This morning Graham Richardson was talking about electricity prices and this comment caught my attention:
From the conservative side, blaming the carbon tax, which has been in place for one month, for price increases occurring over three or four years is pathetic. A portion of this year’s increase may be attributed to the carbon tax but it is not retrospective.
That would seem sensible, but it isn’t quite right. It overlooks something called regime uncertainty (a more precise term for people who like to use the term ‘sovereign risk’ – a term that is usually reserved for bond markets).
Regime uncertainty is a concept developed by Robert Higgs, that describes uncertainty of investors in their private property rights in their capital and the income it yields because of government action.
Vague government policy can have a real impact on the economy before it comes into effect.
So has this happened in the case of electricity prices? I went to the ABS and captured the CPI data for All Groups and Electricity and graphed over the period 1980 – 2012 (the longest period available).
So for a long time the All Groups CPI and Electricity CPI tracked each other quite closely before a massive deviation in 2007. So let’s have a look at that.
About the middle of the year a deviation between the two series occurred that has persisted and shows no sign of reversing. We can hardly blame events in 2007 on the Rudd-Gillard government. Well maybe we can. The middle of 2007 saw the release of the Shergold Report, the introduction of regime uncertainty around the value of power stations, and the price of electricity.
Peter Shergold, chair of the Prime Minister’s task group on emissions trading, said it would take three years to establish such a system in Australia.
Dr Shergold released the group’s eagerly awaited report today, recommending work should start “at once” on developing a cap and trade emissions trading system to achieve a target within five years.
“Australia should commit to an emissions target for post 2012 ahead of any comprehensive global response, and it should do that with an emissions trading scheme based upon cap and trade,” he said.
But he said Australians should know a carbon emissions target would come at a cost to economic growth, business and households.
“What we are doing by seeking to prudently manage risk is bringing forward costs from the next generation, costs that we impose on ourselves,” he told reporters in Sydney.
“While there are these costs, which need to be understood in acting now, the consequences of inaction are potentially larger.”
At that point climate change policy became bipartisan with the Howard government adopting ALP policy – always a mistake in the post Hawke-Keating era. So it looks like a combination of climate change policy and gold-plating (the desire to extract as much value from existing assets before the government expropriates their entire value) is responsible for the massive increases in electricity prices.
We can argue about why the Howard government lost its nerve on climate change in 2007 – it was a mistake and Howard did go on to lose government and his seat – but there can be little doubt that regime uncertainty associated with climate change policy is the cause of the price hikes we have experienced in the last 5 years.
To the extent that Gillard owns climate change, she owns those price increases.