The Impact of Australia’s Carbon Pricing on Transport

By Kym Lennox, Principal Consultant, The Tipping Point Institute*

Australia has finally defined its starting point as a 21st century economy. The competitive dge to provide an improved quality of life is now directly linked to the efficiency of resource use. The metric to measure this efficiency across industry, between companies and countries is carbon.

In about a year, for some in the transport industry, emitting a tonne of carbon dioxide or the equivalent heat forcing potential from other gases such as methane will cost $23. This will have a price effect on electricity; and via the offset of the excise rebates, an effect on commercial use of transport fuels. This will increase costs of transport operation and change the relative costs of fuel alternatives – a result that is intended to be negative and discriminatory in order to change behaviour.

This impact will definitely occur for a carbon price – the question is at what price will the price effect begin to change behaviour? At $23 a tonne, the price shift for diesel is 6.1c a litre. This is a minor impact given that the price of diesel in Sydney has fluctuated more than 23c a litre under the influence of market forces during the first six months of 2011. Considered another way, the carbon price impact on the operation of a Sydney-Melbourne weekday return freight service would be in the order of $300 a week – a reasonable sum, until it is understood that the fuel bill for the cheapest week in 2011 so far would have been close to $6,500 and $7,500 in the most expensive week.

In other words, the existing variables in commercial freight operation far outweigh any impact from the proposed carbon price. In fact, the price would have to exceed $90 a tonne to match the variation in pump prices experienced so far this year. Turning specifically to the transport industry, it is reasonable to consider that pricing carbon is intended to shift behaviour in selecting transport modes (e.g. road vs. rail). Returning to the freight between Sydney and Melbourne, the alternative of rail is four times more efficient than road from a carbon viewpoint. On the face of it, this should mean freight will shift from road to rail under the introduction of a carbon price. However price is not the main determinant in the selection of mode for such a journey. Our analysis indicates that even for those that can shift, the price would have to exceed $60 a tonne for carbon pricing to become a factor in mode selection.

In light of this, the considerable debate regarding the application of the carbon price to fuel seems disproportional. Not only is the impact irrelevant in the commercial sector where it will be applied, but doubly so in the domestic sector where it has been excluded.

The same is true for gasoline, in that to match the variations in pump prices for unleaded petrol that happen every week, the carbon price would have to be greater than $23. To match the variation from the Sydney low of $1.309 in January to the high of $1.541 in April, it would take a carbon price of over $120 a tonne. The result is that at the proposed $23 price, an average tank of fuel will increase by less than the cost of a cup of coffee. So we see that in the domestic sector the proposed price would also have a minor impact.

It is perhaps important to consider why carbon is being priced. Whilst, cynics may suggest it is to feather the nest of carbon traders or justify new bureaucratic empires; most of us accept that carbon is priced so as to create a financial incentive to shift consumption behaviour towards products and services that are less carbon intensive. This lowers the resource intensity within our economy, thus freeing capital for investment to raise productivity. Productivity is the guiding force for long term prosperity. For the transport industry, which contributes near 20% to Australia’s carbon footprint, carbon pricing at $23 per tonne is too minor to drive any change.

So, what transport carbon price would be ‘right’ and would have the desired effect? The key to obtaining any benefit is the ability to shift away from a carbon intensive transport option. In most instances the lower carbon choice is not practically available. For example, for the commuter, a train service often doesn’t exist, is already at capacity, or isn’t efficiently integrated with other public transport services in order to connect the specific origin and destination. That is to say that at almost any price differential, the option to shift from road transport to rail; or private to public on the road is not available.

This lack of choice is a result of an extended period of chronic under investment in transport infrastructure. This under-investment, whilst not planned, has been the result of losing the battle for funds against competing priorities. It might be expected that pricing carbon will improve the relative merit of projects that provide the lower carbon intensity choice. Yet, even if the methodologies to consider the relative merit actually incorporated carbon pricing and risk, $23 a tonne is still far too low to promote a rail project above a comparable road project due to the dissimilar distribution of cost between supplier and consumer in each case.

Potential choices appearing on the landscape for consumers are electric and plug-in hybrid cars. When considering electricity prices, a $23 price represents a near 10 times greater impact than that experienced for petrol. This impact is not passed completely through the supply chain and as such the pricing impact will not be the same between two consumers – the largest consumers may experience near 50% increases while smaller consumers may find increases of less than 10%.

Perversely, due to the high carbon intensity of Australia’s electricity (thanks to the dominance of coal) the carbon price may drive businesses and individuals away from adopting electricity as a transport fuel. This will however be a short term effect, since the much more dramatic impact pricing carbon has on the energy sector will lower the carbon intensity of electricity over the coming decade or so.

All in all, transport industry carbon pricing is not sufficient to cause price effects that will change the consumption use patterns in transport behaviours. However, this does not mean a shift will not occur. The key shift pricing carbon provides, is the integration of carbon measurement into the accounting and reporting of transport services. The changing social values of being sustainable will create a far greater demand effect on transport than price. In the same way that product carbon labelling in British supermarkets has changed consumer’s behaviour, despite often including small increases in price, Australians will change their pattern of demand and their preferences and expectations on the transport sector as the carbon footprint becomes more transparent.

* About The Tipping Point Institute

The Tipping Point Institute (TTPI) is a boutique consultancy that focuses on developing and disseminating responses to the carbon constrained reality of the 21st century. TTPI provides its clients clarity and context for their participation in a sustainable future. Our focus is to:

• Define the targets through what we term ‘carbon economics’;
• Keep on target through programme governance; and
• Support the delivery of outcomes with best practice in procurement, infrastructure utilisation and integrated planning.

Our economy and society is at a tipping point such that the consequences of our actions and inactions will ripple through many generations to follow. TTPI seeks to be an active participant as Australia and the world manage the next stage towards a sustainable future.

Kym Lennox is a speaker at the Lloyd’s List DCN NSW Transport Infrastructure Summit, held on the 5th and 6th October at the Sydney Harbour Marriott at Circular Quay. For more information and the full conference agenda , visit the event website.