Spooked by Abbott's carbon price hype

A number of retail business leaders are complaining that the carbon price will severely harm their business and that it must be delayed. Gerry Harvey has been one, and even the CEO of David Jones, Paul Zahra, used the carbon price as an excuse for his business' poor performance about 12 months ago (nothing to do with him and his business model of course).  

Just a few days ago, we had Gandel claiming the carbon price would be more harmful to his business interests than the threat of online retailing, which so far appears to have taken a chainsaw to retailer margins.

In addition to this we've had front page reports that Westfield intends to pass through the additional costs it incurs through the carbon price to its tenants.

Yet it's interesting that in all of these reports no one seems to mention any hard numbers on the likely impacts of carbon trading scheme. So let's have a look.

The Australian Bureau of Statistics publishes an Energy Account every so often, which lists the energy consumption by fuel type for each industry in Australia. It is energy where the carbon price will have noticeable cost implications, and its impact in other areas is negligible.

In the 2011 accounts, covering the 2009/10 financial year, wholesale and retail trade consumed:

- 5,000 terajoules of natural gas

- 33,000 terajoules of petrol

- 25,000 terajoules of diesel

- 3,000 terajoules of LPG

- 54,000 terajoules of electricity.

So what does this mean in terms of dollars from a $23 per tonne of CO2 carbon price?

The Department of Climate Change and Energy Efficiency publish the amount of CO2 equivalent emitted from the use of each of these fuels. We can then simply multiply this by $23 to give us the carbon price costs, which are detailed in the table below.

This will probably overstate the impact for electricity where the competition from lower emission gas generators should inhibit 100 per cent pass through of carbon costs, but it's a reasonable approximation.

Energy consumption and associated carbon costs in the wholesale and retail trade sector

So, all up, wholesale and retail trade are likely to see an increase in costs from the carbon price of approximately $446 million per year.

Sounds like a lot of money, doesn't it?

Well, not really. The Australian Bureau of Statistics also publishes overall expenditure by industry sector on all inputs, not just energy. It was $695.4 billion for wholesale and retail trade in the 2008-09 year. So overall the carbon price's direct impact increase in costs will be about 0.06 per cent.  

But what about all the intermediate inputs you say? Well last time I went to Harvey Norman, David Jones or Gandel's giant Chadstone shopping centre I didn't see much stuff that was made in Australia. Also, where it was made in Australia, it was generally exposed to overseas competition. So the impact of a carbon price on merchandise costs is close to zero.

However, retail and wholesale trade do spend a fair bit of money on transport related services which are energy-intensive. Based on similar calculations as in the table above, costs for transportation services will increase by around 0.76 per cent. Wholesale and retail trade spent $15.9 billion per year on these services based on the latest ABS input-output tables. So this would increase by $121 million as a result of the carbon price.

This brings the total cost increase from the carbon trading scheme for wholesale and retail trade to 0.08 per cent of total expenditure, of which much can be passed onto end consumers. Not to mention the fact that retail outlets are notorious for wasting large quantities of energy on poor lighting and air conditioner practices, so these costs could be trimmed considerably if they put in some effort.

I suspect that what has in fact happened here is that Gerry Harvey, John Gandel and Paul Zahra have been spooked more by the hype around the carbon price, rather than a deep understanding of its economics.  

Tony Abbott, the vast majority of the media, and even Penny Wong, when she was minister for climate change, have been talking-up how dramatic an impact the carbon price will have. This ultimately filters through to perceptions, which then affects consumer confidence. And this can create its own economic reality.

The majority of householders will find pension and family benefit increases, as well as income tax cuts, will outweigh the increased costs they'll bare from the carbon price. But a large proportion of householders don't yet believe that this is true. The only way to overcome these false perceptions is to implement the carbon price, not delay it.