Jacqui Lambie's carbon tax dilemma – what is good for Tasmania?

As one of the incoming PUP senators, Jacqui Lambie has indicated she will be putting Tasmanian interests first when deciding which way to vote on legislation. The carbon tax will be one of her first tests, having indicated a preference, along with her PUP colleagues, to vote for its axing.

But is “axing the carbon tax” really in the Tasmanian interest?

Currently, the carbon tax is largely focussed on the electrical power generation sector, and so hits hardest those states with emission intensive coal fired power. The emissions intensity of Tasmanian power generation is the lowest of any Australian state by a country mile. Courtesy of the dominance of hydro in its power generation mix, in some years Tasmanian generation emits virtually no CO2. In the financial year 2013-14, the emission intensity of Tasmanian power generation was just 1/40th of Victoria’s.

So you would think a strong carbon price should dramatically increase Tasmanian competitiveness relative to the mainland and, especially, emission-intensive states such as Victoria.

The key question for Jacqui Lambie and others who would seek to advance Tasmanian interests is how has the carbon tax impacted power prices in Tasmania, in both absolute and relative terms?

The best way of assessing this is by looking at the wholesale market, since that is where the carbon tax factors into power prices.

Because of the low emission intensity, the carbon-tax contributes a negligible direct component in the wholesale power prices in Tasmania, adding just 1.8% to wholesale prices in 2013-14. With wholesale prices currently accounting for around 20-25% of retail prices, that means the average carbon tax component paid by a domestic consumer in Tasmania is less than 0.5% of the total bill, or about the same as the inter-annual variability in inflation. In other words, the direct effects of the carbon tax for Tasmanian consumers is in the noise.

Compare that to Victoria with its reliance on high emissions brown coal power. There the carbon tax accounts for almost 50% of the wholesale price, and contributes around 10% to the average retail bill.

As a direct consequence of the carbon tax, Tasmania now has the lowest wholesale prices of any of the states participating in the National Electricity Market. In fact, in the last financial year (2013-14), Tasmanian wholesale prices averaged $10 to $20 per megawatt hour less than the other states. In percentage terms that amounts to a 20-40% advantage over its competitor states on the wholesale component.

Of course, Tasmanian wholesale prices are not entirely immune from the carbon tax, since the Basslink interconnect allows Tasmanian hydro power to bid into the Victorian market, connecting Tasmanian wholesale prices to the mainland.

As a consequence, Tasmanian wholesale prices have lifted about $10 per megawatt hour from the extreme lows that preceded the implementation of the carbon tax in July 2012. The big winner from this rise is the Tasmanian generation sector. After the carbon tax, Tasmanian generators have recouped an average of $12 per megawatt hour more than Victorian generators on the wholesale market. Given the low marginal cost of hydro generation, Tasmania is the one bright spot in a power generation sector with an otherwise bleak national outlook.

Importantly, current Tasmanian wholesale prices ($42 per megawatt hour) remain ~20% below the long run adjusted average of ~$52 for the NEM in the period prior to the implementation of the carbon tax. Moreover, current wholesale prices remain significantly below the long-run Tasmanian average (adjusted to 2014 dollar terms), and are around 40% lower than the Tasmanian average for the four year period leading up to the global financial crisis, before wholesale market prices began to nosedive across the NEM. So, if commercial rates for electricity in Tasmania have risen in adjusted terms relative to pre-GFC years, then it is patently not because of the carbon tax.

While the pros and cons of the carbon tax can be argued for the nation as a whole, it is clear that Tasmania is benefiting in relative terms. In absolute terms wholesale prices have risen, but still remain below long-run average. Moreover, what holds nationally will hold internationally, once our trading partners start to price carbon. In a world in which carbon is priced Tasmania will be advantaged very significantly, and the higher the price the bigger the advantage.

If the new senator is sincere in putting Tasmanian interests first, then she might not do much better than to advocate a strong price on carbon, both nationally and internationally. At very least, by voting for retention of the carbon pricing mechanism infrastructure, in line with PUP’s declared position on an ETS with a starting price of zero, the senator will be helping secure Tasmanian interests in the event that the world begins to move more quickly on pricing carbon.