Is the carbon tax really about getting people to switch off the beer fridge and get rid of the second car?
The elasticities of demand for electricity and motor fuels are typically low, suggesting that to a large extent Australians will cover the price increase by reducing other consumption instead. So it is not the reduction in electricity usage so much as the substitution to alternative forms of electricity generation that will be the real achievement of the carbon tax. Lifting the price of cheap and dirty brown coal electricity generation opens the door for the more expensive, greener options: carbon capture, wind, geothermal and solar.
How successful will this strategy be? Here is Chart 5.5 from the Treasury modelling without all the confusing bumph.
Domestic carbon pricing will not achieve any target by 2050 – let alone by 2020. The effect of the tax isn’t that Australia will substitute from a cheaper source of power to more expensive sources of power but rather that we’ll be exporting capital through the purchase of carbon credits. We’ll be paying foreigners for the right to use our own natural resources.