Terry McCrann's outdated carbon tax attack

Outdated, rear-view mirror thinking on energy’s place in the economy dominates criticism of the carbon tax, and the Herald Sun’s Terry McCrann desperately needs a refresher course in energy and economics.

Terry McCrann, business writer for the Herald Sun and the Daily Telegraph, is like a lot of those railing against the carbon tax who fail to realise that their knowledge and training is desperately out of date.

You meet people like McCrann on a regular basis at free-to-attend functions. They’re usually retired or semi-retired businessmen or engineers. They haven’t practiced the profession they originally trained in for many years, haven’t published a peer reviewed paper (at least in the last two decades), but they fancy themselves as experts on matters of energy, economics and atmospheric science.

You see poor old Terry McCrann has absolutely convinced himself that the carbon price will be the end of civilisation as we know it, and now he’s finding it rather difficult to reconcile his beliefs with reality.

At various times in the recent past McCrann has described efforts to price carbon in the following terms:

-- “The tax will be most vicious and most destructive yet asked of the hundreds of thousands of small and medium businesses”

--“…a tax that attacks the very foundations of our economy, directly undermines our national prosperity, will destroy businesses and jobs and send them overseas.”

--“But those obvious losses will be only a small part of the pointless cost of the tax. We will all be victims, every single Australian, as we will all suffer from Gillard and Brown's shared determination to take us back to the 19th century.”

 

But yesterday he was trying to move from what I could only think of as the ‘cobra strike’ school of thought to instead proposing the ‘python squeeze’:

“The carbon tax has had a direct, immediate and significant impact on electricity bills. That will filter into costs and prices – over time, and not all or even very much in the first week. Obviously, we won't feel the impact of that in the first week, or even the first year or two. But when it comes it will be savage. In terms of power prices. In terms of jobs.”

What I suspect underpins McCrann’s misunderstanding of the impact of the carbon price is an out-of-date understanding of the changing structure of the Australian economy. This leads him to overestimate the importance of the cost of energy. Take for example these statements McCrann has made:

“The tax targets the very basis of industry productivity – cheap, plentiful and reliable power.”

And:

Read my lips: economic growth and jobs equals energy use equals carbon emissions.”

Make no mistake, energy underpins the effective functioning of our modern world – we couldn’t do without it. But that doesn’t mean we couldn’t afford to pay more for it or couldn’t become more efficient in using it.

Back in the early 1970s, the Arab Oil embargo and resulting spike in oil prices led to a huge global economic shock with rising unemployment in combination with high inflation. I suspect this experience may partly be to blame for the huge weight McCrann, and many retired engineers and geologists, place on the price of energy and electricity in particular.

Yet since that time there has been a rapid decline in relative share of energy costs in our economy and that of the rest of the developed world. This has been largely a function of the rise in the importance of services in our economy compared to industrial goods, but also substantial improvements in energy efficiency.

The chart below, taken from the US Energy Information Administration latest 2012 Annual Energy Outlook, provides a striking illustration of how growth in the demand for electricity in the US has dramatically declined since the formative years of Terry McCrann. A similar pattern has been repeated in Australia.

United States electricity consumption growth over time

Source: US Energy Information Administration (2012)

Also the chart below illustrates that compared to 1989-90, Australia now needs 20 per cent less energy to produce a dollar of economic output (GDP). If we stretch this back to the 1970s, then the improvement is even greater.

Index of Australian energy use per unit of GDP

Source: Bureau of Resource and Energy Economics (2012)

If you bother to examine data on flows of goods and services within the economy you quickly realise that costs of electricity and gas are important, but they aren’t anything close to the influence of say interest rates. Also in terms of petrol (excluded from the carbon tax), which as Stephen Koukoulas points out in Climate Spectator today is more important to the household budget, the carbon price impact if it were applied is like a rounding error relative to underlying fluctuations in the international price of a barrel of oil.

If you’re going to claim that, “the 'price on carbon' will seep into the price of everything”, as McCrann does, you need to take the time to analyse the data on energy, economic flows and emissions.