Friday, November 28, 2014

You'd think the networks owned the airwaves

You'd think our commercial networks owned the airwaves.

When Communications Minister Malcolm Turnbull cut back the ABC and SBS last week he also gave notice of a minor rule change that sent them into convulsions.

Henceforth, the SBS would be able to broadcast up to 10 minutes of advertising each peak hour instead of the usual five.

The networks acted as if he had attacked their right to exist.

"This government was elected as being pro-business," thundered Seven Network chief executive Tim Worner. "It shouldn't be making decisions that harm Australian businesses."

"I am surprised the government is prepared to compete against and inflict damage on Australian commercial broadcasters," wailed Nine's David Gyngell.

What was proposed was "directly at odds with the government's claim that Australia is open for business," said Free TV Australia chair Harold Mitchell.

What was proposed was competition.

Australian television networks don't believe they are like other businesses. Banks have to put up with competitors muscling in on their turf, supermarket chains have had to cede ground to Aldi, carmakers have had to compete or go under, but the spoiled children of Australian industry want to be forever protected from competition on the airwaves as everything changes around them.

The biggest change is that broadcast spectrum has become incredibly valuable for mobile communications. Yet the networks sit on it.

Another is that much less spectrum is needed to broadcast a TV program than before.

Yet the networks sit on it. During the switch to digital in the 1990s, rather than broadcasting what they had before using much less spectrum (the whole point of the exercise) they said they needed more spectrum in order to broadcast in full high definition. That way it couldn't be used by anyone that might want to start a competing network. They produced dodgy-looking research saying Australians didn't want extra channels - they wanted the same channels in high definition.

Prime Minister John Howard bought their line against the recommendations of his advisers.

The Office of Asset Sales labelled it "a de facto further grant of a valuable public asset to existing commercial interests".

His department said there were "better ways of introducing digital television than by granting seven megahertz of spectrum to each of the five free-to-air broadcasters at no cost when a standard definition service of a higher quality than the current service could be provided with around two megahertz".

They were given it on the condition that they could only use it for broadcasting their existing channels in high definition.

When after some years it became apparent that Australians weren't going to switch to digital if all they got was the same channels (invalidating the networks' dodgy looking research) the networks said they could better use the excess spectrum for extra channels themselves.

Each still maintains a token commitment to high definition on one of its channels (it's actually degraded high definition to make way for the extra channels) but no one much notices. Much of the time those channels don't carry high definition content. The spectrum is wasted, but no one else has it. That's how the networks think.

And the minister is on to them.

He has already picked on the easiest target. The poorly watched community channels in Melbourne, Geelong, Sydney, Brisbane Adelaide and Perth will be kicked off their spectrum at the end of 2015. They'll have to use the internet. After the freed-up spectrum is used to test new technologies it'll be made available to the highest bidders, almost certainly mobile phone and data companies.

The next step will be grabbing back spectrum from the ABC and SBS. That's fairly easy - cut their budgets, let them use a new compression technology called MPEG-4 that halves the amount of spectrum they need and tell them they can save on transmission costs and give the other half back.

The commercial networks require more subtle handling. The minister has launched an inquiry - the spectrum review -  to work out how to "maximise the economic and social return from spectrum". Its preferred approach is auctions, with the winning bidders limited to 15 years at a time and the department given the right to take the spectrum off them (with compensation) if it's not fully used.

The treasury describes spectrum as a scarce resource in its submission. It says it should be allocated to the highest value uses.

"To be clear, this includes both commercial and non-commercial applications," it says - making a pointed reference to two of the biggest hogs of spectrum, our armed forces and our police and emergency services.

Defence will, at the very least, have to justify what it needs and hand some back. Police and emergency services might be able to hand back a lot with the proviso that in a real emergency they get it to use it again, with the mobile communications company that has bought it agreeing to degrade its service to give emergency services priority.

