I’m not sure that Geoff Carmody has pinpointed the key issues in carbon pricing policy. Like many economists he seems confident that, with the right policy, carbon pricing would successfully reduce emissions to whatever extent is required. It's just a matter of getting the policy right. He invokes ‘Economics 101’ to back his argument. But he ignores two critical aspects.

Firstly, energy and GDP are bound together. In the short term any reduction in energy consumption brings a fall in GDP. Indeed, given the annual energy consumption of any OECD country, one can easily calculate its GDP with reasonable accuracy. So, while there will certainly be a marginal impact of energy price on reducing energy consumption, the ultimate link with prosperity imposes a major practical and political constraint.

Second, a carbon price is meant to drive a shift to lower-carbon energy technologies. That’s the theory, and it has been working to some extent, in some economies, in some sectors, like electricity generation. The constraints are to do with intrinsic limits of solar and wind technologies, unrealistic hopes for future geothermal and carbon capture technologies, and absence of practical replacements for liquid fuels for transportation.

So it’s not just about economics, it’s about adopting realistic outlooks for technology

Carbon pricing is rapidly turning into a dogs breakfast. Not only are we to abrogate to the failed European scheme but according to the AFR we are to have mini permit auctions from next year. I'm fairly sure that wasn't supposed to happen til 2015 so it seems we'll have carbon tax + ETS-lite + foreign carbon credits. It has 'winner' written all over it.

The odds are we'll achieve the pissweak 5% emissions reduction 2000-2020 due to the global economic downturn and the recent trend to gas fired generation. However the Germans remind us that gas is a much more expensive fuel than coal so a relapse is still on the cards. Carbon tax will have little or nothing to do with achieving a 5% cut. If anything the emissions cut by 2020 should be around 30%. As often pointed out we'd do more for global emissions reduction by slightly reducing coal exports rather than a domestic carbon tax.

And as Tombee points out carbon pricing is a tough sell in a shrinking world economy. Perhaps this is why all the schemes are tokenistic not effective. I also believe that any grand plan that omits nuclear energy is doomed to fail. I guess that means we've chosen both a shrinking economy and melting ice caps.

I don't necessarily disagree with either Geoff or Tombee or Taswegian but one point should be made about current high prices.

* Electricity demand has levelled out. Look at the resports produced by teh Aus Energy Regulator and the Aus Energy Market Operator. This is partly the result of the economic restructuring with a lot of manufacturing closing down, but also due to high prices. High bills are discouraging energy use.

* Much of the problem with over-investment can be eliminated if the Aus Energy Regulator is given more discretion to rule on price increases. At the moment, as I understand it, the rules are set up so that over-investment is encouraged. Many of the restrictions on peak charging during those really hot days could also be dropped, as Geoff suggests.

I don't see any confusion, linking the carbon credits to the European market gives it more strength.
Europe being depressed at the moment, has caused a slump in the cost of credits, but can Europe stay depressed for ever.
10$ / credit at the moment.
AU credits will be on sale before the 3 years entry to Europe opens.
Invest in credits or invest in ways of making your company cleaner, so no further costs can be incurred.

Curmudgeon is right that some reduction in demand for electricity can be attributed to higher prices, mostly network charges rather than carbon tax. However it will not produce the really big CO2 cuts that climate scientists say we should make.

579 what you're talking about sounds like a recipe for fraud. For example I expect Australia's carbon farming initiative to demonstrate that we are not only slapdash in scientific terms but babes in the wood when it comes to anything beside digging up rocks. The Europeans will laugh at our CFI credits unless they are absurdly discounted. Brokers not farmers will pocket the cash. Meanwhile the big coal fired power stations (ie not the old or semi-idle plant) keep spewing away. The winners will be the hangers-on.

The big coal fired plants have the most to gain from green power, there is no carbon credits or 23 $ / ton required.

Good good article Geoff (if a bit disjointed). I think that all major emitting nations will inevitably have to join an international fixed price scheme. It's a matter of when not if. Such a scheme will be similar to the existing one we have here, without the exemptions for certain classes of industry.

Why? Because generators and industry will demand certainty to make good investment decisions.

It's a shame that no government has so far had the intestinal fortitude to bite the bullet and go with a permanent fixed pricing scheme. I guess Australia is too small a player to be the first, but at least we have demonstrated that it can be done at least for three years. Our current scheme shows how what amounts to a revenue neutral tax can work. I just wish they'd left out the whole carbon trading thing.

PS. There would still be a market for voluntary offsets and local agricultural offsets can be allowed in a fixed price scheme as long as their price was also fixed in line with the scheme price (as they are with the existing Carbon Farming Initiative).

Good article and good points. Your article makes it pretty obvious that the government’s scheme is not about reducing carbon emissions. It is about revenue, wealth redistribution and politics.

Furthermore, it seems that the whole idea of pricing carbon is flawed and cannot work as intended for the reasons explained here: http://jennifermarohasy.com/2012/06/what-the-carbon-tax-and-ets-will-really-cost-peter-lang/ .

You said:

“First, some Economics 101. Increased prices reduce power demand (and thus emissions).”

That is only true within the country. Increasing power prices does not necessarily reduce global emissions. It could increase them.

Furthermore, raising the cost of fossil fuel electricity generation in Australia, or even in the developed countries, is not what is needed to help the world to reduce global emissions.

What is needed instead is for the developed countries, and especially the USA, UK and EU, to remove the impediments that prevent the world having low-cost nuclear power at a cost that is competitive with fossil fuels.

The high cost of nuclear power has been caused by 50 years of anti-nuclear activism led by so called Greenies. It is up to these people and groups to swallow their pride, recant and then lead the move to remove the impediments to low cost nuclear power.

"The high cost of nuclear power has been caused by 50 years of anti-nuclear activism led by so called Greenies. It is up to these people and groups to swallow their pride, recant and then lead the move to remove the impediments to low cost nuclear power."

Impossible Peter; the moral arrogance of the green mindset allows for no such admission of error; they are the chosen ones of the Gaia, don't you know!