Government senator telling porkies and scoring own-goals

Last week Senator Matt Thistlethwaite (ALP, NSW) asked questions about the Australian Trade and Industry Alliances advert on the Carbon tax. His first question to Ms Quinn of the Treasury was this.

Senator THISTLETHWAITE: Thank you. The Australian Trade and Industry Alliance have an ad campaign going at the moment in which they make the claim that the cost of the Australian carbon pricing scheme compared to the EU’s is much greater; I think their figure is $70 billion over the first five years. What do you say about their claim? Is that true?
Ms Quinn: What they are talking about is the revenue received from different schemes, which cannot be equated to either the fiscal cost or the economic cost of a scheme. So it would be inaccurate to draw the link between the revenue received from a scheme—
Senator THISTLETHWAITE: And the cost.
Ms Quinn: and those two different types of measures of cost. One thing that affects the measured fiscal revenue is the provision of permits to stakeholders or companies within an economy versus the idea of auctioning permits. In the European Union, for instance, at the moment they provide a large number of permits to companies who then can use them or sell them, so they do not receive the revenue directly for those permits. That suggests that the revenue implications are lower, but that does not equate to economic cost and does not equate to the incidence of the economic activity. Similarly, in terms of the economic cost, if you just bear with me, I have some analysis. The United Kingdom, for example, has provided information about what impact it expects a carbon price to have on its GDP. The assessment for the UK economy is that the effect of carbon pricing on GDP for the UK by 2050 is in the range of 0.8 per cent to 1.6 per cent, which is a level deviation. So under carbon pricing they expect continued growth and a very modest impact on their economy. If you took the economic analysis as an economic cost, which is what the Australian Treasury typically does, then the costs overseas are fairly modest and the cost to Australia is also expected to be modest. So it would be inaccurate to say that our scheme is significantly more expensive. Reducing emissions for Australia is more expensive than for some countries, but those statistics used about revenue are not the way you get that analysis.

That is a long and complicated argument. Yet, it is all besides the point. Watch the advert.

Did the word ‘cost’ appear at any time? As far as I can work out, it is a simple revenue comparison.

Later he asked John Quiggin.

Senator THISTLETHWAITE: The Australian Trade and Industry Alliance have produced an advertising campaign. I am not sure if you have seen the particular ad on television which compares, in their words, the cost of the proposed carbon pricing scheme in Australia to the European Union’s scheme in the first five years. Their estimates are that the Australian scheme will cost $70 billion and in comparison the EU scheme was somewhere in the vicinity of below $10 billion. Have you seen that particular advertisement?

Quiggin hadn’t seen the ad, perhaps Thistlewaite hadn’t either.

Then he had this exchange with Greg Evans from the Australian Chamber of Commerce and Industry

Senator THISTLETHWAITE: It is true, is it not, that the advertising is somewhat misleading in that it claims that the costs of the carbon pricing scheme will be $70 billion, when in actual fact that is the revenue that will be raised from the scheme?
Mr Evans: No, it is not misleading. We stand by our figures. The figures we use are based on government revenues.
Senator THISTLETHWAITE: That is right: government revenues. They are not the costs, though, are they? They are the revenues that will be raised from the scheme.

As we now know, the advert makes no claim about revenues being the cost of the carbon tax. That cost is much, much higher than a mere $71 billion over 6 and a half years. The problem is Treasury won’t tell us what that cost is. Luckily Henry Ergas did a back of the envelope calculation

Prof. Ergas: Yes. What is available that Treasury have indeed released, and I congratulate them on doing so, is a spreadsheet that is similar to a spreadsheet that they had released for the CPRS model and that spreadsheet allows you to look at the change in the value of GDP under the base case, as it were, and with the so-called core policy, which is the primary abatement scenario that they model, and also under the so-called high-price scenario, which is where you go for more ambitious abatement. So what you can do, Senator, is you can use that spreadsheet—and you do need to make a number of assumptions—to calculate the value today of the change in GDP under those alternative carbon tax scenarios. To put it in perhaps simplistic terms—but this may help explain what is going on—say that in 2020 GDP would otherwise have been $2 trillion and instead, under the modelling of the core policy, it is $1.8 trillion, and in 2030 it would have been $3 trillion and instead is $2.6 trillion, you can take that difference and express it as if it were a value today. You can bring it back to the present. To do that you have to find some way of adding up amounts at different points in time. You have to take some account of the time value of money. In the calculation that I set out, I used a discount rate—that is, the assumed time value of money, as it were, that is used in the Garnaut report. When you do that, you get a GDP loss that is in the order of somewhere between $890 billion and $1.345 trillion for the core policy scenario. I rounded it to about $1 trillion.