And the networks. Turnbull will probably get it off them by being nice. Using new compression technology, they will need only half as much and be able to sell the excess to someone who wants it more. It's far more than they deserve, but at least their spectrum will be better used.

It'd make a nice little earner for whoever buys Channel Ten and a really good earner if the new owner sold the lot and closed the station down.

Mobile communication is increasingly important to us. Network television is not.

In The Age and Sydney Morning Herald

Tuesday, November 25, 2014

The secret report Napthine won't let you see

Within months of becoming treasurer, Kim Wells commissioned a report. He asked the Victorian Competition and Efficiency Commission to deliver "a state-based reform agenda" – a user manual for boosting Victoria's economic growth.

It had been abysmal for two years. High population growth was masking "dwindling growth in productivity and in per capita GDP – the main determinants of growth in living standards". And the Australian dollar was set to remain high, "threatening the competitiveness of Victorian exports".

Wells knew the problems. He wanted Victoria's strengths benchmarked against those of other states and he wanted a list of options that would "yield the greatest potential benefit in light of Victoria's relative competitive strengths and weaknesses".

He wanted it within in nine months.

The commission issued a discussion paper, received 81 submissions, convened conferences, commissioned outside studies and published a draft report two months ahead of the deadline in November 2011.

Then it convened another conference, received another 37 submissions, and presented its final report to the government by the deadline in January 2012. Then nothing. Absolutely nothing.

Not only did Victoria's government not respond to the >commission's report, it did not publish it. Not at all. It was as if it had never happened.

Like the Productivity Commission at the national level, the Victorian Competition and Efficiency Commission is unable to publish its final reports off its own bat.Its reports are considered to be reports to the government. But the government is expected to publish them after considering what is in them. To keep them secret would deny the public a return for the money it spent preparing them.

The Order of the Governor in Council establishing the commission even sets out a timeframe: "The treasurer should publicly release the final report within six months of receiving it from the commission," it says.

As well, "the government should publicly release a response to the final report within six months of the treasurer receiving that final report from the commission, regardless of the date of release of the final report". Neither of these things happened.

Apparently, the loophole is the word "should". Other parts of the order use the word "must". Although clearly against the intention of the commission's founders, it would be legal to make sure one of its reports never saw the light of day, which is what the government is trying to do.

By keeping it secret for 32 months, right through to the end of its time in office, it has probably buried it for good. If, as is likely, a new government is elected on Saturday, it might be unable to release it. That is because of a convention that unpublished reports delivered to one government are unavailable to its successor. The convention exists to stop an incoming government trawling through its predecessor's files.

A look at the website listing the 19 reports the commission has completed since it was established by Steve Bracks in 2004 reveals only one has never been published. It is as if the Baillieu and then Napthine governments were embarrassed by what the commission told them.

It is possible to make some guesses. An ACIL Tasman report prepared for the review found against large road projects, saying some had a benefit-cost ratio of as little as 1, "with little public information about what alternatives were considered".

In contrast, small road projects typically had a benefit cost ratios of 3. It suggested "less focus on large projects" and "more on modest projects that have a higher rate of return".

The rate of return for the East West Link is said to be 0.8. Even bulked up to include nebulous "wider benefits", it is to just 1.4.

ACIL Tasman suggested congestion charges as alternative. "The introduction of time-varying one-way tolls in the Sydney Harbour Bridge and tunnel have increased off-peak traffic and reduced rush-hour traffic," it said. "The economic case for congestion charging is strong, and the political challenge becomes easier if some or all of the revenue is channelled into road and public transport improvements."

The commission agreed. Responding to congestion by building new roads did "not tackle the underlying causes". It generally only succeeded in improving travel conditions "by small amounts or for a limited period".

"Future transport policy and planning should identify ways to work existing assets harder and provide services more efficiently as opposed to resorting to new investment as the first recourse," it wrote in its draft report.

