Will a carbon tax double the price of petrol?

Possible future petrol prices under different oil market/carbon price scenarios (CSIRO)

Tony Abbott made a surprising claim on Sunday that a $40/tonne carbon tax would increase the retail price of electricity by 100%. Fortunately, John Quiggin has ‘done the maths’ on Abbott’s assertion and points out that it would result in a much lower increase in the retail price to households – around 20%.

So let’s look at the likely effect of a carbon tax on the price of petrol. This CSIRO report, Fuel for Thought, estimates that a $40/tonne emissions permit would only increase the retail price of petrol by 10 cents per litre. So the additional cost of the $23/tonne carbon price touted by the Greens would seem to be no more than the weekly fluctuations in price at my local servo!

That’s hardly a great big new tax. But what’s important from a policy perspective is that a price on carbon of this order isn’t really going to have a significant effect on what we drive and how we drive.

As Harry Clarke points out, the demand for petrol is ‘inelastic’ with respect to price – consumption doesn’t go down that much when the price rises. So if we want to encourage more sustainable travel we have to be looking beyond the current limits of the carbon debate because even a price of $100/tonne would increase the cost of a litre by only 25 cents.

While I bagged the Prime Minister last week for the design of her Cleaner Car Rebate and Mandatory Car Emission Standards initiatives, I think she has got the direction right. Too little attention is given at both Federal and State levels to improving the environmental efficiency of cars and vans (as I’ve discussed before).

Perhaps she understands that it’s not enough simply to provide better public transport. A precondition for significantly increasing public transport’s share of travel is that cars must be rendered less attractive – they either have to be made slower, harder to park or more expensive to run, relative to public transport.

Petrol prices US$/litre (95 RON) - Australia in yellow

The reason public transport has such a big share of work trips to the CBD in all our capital cities is only partly because the level of service is very high. Just as important is that traffic congestion in the morning peak reduces the competitiveness of cars.

It can’t just be assumed that the price of petrol will necessarily go stratospheric in the near future and thereby increase the cost of car travel.

As the first graphic (from the CSIRO report) shows, even the US Energy Information Administration’s ‘high oil price’ and ‘slow peak oil’ scenarios do not result in a petrol price that by itself would be high enough to drive really serious mode change in Australia. That would only happen if the ‘fast peak oil’ scenario eventuated, as prices would rise to over $8 per litre.

The second graphic shows that petrol prices in Australia are relatively modest compared to the rest of the world. Whereas the price in Australia in November 2009 was US$1.14/litre (95 RON), residents of Turkey, The Netherlands and Norway were paying more than US$2.00 per litre.

Increasing the price of carbon is a good thing, but more will need to be done to make cars environmentally friendly and to increase public transport’s share of travel.

5 Comments on “Will a carbon tax double the price of petrol?”

  1. Matt says:

    Alan, I agree with you, it should be mandatory that cars are made to be more environmentally friendly, with inefficient cars strictly unable to be registered, and I’d advocate not only for a price on carbon, but also using price to limit demand with road tolling, but I’d not necessarily argue that everyone should then have to use public transport.

    Don’t forget there is another way to get people out of cars, and that is to get them walking and cycling. It’s actually the cheapest to provision for. Roads cost a lot of money. Trains and buses cost a lot of money. Bike paths cost very little. It’s amazing then that pedestrians and cyclists get almost universally ignored. Cyclists and pedestrians care about safety more than the money they’re saving. As you note higher petrol prices don’t translate into much reduced car use.

    I’d fund only the trunk routes of public transport (but really well), and let the leafy bits of the network, like all the 15/16ths empty buses at the ends of the route wither. It’s better to ride an electric bike to a station with secure bike parking and a high level of frequent, quality 10 minute service, then to wait for an hourly bus.

    And that $40 tax on a tonne of carbon is going to make my 80km of charge on my bicycle cost an extra 5 cents.

  2. […] We don’t, for example, know the timing or the extent of future price changes. As I’ve noted before, even a $40/tonne price on carbon will only increase the price of petrol by 10c/litre (the price […]

  3. […] won’t however go far enough, as I’ve acknowledged here. Even a $40/tonne price on carbon will only increase the pump price by 10c per litre, not enough by […]

  4. […] It might be argued that a price on carbon would render road pricing unnecessary, however there are two reasons why this seems unlikely. First, a carbon price won’t do anything about congestion. Second, even a $40/tonne price on carbon will only increase the price of a litre of petrol by ten cents. […]

  5. […] a $25/tonne tax is generally estimated to increase the price at the pump by around $0.06 per litre. The CSIRO calculates that even a $40/tonne tax would only raise the price of petrol by about ten cents per […]

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