Worry grows over carbon trade flow-on

By Keith Orchison
(Published in The Weekend Australian, 10-11 May 2008)

One of life's more spine-chilling experiences is being on board an airliner making an emergency landing with the entire cabin crew chanting "brace, brace, brace, brace."

Most of the passengers on airship Australia may not yet be aware of it, but the dirge-like chant of "brace" is growing louder as we prepare to land in the new field of carbon-constrained energy supply.

One of the latest warning of a potential rough landing is Roger Corbett, former head of Woolworths and a Reserve Bank board member. "I don't think it is beyond the realms of possibility that the cost of energy could go to five times the current level or even more," he said earlier this month. "I think we are looking at a five to 10-year timeframe."

This view has been broadly reinforced by the Rudd government's key adviser on emissions trading, Professor Ross Garnaut. "One of the intended effects of the scheme is to make emission-intensive goods and services more expensive," he says.

Corbett's perspective finds support in widening areas of the Australian energy sector and among those dealing with policy or seeking to influence it.

" Rather than greenhouse gas emissions costing $20 per tonne under carbon trading," an adviser to government conceded in private conversation this month, "it is beginning to look as if the scheme will require prices of $40 to $50 per tonne."

Across the economy emissions trading at $50 levels would add about $25 billion annually to the nation's energy costs, feeding in to the shopping shelves as well as the petrol bowsers and impacting on inflation and employment.

A $50 trading price will translate in to an increase in the annual cost of generated electricity of between $8 billion and $9 billion a year -- and in to a 50 percent increase in consumer bills for power, which then roll on in to the rest of the economy. Australian business consumes 72 percent of the nation's electricity.

To this can be added the impact on generation costs of the Rudd government's enlarged mandatory renewable energy target, proposed for introduction along with emissions trading, which is expected to add up to $2 billion a year to wholesale prices by 2020.

In the petroleum sector, the cost of emissions trading will land on top of the impact of international oil prices. In the Australian oil industry, explorers and producers are convinced that $US50 per barrel now represents a floor price in world trade -- a figure that represented a 20-year peak in 2003 and that has been surpassed in the past five years as oil prices have averaged more than $US75 a barrel -- and some are expecting it to hold at $US100 or higher in the next few years.

The bottom line for consumers, who were upset a year ago by bowser prices passing $1.30 a litre, is that they had better brace for $2 per litre and more.

This month's annual conference of the Australian Petroleum Production & Exploration Association -- which attracted a record 2,600 delegates to Perth, making it the world's third largest petroleum forum -- also saw much debate among participants about the price of Australian gas.  Western Australian gas costs have soared in the past three years as LNG export prices have fed in to the domestic market and there are now questions being asked about the potential impact of liquefied coal seam gas exports from Queensland on the eastern States market in the next decade at a time when it is hoped there will be also a large increase in the use of gas for power generation.

One of the great unknowns of the proposed shift in energy pricing is how it will change consumption patterns.  Energy demand is notoriously "unelastic" -- that is unresponsive to price rises. As an example, despite the shrieks of anguish from Australian motorists over high petrol prices, sales of  gas-guzzling SUVs actually rose last year.

One of the big goals of imposing carbon costs is a sharp reduction in the growth of energy demand, most importantly in electricity consumption. Government and the environmental movement expect to see power growth cut by a third by 2020 -- representing an emissions growth reduction, but not a cut in actual greenhouse gases from today's levels.

The minds of political party strategists should already be exercised by consideration of how voters will react at the polls in 2010, 2013 and 2016 to having to dig far deeper in to their pockets to buy petrol, power and other energy needs, as well as meeting other costs driven up by higher energy prices,  while watching domestic emissions rise -- and global emissions soar on the back of Chinese and other developing nation demand -- despite the strident warnings about the imminent danger of global warming.

If carbon costs in Australia also drive employment losses -- energy intensive industries employing a million people use a third of domestic electricity consumption -- it may be some of the politicians who are shouting "brace, brace" the loudest in a few years time.

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