Denis Napthine plumped for the East West Link only after Tony Abbott made it clear he was prepared to grant Commonwealth funds for big road projects, but would withhold them from (more important) big rail projects such as the Melbourne Metro. Napthine scaled back the Metro and pushed the timeline out into the next decade.

Perhaps embarrassed by the avalanche of expert voices saying it was a poor use of money, he might have felt he did not need yet one more voice, a report commissioned by the Coalition itself when his predecessor was premier.

It is an appalling way to run a government and an appalling way to treat voters who you are trying to persuade you have the best plan.

If Napthine loses on Saturday, it will be in part because he did not stand up to Abbott and in part because he did not level with the public about what his own experts were telling him about his platform.

In The Age and Sydney Morning Herald

Tuesday, November 18, 2014

China is ahead of us on climate change. Let's not belittle its commitment

China must hate the things that were being said about it as it closed its free trade deal with Australia.

Interviewed at the G20 as Chinese and Australian officials were fine-tuning the details of the announcement, Treasurer Joe Hockey belittled its commitment to turn back its tide of rising carbon emissions.

"I mean, you just look at China," he told the ABC's Barrie Cassidy. "China is going to continue to increase emissions Barrie, until 2030, it is going to continue increasing emissions."

Earlier he had told Sky News that: "To put it in perspective we are in the business of trying to reduce our emissions off a base load and China actually is increasing emissions and said in 2030 it will start to reduce them".

The perspective missing from Mr Hockey's account is that Chinese living standards are a fraction of Australia's. China is lifting its emissions because it is rapidly industrialising as its citizens move from the country into cities, something ours did a long time ago.

To slow and stop emissions growth while industrialising would be an achievement of unimaginable proportions.

It has never happened before.

To do it the White House believes China will install an extra 800 to 1000 gigawatts of emission-free technology by 2030 -  "more than all the coal-fired power plants that exist in China today and close to total current electricity generation capacity in the United States"...

China's use of coal for electricity climbed 13 per cent a year as its economy roared into life between 2000 and 2011. Since then it has climbed just 3.25 per cent per year and looks likely to have stabilised in 2014. China expert Ross Garnaut expects its use of coal for electricity to slip 0.7 per cent per year from now on before sliding sharply after 2020.

Mr Hockey said he "didn't hear the United States or the Chinese saying they were going to introduce a carbon tax", but China's vice finance minister Zhu Guangyao mentioned emissions trading in a briefing to journalists on the sidelines of the G20 summit Mr Hockey attended. China has seven pilot schemes in operation and is preparing for a China-wide scheme by 2020. China's vice finance minister seemed serious.

Yet on Thursday Prime Minister Tony Abbott mocked China's plans as "hypothetical" and "down the track".

"It is all very well to talk about what might happen in the far distant future but we are going to meet our five per cent reduction target within six years," he said. "We are talking about the practical; we are talking about the real. We are not

talking about what might hypothetically happen 15, 20, 25, 30 years down the track. We are talking about what we will do and are doing right now."

Aside from any offence caused to Australia's newest free trade partner, the problem with Mr Abbott's statement is that the commitments announced by China and the US on Thursday will force Australia to do much more than five per cent within six years.

And Mr Abbott's preferred mechanism, his "direct action" Emissions Reduction Fund is incapable of doing much more.

That isn't just because the $2.55 billion he has set aside over four years for grants to polluters to cut pollution wouldn't be enough to meet the bigger target (it's almost certainly not enough to meet the present target).

It's also because of something else, something of a dirty secret among proponents of direct action grants:  they are not directly scalable.

The bureaucracy that would be needed to hand out enough grants to get a 5 per cent reduction on Australia's 2000 emissions by 2020 wouldn't be able to handle a 30 per cent reduction by 2025 - and that's what the Climate Institute believes will be required if Australia is to match the US commitment.

The red tape that's tolerable when you are using a system of bookkeeping and grants to achieve something small becomes intolerable when you are attempting to achieve something big.

