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How a Carbon Price WILL lower emissions

27/06/2011

I will for the sake of this explanation talk about wheat biscuits.

Let us say we have TWO manufacturers of wheat biscuits. Both biscuits, for simplicity sake, are fairly similar. The only difference is market share and associated advertising.

Let us also say there are two electricity providers. Provider one is the sole provider for manufacturer one. And provider two is the sole provider for manufacturer two. On top of this the providers also offer electricity to residents.

Electricity provider one  has 25% energy from renewable sources. Energy provider two has 35% energy renewable sources.

In comes the price.

Now manufacturer one is paying 10% more electricity then manufacturer two. Residents, who also see the difference between the two providers, will also choose the cheaper source (provider two).

Provider two would then get a bigger share of the electricity market in their region. They will also have a greater demand. Provider one, seeing this, will try and also increase their renewable supply to match if not beat their competitor. But will they be able to do it before provider two lowers their emissions first.

Yes. All this investment in sources is a capital cost.

But even BEFORE either company commit toe capital costs, you have one provider, provider one, at a 10% cost disadvantage.

That means any manufacturers sourcing their power from them will incur greater costs. But the manufacturers that are sourcing their power from provider two have a 10% advantage.

That means the manufacturer who has the cheaper electricity will be able to provide a cheaper product and secure more market share. Further, if the manufacturer takes their own steps to reduce emissions in their process by say 2% will be able to increase lower their costs even more.

You can even factor in the method of transporting the goods to the shops. One may be more energy intensive then the other which means the cost is greater then the competitor. It would be beholden to companies to reduce their costs by minimising their emissions or lose market share.

In fact, they may even wear the extra cost to maintain their market share while they upgrade their facilities because their competitor does not need to raise their price as much.

Thats how a market system works.

Further, let us say the wheat biscuit companies make 2 million packets of their product a year.  If their costs go up by 5%, it does not mean every packet of biscuits will go up by 5%!!! IE if they are paying say 1 million in electricity cost now, and after the price moves in they have to now pay an additional say 50,000 dollars, then that money is divided by the number of biscuits they make.  That is the additional cost spread out. This reduces down to under 1% a packet in cost rises, not the 5%.

It would mean that companies that have more non carbon sources of energy will be able to undercut their competitors, and companies that refuse to change will have to increase their prices and hope the customer will pay extra for their product then the competitor.

Again. This is all very very simplistic. There will be other factors. Travel distance, cost of raw materials etc. Also as you can see above each sector has a significant cost. So if you can half your transport emissions, you lower the cost of your product by up to 8%

If you think I got it wrong, please feel free to add you comment.

A. Ghebranious (All Rights Reserved)

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3 Comments
  1. Jennifer Baratta permalink

    Thanks for the information.

  2. Sorta.

    The operational (not capital) cost of the electricity could be sourced reduced by switching to the provider which is providing electricity at a lower cost, but frequently these suppliers are bound by contracts and the exit costs or the associated labour and operational cost with changing providers (and potentially suffering a period where no electricity is provided) is prohibitive. Instead, the logical way the bikkie manufacturer should deal with the operational cost rise due to sourcing dirtier power, is to pass the increased cost onto the consumers of biscuits in the form of more expensive biscuits. This is accompanied with a notice that due to increased operational costs it’s been neccessary to adjust the price in order to keep bringing that great wheaty taste.

    The consumers of the biscuits WOULD be outraged by this, but they are elligible for compensation under the scheme so the increased costs of both their own electricity consumption and the consumption of goods where providers pass on increased opex is offset, using…

    the money gained from the tax.

    Circular argument. The carbon tax probably won’t decrease emissions much. I still think we should do it, but your economics are, in my humble opinion, not quite there.

    • Sure but it is in the interest of the company to minimise its exposure to the tax. Not doing so will bite them when new companies with newer tech and green tech can destroy them. Same with electricity suppliers. Especially if they contracted to supply at a certain price and the new cost reduces what profit they get at that price.

      The more competition, the more they would battle to get their exposure down and therefore maximise profit and market share even at a lower shelf price then their competitor.

      At least, that is how I think it will/should work. If there is collusion between electricity providers though, then all may indeed not reduce emissions knowing no other is and pass on price to consumer, but that will be against the law (if proven) and if a third party enters and does not play their game, then they will be forced to reduce emissions.

      End of the day, the idea is to replace some of our energy supply (the more the better) with renewable but in a way that our production levels are not restricted.

      If we get, nation wide, new renewable electricity suppliers, this will mean business as usual and at lower carbon price. And ALL nations will price carbon. They are now. Ask Qantas why they raised their prices to Europe. It is because those countries impose a carbon price.

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