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Wednesday, December 8, 2021

Paying fossil fuel producers to store carbon dioxide

The Australian Government and fossil fuel industries have planned for over a decade to have taxpayers pay fossil fuel businesses to store carbon dioxide. 

Discussion on climate policy often raises the possibility of some carbon pricing mechanism. 

The preferred option of the Australian Government - to have taxpayers fund the storage of carbon dioxide - is ignored as though it is unthinkable.

Australia includes Carbon Capture and Storage in the Emissions Reduction Fund
Australia includes Carbon Capture and Storage in the Emissions Reduction Fund

The two different approaches can be easily understood in several other policy areas. 

As an example, consider the meat export industries in two countries - such as Australia and the U.S. 

Assume that beef producers in both countries need identical government-regulated export inspection services to assure the quality of the exports. 

Assume also that the cost of government-regulated export inspection services is identical in the two countries. 

The Australian Government, in line with policy of its economic advisors, considers that full cost recovery is the most rational method of funding the service it provides to beef producers. 

See for instance:

Australian Government Charging Framework

"The Australian Government Charging Framework (the Charging Framework) is a policy of the Australian Government. The Charging Framework covers activities where the government charges the non-government sector for a specific government activity such as, regulation, goods, services, or access to resources or infrastructure."

And the implications of implementing it:

Live exporters facing huge cost surges under Federal cost-recovery plan

The cost of an annual livestock export license in Australia will soar from $25,000 to over $100,000 under the latest round of cost recovery increases planned by the Federal Government.

As it does with other export sectors, the Federal Government aims to recover the full bureaucratic costs it incurs for certifying and regulating the livestock export industry, through a series of fees and charges imposed on livestock exporters.

Every five years or so the Federal Government reviews and updates the rates it charges with a view to ensuring full cost recovery from industry.

Suppose that the U.S. Government does not adhere to this economic philosophy, and provides its beef industry with the same services - at the same cost - but pays for the service from general revenue collected from taxpayers. 

In both countries, the same service is provided, but in the U.S. the cost is borne by taxpayers and so U.S. exporters - who do not bear the cost - do not need to recover the cost from the customers who import beef from the U.S. 

In Australia, the cost is borne by the beef industry. It needs to recover the cost by adding it to the price it charges its customers. 

The Australian beef producers are, as a result, at a commercial disadvantage to the competing beef exporters in the U.S. who are not charged for the service provided by the U.S.Government at no cost to them. 

Now, back to the public "blind spot" on alternatives to a carbon price...

While it may seem obvious to everyone that a carbon price is the way forward, it is only one of two ways to pay for reducing carbon dioxide emissions from fossil fuels. 

With a carbon price, businesses that emit carbon dioxide bear the cost - through that carbon price - for emitting the carbon dioxide, and need to add that price on to the products they sell. 

This puts them at a commercial disadvantage to other businesses that provide alternate products that do not incur that cost. 

This is similar to the example of beef exporters, where one group bear the cost of a service, who are in competition with exporters in another country who are selling a competing product but without bearing any cost for the same service. 

The Australian Government has long planned to allow fossil fuel exporters to avoid the cost of carbon dioxide emissions. 

The most recent and clearest example is the measure announced in October 2021 to give Australian Carbon Credit Units (ACCUs) for carbon capture and storage. 

This measure is only the latest step in a sequence of measures put in place over several decades. Earlier steps were in preparation for regulating and licencing underground storage sites for carbon dioxide. 

Greenhouse Gas titles in Commonwealth waters in Australia
Greenhouse Gas titles in Commonwealth waters in Australia

The most recent step is the concluding step to address commercial viability of carbon capture and storage. It prevents carbon capture and storage being a cost to fossil fuel producers that they will only choose if a carbon price makes it cheaper to store carbon dioxide to avoid paying the carbon price.

Allocating Carbon Credits for storing carbon dioxide results in taxpayers paying for pumping carbon dioxide into the underground storage sites that are being licensed. 

This is like the hypothetical example of beef exporters where cost of the service is the same - in this case, storage instead of emitting carbon dioxide - but the cost is borne by taxpayers and not by the businesses that use the service.