That's what the Treasury advised the Coalition in the change of government document it prepared in 2010. In its words then, "a market mechanism can achieve the necessary abatement at a cost per tonne of emissions that is far lower than alternative direct-action policies".

It's what Prime Minister John Howard's emissions trading taskforce told him in 2007. It said "by placing a price on emissions, trading allows market forces to find least-cost ways of reducing emissions by providing incentives for firms to reduce emissions where this would be cheapest, while allowing continuation of emissions where they are most costly to reduce".

Once emissions permits are sold or given away it is up to the firms that own them to decide whether to use them or whether to cut their pollution and sell them to firms that need them more. This automatically ensures that the firms that can most cheaply cut emissions cut them first (pocketing income along the way) and that the firms that can't afford to do it cheaply do it last (paying to buy permits).

Emissions trading is "set and forget", and infinitely scalable.

The Coalition's "direct action" system of grants attempts to achieve the same goal but will do it less perfectly because the grants its bureaucrats will administer can't be traded among polluters to ensure that the lowest cost methods of cutting pollution are tried first. And its cost scales up with the size of the task.

The Coalition has said often that Australia will lift its emissions reduction target beyond 2020 if other major nations lift theirs. China is doing so, making an unprecedented promise to cut its emissions growth to zero while industrialising. The US has made a commitment that when applied to Australia would require us to cut our emissions by 30 per cent on 2000 levels by 2025. Last month, European leaders agreed to cut their emissions by 40 per cent on 1990 levels by 2030.

Australia will need to stump up with something in time for the Paris climate change summit due late next year. As Mr Abbott and Mr Hockey well know having just organised Australia's G20 summit, the reality is that Australia will need to show its hand well before the Paris summit.

A bigger commitment is no longer hypothetical, and it's not down the track.

In The Age and Sydney Morning Herald

Sunday, November 16, 2014

Breastmilk is worth more than you think. Gina Rinehart doesn't know the half of it

Gina Rinehart is on to something. The woman who picked the mining boom by betting on iron ore at a time when few realised what was about to happen in China, she is now betting on powdered milk.

So fast is China's market for infant formula growing that it doubled in five years and is expected to double again in three years. It's why foreign companies are falling over themselves to take over Australian milk producers.

And it's why the richest Australian is spending half a billion to build Hope Dairies from scratch. Bloomberg reports it'll take up 5000 hectares of Queensland farmland pumping out an extraordinary 30,000 tonnes of infant formula per year, all of it bound for China, gazumping Australia's present milk powder exports to China of 18,000 tonnes per year.

It would be great if it actually helped Chinese infants. But it won't. Infant formula is one of those rare products the use of which usually hurts rather than helps the user. And unlike others such as alcohol and unhealthy foods the user has no choice but to use it.

Formula milk displaces breast milk, a wonder-food specifically designed for emerging human beings. Formula-fed babies are less resistant to infection, more likely to suffer from diarrhoea and pneumonia and more likely to die of sudden infant death syndrome. Later in life they are more likely to contract diabetes, multiple sclerosis, heart disease and cancer. And they are likely to have lower IQs.

And that's where formula milk is prepared properly. Where it isn't – where water is tainted or where hygiene is bad – the results can be lethal. In 2008 around 54,000 Chinese babies were hospitalised after ingesting a chemical added to formula to give it a higher apparent protein content.

Yet the way we treat formula milk and breast milk in our national accounts is bizarre.

When more formula milk is produced or consumed we say that Australia's (or China's) gross domestic product has gone up. GDP is regarded as a measure of standard of living.

But our standard of living will have got worse. Breast milk is an incomparably superior product that formula necessarily displaces, and it isn't counted in GDP.

But it should be. Breast milk can be stored, exchanged and traded, like other foods. In Norway hospitals sell it for around US$100 per litre. 

