John Quiggin suggest that an emissions trading scheme that put a price of $100 a tonne on carbon dioxide would push up the price of petrol by 25 cents a litre.
That’s the sort of increase Kevin Rudd needs to be preparing us for unless he is planning to exempt petrol from the trading scheme and push up the price of other forms of energy even more.
Even in the absence of an emission trading scheme the price of petrol is likely to soar. The rising Australian dollar will lessen the blow, but if the price of oil climbs from US$130 a barrel to US$200 in the coming months we will be paying $2.00 a litre before Christmas.
Qantas is treating what’s happening as a reality. It is cutting its routes and grounding planes. It is certainly not wasting time hoping the higher prices pass.
By each investing so much time in these past two weeks creating the impression that they could take the pressure off petrol prices Kevin Rudd and Brendan Nelson have given us false hope.
They have encouraged us to delay making the adjustments that we will have to make and may have even ensured that our future energy prices will be higher.