So Senator Thistlethwaite, the cost of the carbon tax is not $71 billion and the Australian Trade and Industry Alliance makes no such claim – rather it is about $1 trillion and that’s from a Treasury spreadsheet.

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20 Responses to Government senator telling porkies and scoring own-goals

  1. Jarrah

    “I used a discount rate — that is, the assumed time value of money, as it were, that is used in the Garnaut report.”

    Wasn’t that rate roundly condemned here and elsewhere as unrealistic? Is Ergas being cheeky?

  2. Sinclair Davidson

    Is Ergas being cheeky?

    🙂

  3. Entropy

    Yes I thought that was gold. I wonder how parliament house would look if it had a row of petards out the front, particularly if they were functional.

  4. Rob

    $1 Trillion, is that more or less than what the NBN will really cost?

    At least for that $Trillion we might get a global temperature decrease of 0.00001 degrees, it’s value for money compared to most Gillard govt schemes.

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  6. steve

    How did Prof Ergas come to the figure of a cost to GDP of 10%. (1.8/2 = .9). Did he just make it up?

  7. Sinclair Davidson

    Open the spreedsheet – subtract the GDP under the policy from the No policy case then discount the difference back to the present and add them all up.

  8. steve

    Am I doing a boy look? There is no “No policy” case?

  9. Sinclair Davidson

    I took that to be the medium global action.

  10. Capitalist Piggy

    Not being an economist, I don’t follow what Ergas did. But what is wrong with this approach:

    Subtract the core policy figure from the medium global action figure (e.g. for 2020, 1721-1726), then repeat for each year of 2010 to 2050, and sum the results.
    Doing that, I get -$1.345 trillion (in 2010 dollars).

  11. Capitalist Piggy

    BTW, did Treasury provide GDP projections for ‘No core policy’ and ‘no global action’, i.e. ‘nobody doing anything’?

  12. steve

    Thanks CP – I get it now. He didn’t say anything about 2050, and his hypothetical examples showed a 10% reduction in GDP, which confused me greatly. So treasury is estimating the cost to GDP over 40 years is 1.43%, which sounds a lot smaller than $1 trillion.

    And no they didn’t model nobody does anything, but they did write something about Australia acting when the rest of the worlld does nothing – see here, box 5.2 Page 97, though I recall Henry Ergas saying he didn’t agree with that analysis.

  13. Sinclair Davidson

    CP – have to adjust for time value of money.

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  15. cohenite

    That a carbon tax would decimate the economy should come as no surprise especially to the duplicitous bastards now ‘running’ the nation; in 2009 the then criminal empire known as NSW Labour commissioned Frontier Economic Modelling to analyse the effect of the then Witless Rudd government’s ETS, which to all intents and purposes is the equivalent of the 5% carbon tax;

    http://www.theaustralian.com.au/news/nation/ets-to-shrink-regional-growth/story-e6frg6nf-1225691476399

  16. Garry

    The POQ message sent to business is incalculable. Why would any aspiring entrepreneur sacrifice and risk today when it is guaranteed his business will eventually fail under a windmill only energy policy? Makes sense to just initiate where business is embraced or to simply not bother. Our current leaders don’t understand business sentiment and the need for confidence to invest for the long term. Business people are not stupid and they do have choices.

  17. Entropy

    Well Steve might be very challenged when it comes to using a spreadsheet, but I suspect that that sort of language is never called for. After all, if that sort of mathematical skill is all that can be brought to the table why should it bother you, dot?

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