An Australian study back in 1992 put the value of breast milk at $67 per litre. (By way of comparison wine often costs $20 per litre, petrol costs $1.60.) Multiplied by the number of litres produced it implied that more than $2 billion was missing from Australia's national accounts, around 0.5 per cent of GDP. At the time the sales of formula were worth $135 million.

The author, Julie Smith, says estimating the production and consumption of human milk is straightforward. It's the only food for which production equals consumption. There are no "post-harvest losses" and no "plate waste". It's simply a matter of estimating the daily volumes of breast milk produced per mother, the number of mothers breastfeeding and the market price. Australia has milk banks in Perth, Brisbane, the Gold Coast and Sydney's Royal Prince Alfred Hospital and Melbourne's Mercy Hospital for Women in Heidelberg .

The Bureau of Statistics already counts around $1 billion of backyard production in the GDP; things such as the on-farm consumption of eggs, fruit and milk.

This year it says it was thinking about going further, including the value the electricity produced by household solar panels and the water collected in backyard water tanks.

Its guidelines say it should include things in the GDP where there is "a reasonably satisfactory basis for valuing the transaction" and where "exclusion could result in distortions to the national accounting figures."

Yet it doesn't yet count breast milk. Dr Smith says this means that when farmers' children are fed milk from a cow, it counts in GDP. But when their children are fed by their mothers it does not.

The invisibility of one type of milk but not the other means less care is taken to support it. That could be through providing quality maternity care and mother and child health programs, through providing access to unpaid and paid maternity leave or through providing breastfeeding-friendly workplaces.

It also means that funds are likely to be directed to supporting the alternative, should its fortunes turn down, even though it usually harms rather than helps its users. In the United States governments assist the dairy industry by distributing free or low-cost formula to households with children.

And it also means that we can't work out what's missing – how much better off Australia (and China) would be if more mothers breastfed and fewer used formula.

What is counted and can be traded matters. Gina Rinehart knows that. It's why she dived into iron ore, eclipsing the exposure of her father. She can see an opportunity in formula milk as well.

If breast milk was counted and could be traded we would see an opportunity in that too. We should. It's worth more.

In The Age and Sydney Morning Herald

Tuesday, November 11, 2014

Truth in promises. A policy worth voting for in the Victorian election

Now noone knows where the money is coming from.

Usually governments are restrained in what they offer in election campaigns. Their promises are already in the budget, already accounted for. It's the opposition that appears reckless, making promises that by definition aren't in the budget and aren't funded with savings.

Unless the government is in imminent danger of losing. Then it'll throw out money like an opposition on steroids, announcing unfunded promise after unfunded promise like a squid under attack squirting out ink.

Denis Napthine announced new promises worth $4.2 billion in his 33-minute campaign launch speech on Sunday. Something of a record, it works out at $127 million per minute which is more per voter per minute than John Howard promised in his final desperate pitch to get re-elected in 2007.

Most of it was for trains and trams, which is odd because just two days before, the Prime Minister Tony Abbott defined the election as a "referendum on the East West Link".

When you're facing political death it's wise to cover bases. Which means scrambling to find money.

We don't yet know where he would get the $3.9 billion for public transport, the $100 million to spend on regional cities, the $23 million to give to parents of kindergarten children and so on and nor do we really know how he would find the $8.5-$11 billion he promised in the budget to pay for the Melbourne Rail Link. Most of it is beyond the budget's four-year forecasting horizon...

And we are not likely to know until just before the election. "At a later stage" are the words used by the treasurer's office. If history is any guide we'll be told on the Wednesday or Thursday before the vote; or even on the Friday, election eve. It'll be too late for the Victorians who've voted early (more than half a million are expected to) and effectively too late for debate and discussion about what Napthine has in mind.

It'll be the same for Labor, although at least it has come up with a date. It'll outline the costs of its promises and how they will be funded >on the Thursday before the poll - that's 40 hours before we vote. Labor will outline these promises in a press conference attended by a representative of Moore Stephens, the private accounting firm that has been going over its numbers.

It's an appalling way to treat the people who are meant to be deciding how to vote, not to mention the press which is meant to be giving those people the information they need to decide.

"The big reveal" two or three days before the election can and does result in voters being misled, with no time to check the truth of what they are being told.

In the 2010 federal election the Coalition's treasury spokesman Joe Hockey released 12 pages of costings (with no explanation of how they were derived) late on the pre-poll Wednesday. They were covered by a one-page note from a Perth-based accountancy firm that said it was "satisfied that based on the assumptions provided, costed commitments and savings have been accurately prepared in all material respects".

But the costings weren't accurate, as the Treasury discovered after they were released after the election. Among other basic mistakes the Coalition had booked as a gain the interest it would save by banking the proceeds of selling Medibank Private without booking as a loss the dividends it would no longer receive after selling Medibank Private.

Four years later in 2013 the Coalition delivered an eight-page document that was no more informative. It did it on the Thursday, 40 hours before voting began. This time a post-election review by the Parliamentary Budget Office found it was mistake-free, but voters weren't able to know that at the time, and they weren't able to see the assumptions that lay behind it until after they had voted.

Victoria doesn't have a parliamentary budget office.

The Commonwealth has one, NSW has one, and the Victorian Coalition promised one when it was in opposition. Ideally a PBO works with political leaders to fine-tune and cost their policies and then makes public the final document when the policies are announced. The Commonwealth's has a major flaw. It is not allowed to make the documents public until the leader says so. In 2013 Abbott didn't say so. That meant the Coalition was able to claim the endorsement of the PBO without letting the public see how that endorsement was arrived at.

Victoria's wasn't going to have that flaw and the Baillieu government was going to write it into law on taking office. It didn't, for three years. Then under Napthine it introduced legislation for a cut-down "temporary recurring" PBO. Rather than working all year round it would accept costing requests only for the three months before each election and then shut down. (The NSW office is also temporary recurring but it accepts requests for many more months than three). Opposition Leader Daniel Andrews said he wouldn't cop it and Napthine dropped it.

Now Labor's putting forward a proper model that would work all year round. It would cost $3.3 million per annum. It's the least we deserve.

In The Age and Sydney Morning Herald

Tuesday, November 04, 2014

Power down: What the Melbourne Cup tells us about electricity

Something remarkable happens as the horses leave the barrier at 3pm each Melbourne Cup day. Our use of electricity drops.

Last year NSW usage slid from 7.831 gigawatts just before 3pm to 7.791 gigawatts at 3.15pm. By 3.30pm it had climbed back up to 7.865 gigawatts.

In Victoria the dip is less severe. Tuesday is a public holiday and so electricity use is down all day. But in the rest of the nation factories slow or stop work at 3pm as workers gather around TV sets to watch the race. By 3.30pm they've finished and are back to work.

Electricity suppliers have to react in real time. If electricity supply doesn't almost exactly match demand awful things happen to the equipment.

A YouTube video titled Tea-time Britain illustrates the balancing act wonderfully.

On the wall of Britain's national grid control centre in London is what looks like a large digital clock. Its readout usually varies from 49.9 to 50.1. More power than is needed pushes the frequency of alternating currents to more than 50.1 times a second - a danger zone. Less power than is needed drops it below 49.9 - another danger zone.

To cope with the surge in demand as more than a million kettles are turned on at the end of EastEnders the controller fires up hydroelectric power stations as far away as Scotland and pulls in power from France. He has one eye on the TV schedule and another on a TV screen so he is able to time the surge in supply to meet the surge in demand as the credits roll.

Some of the adjustment is automatic. In both Australia and Britain certain power stations are designated "Frequency Control Ancillary Services" generators. Their output adjusts instantaneously in response to demand in an attempt to get things back in sync within six seconds. They achieve this by either opening or closing turbine steam valves or (in the case of hydro) quickly unleashing or stopping a torrent of water.

But big events overwhelm automatic adjustments and demand on-the-spot decisions.

During the first 2013 Queensland-NSW State of Origin match the controllers watch the action on TV screens and attempt to time a surge in supply to match the surge in demand when viewers turn on kettles and open fridge doors during the halftime break. They even pay attention when the match gets boring. The energy analyst Global Roam has published a fascinating blow-by-blow graph of a 2013 State of Origin match linking surges and troughs in demand to "First try to Hayne for the Blues - a 30 megawatt rise in 1 minute", "Second try to Blues, more tea anyone", and "Maroons try denied, kettles are boiling".

The process by which we - through our individual decisions - control what's happening in power stations from Townsville to Hobart can best be thought of as an industrial form of democracy. Although no single Australian decides whether more or less power will be produced across the eastern Australian grid, combined we make the entire decision.

It's analogous to what economics pioneer Adam Smith called "the invisible hand".  And it's true that we rarely think about it.

Remember the oil crisis of the mid 1970s? It ended largely because Americans switched from six-cylinder to four-cylinder cars and insulated their homes. For the most part no one told them to switch, but millions did and slashed an entire nation's demand for oil.

They were responding to price.

Australians did the same thing in just as spectacular a fashion from 2010 as climbing energy prices and talk about a carbon tax started to bite.

For Australia's entire history right up until 2010, every year through two world wars and the Great Depression, Australians used more electricity each year than the year before. Each year from 2010 on Australian households have been using less.

It's probably not because anyone told them to - there have been exhortations about saving electricity for decades. It's because big price rises and the talk about the looming carbon tax persuaded enough individual Australians to insulate their houses and to install solar generators and hot water systems.

For the most part it was painless. Most households were compensated for the carbon tax with tax cuts. But the price signal worked as expected. When something is more expensive we buy less of it - not all of us, and not because we are forced to, but because enough of us decide to.

It's a different approach to the one the Coalition is adopting with Direct Action grants to polluters. Although clunky (think of the administrative expenses) the Coalition's idea is fair enough as far as it goes. Any business that has a good idea about how to cut its pollution can bid for a grant to reward it for implementing it. The lowest-priced bids win.

What's missing is the price signal encouraging individuals to change their behaviour. We know that it works. And we know that individual decisions add up, just as they do each Melbourne Cup day and each State of Origin night.

This week's Intergovernmental Panel on Climate Change report warns of "severe, widespread and irreversible impacts" unless carbon emissions are cut sharply and rapidly. "Substantial" cuts are needed in coming decades and "near zero" emissions by the end of the century.

If we accept the findings, we need to accept that it's silly to argue about whether we need Direct Action or a renewable energy target or an emissions trading scheme. We need all of them, and more, at once. Both Labor and the Coalition are guilty of acting as if their preferred solution works to the exclusion of all others.

Whether it is cost-effective or not, Direct Action will be with us for a long time. Its contracts will lock in the government for years to come. A carbon price, likely to be recommended by the inquiry set up by the Coalition as part of its deal with the Palmer United Party, could work alongside Direct Action, even helping fund it.

The invisible hand is too valuable a tool to throw away.

In The Age and Sydney Morning Herald

Sunday, November 02, 2014

Sunday Explainer. Why we will pay more for petrol, even though Parliament said no

The excise on petrol is set to go up in line with inflation despite the government not having taken the policy to the election or having the support of  Parliament. Peter Martin examines the case for and against.

First, the history. Why do we tax fuel at all?

To pay for roads and the costs of maintaining them. We've been doing it since 1929.

Has the money raised actually been spent on roads?

That was the law from 1929 to 1959, but it has been the practice all along. In July the Productivity Commission reported that in 2011-12 total road expenditure by all levels of government amounted to $19.5 billion. The revenue collected from fuel excise, registration charges, driver's licence fees and stamp duty amounted to $16.5 billion.

It's called an excise, not a tax. What's the difference?

A tax is levied on the price of something. The goods and services tax is levied at a rate of 10 per cent. Income tax is levied at rates of 19 per cent, 32.5 per cent, 37 per cent and 45 per cent. An excise is levied on the amount of something. In case of the alcohol in full-strength beer it is $46.30 per litre. In the case of tobacco it is 50.8 cents per gram. In the case of petrol it is 38.1 cents per litre.

As prices go up wouldn't the impact of the excise shrink?

That's why every so often the government used to announce one-off hikes in excise. The typical budget headline read: "Beer, smokes, petrol up". Then, in 1983, prime minister Bob Hawke made the process automatic. From then on, every February and August the excises on tobacco, alcohol and petrol climbed in line with inflation.

Did you say petrol? Did the rate of petrol excise climb with inflation?

It did until 2001 when prime minister John Howard froze it where it was at 38.1 cents per litre. He was trying to head off criticism of his recently introduced GST.

So as a proportion of price the fuel excise has been shrinking?

Too right. When John Howard froze the excise in 2001 the petrol price was $1 a litre making the tax rate 38.1 cents in the dollar. Petrol is now near 150 cents, making the tax rate only 25 cents in the dollar. Unless indexation is reintroduced the tax rate will fall even further.

So the government is undoing a decision of John Howard's and reinstating a decision of Bob Hawke's?

Exactly, and it is happy to sing Hawke's praises. "We have simply done what Bob Hawke did," prime minister Tony Abbott told the parliament on Wednesday. "Bob Hawke was a real Labor leader, Bob Hawke was someone who was prepared to put the national interest ahead of short-term politicking," he told the leader of the opposition.

What about the politicking? How have Labor and the Greens justified opposing the reintroduction of indexation?

They say that it is a new tax, and that Abbott promised no new taxes. And they say that it hits low income Australians the hardest, which is does despite the treasurer's assertion that "the poorest people either don't have cars or actually don't drive very far in many cases". As a proportion of income, low-income Australians spend much more on petrol than high-income Australians.

And the Greens are concerned that the legislation 'sets aside' the extra revenue for spending on roads. But the provision is fairly meaningless. The government spends much more on< roads than the extra revenue already. When the government offered to withdraw the provision the Greens wouldn't budge, so the government left it there and used regulations to get around Labor and the Greens.

What will the regulations do?

The regulations will lift the excise on petrol in line with inflation just as the legislation would have. The regulations will lapse unless they are validated by the parliament within 12 months.

Can the government do that - impose tax increases without the approval of parliament?

Yes. Whenever beer, cigarettes and petrol were slugged in budget nights past, the excise went up at midnight on the night of the budget. A delay would have encouraged a run on supplies. This time the provision isn't being used to stop a run on petrol stations - it is simply being used to get around the parliament.

The increase will take effect on Monday, November 10, so it could be worth filling up the evening before. But it won't be worth much. The first increase will take the excise from 38.1 to 38.6 cents per litre. The November hike will lift the price of a tank of petrol by around 25 cents.

What if the parliament withholds its consent?

After 12 months the money would be returned to the petrol manufacturers and importers.

Is the parliament likely to withhold its consent?

Not likely. It would be hard to justify handing to oil companies money that was effectively collected from their customers.

Does that mean the Senate will cave in and pass the government's legislation?

Not at all. It could simply validate the government's regulation so as not to hand money back to oil companies but still refuse to pass the legislation that would reintroduce indexation. The government would have to regulate one year at a time, with embarrassing consequences. Each year it would be hit with headlines saying "fuel tax up", the sort Bob Hawke's system of automatic adjustments was designed to avoid.

Abbott said after a year it'll cost the average family just 40 cents extra a week. Is he right?

No. He misspoke. It will cost the average household an extra 40 cents per week. But the average family is bigger than the average household. Many households contain just one person. It'll probably cost the average family an extra 55 cents per week.

In The Age and Sydney Morning Herald