Stimulating energy innovation

Toyota Prius – not as green as it seems, but the forthcoming “plug-in” one might be

If there’s a certain bet flowing from last weekend’s Gippsland by-election result, it’s the proposition that any inclusion of petrol in Labor’s emissions trading scheme will be carefully structured to avoid any adverse price impacts at all in the short-medium term (or that they’ll be fully compensated for everyone). Voters have signalled that anything else would consign Labor to a single term in office, a fate Kevin Rudd will do almost anything to avoid.  However that means the scheme will also have little or no tangible effect on people’s carbon-emitting behaviour in the short term.  No pain no gain as they say.

Quite frankly though, until people actually have viable alternatives to their current behaviour no pain is justified.  If there are no viable alternatives to using private cars with internal combustion engines as our predominant method of urban transport, an emissions permit system or additional tax on petrol is nothing more than a revenue-raising device, or at least an expensive and fairly pointless revenue-churning exercise if everyone is fully compensated.  On the other hand, putting in place a revenue-neutral and fully compensated system would at least make some limited long-term sense, because rates could be cranked up at short notice to behaviour-changing levels once viable alternatives really exist.11. KP: Moreover, there really isn’t a need for a new behaviour-changing tax on petrol as long as market prices remain at their current levels for other reasons.  What’s needed is something that convinces people that the higher prices are permanent, because that’s what will induce lasting behaviour change.  Thus an emissions scheme for petrol expressly designed to kick in if/when market prices fall would send exactly the right message (though not electorally). []

At the moment, public transport systems in our major capital cities are already running at or near capacity in the absence of substantial new capital spending, so most Australians don’t genuinely have the option of switching from car to public transport.  Moreover, lower carbon-emitting private transportation options also aren’t readily available.  Hybrid vehicles like the Toyota Prius arguably emit a little less carbon in operation, but many argue that this advantage is negated by significantly higher carbon emissions in the production process than conventional internal combustion vehicles.  And even the operational advantage is disputed:

Jay Nagley, publisher of Clean Green Cars, said: “People may be surprised to learn that hybrids are no better in the real world than diesels, but our tests confirmed what we had long suspected.

“Hybrid technology offers the prospect of real benefits, but only with the next generation of plug-in hybrids using more advanced lithium-ion batteries, which are expected from 2010. Current models only confer dinner-party bragging rights.”

Moreover, as I discussed in a recent post, the way larger Australian cities treat cyclists means that leaving the car at home and using the treadly instead is an option only for the young and courageous.

Is there anything constructive that individual governments could do in the meantime (in the absence of a globally agreed carbon emissions trading scheme that would avoid drastic local competitive disadvantage)?  I think the answer is yes.  I don’t see any obvious reason why the Australian government should not immediately announce a 50% reduction in company tax on profits generated from the first seven years of sales of any locally developed fuel, power generation or transport propulsion technology that delivers substantial savings in carbon emissions over current technologies, as well as extended profit retention as long as profits are invested in further research and development of carbon-reducing energy-related technologies.  There are lots of potentially promising ideas out there, not least in battery technologies.  But a tax break of the sort I’m suggesting wouldn’t involve government in picking winners (individual winners anyway), nor can I immediately see any other major objection.   Australia could quickly become a world leader in energy technology innovation.  It’s a more targetted version of the way Ireland has achieved such remarkable economic success over the last 15 years or so.22. KP: Moreover, if it proved as successful in stimulating new investment as I suspect it would, we could adopt the full Irish model and move to a general 15% corporate tax rate. []

Then again, I’m not fit to tie an economist’s shoelaces so I might be missing some glaringly obvious problems that would make this a really stupid idea.  And what better way to find out than by posting the idea here at Troppo where it’s sure to be dissected by some of Australia’s leading economics brains and ripped to shreds if defective? 

About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.
This entry was posted in Economics and public policy, Environment, Politics - national. Bookmark the permalink.

41 Responses to Stimulating energy innovation

  1. TerjeP says:

    I think plug-ins will be game changing technology but only when the batteries are ready. The nanowire battery innovation out of Standford that has enabled a 8-10 fold storage capacity in Lithium batteries (under lab conditions) is extremely promising in this regard. I’m guessing that the pure internal combustion engine motor vehicle will face real competion before 2020 even without government incentives.

    In terms of CO2e emissions per Joule of energy, electricity from fossil fuels is comparitively low taxed whilst Joules from petrol are very heavily taxed (ie fuel tax). There is a lot of scope to apply a broad carbon tax whilst also reducing the total tax burden on petrol. We could tax emissions harder and more evenly and also reduce the price of petrol. John Humphreys published a paper on this point late last year. If Kevin Rudd cares to read it then he should find that he can have his cake and eat it. Unless he is merely concerned with symbolism.

  2. JC says:

    Europe has had a cap and trade system for several years now and to be honest we should have seen some innovation by now even if it was down the pipeline (petrol is around Euros 2.8 a litre). I must say it’s been underwhelming to say the least. The only innovation that’s come out are slightly more efficient diesel engines.

  3. NPOV says:

    “Moreover, lower carbon-emitting private transportation options also arent readily available”

    I’d question this. If everyone bought the most fuel-efficient vehicle available currenly that would reasonably satisfy their space needs, emissions from private transport would drop substantially. Especially if they also adjusted their driving habits (this includes both better trip planning, and better attention to acceleraion & decleration).

    As for the carbon-intensive nature of manufacturing hybrids – I can see this being a problem in Victoria where the electricity comes from brown coal, and manufacturing quantities are likely to be on the low side. But aren’t most manufactured currently in countries that use a fair bit of nuclear power?

  4. Mark Hill says:

    I’ve read recently innovations in solar cells have made them up to three times more efficient. So about 45% efficiency can be achieved. Do we need to subsidise something that looks like it will be commercialised eventually anyway?

    As a bizzare hypothetical, shouldn’t we develop the Antarctic to develop wind power?

    As for Ken’s idea:

    It’s better than Rudd’s.

  5. woodsy says:

    I have suggested in my submission to the NT Government discussion paper on climate change that the answer lies in using biodiesel made from a variety of non-food oils (oil producing trees and algae) as a ‘transition’ fuel until the technology of using lignocellulosic ethanol becomes widespread.

    I’m not sure why but the idea of producing electricity from brown coal to run cars doesn’t seem sensible to me.

  6. Tom N. says:

    If there are no viable alternatives to using private cars with internal combustion engines as our predominant method of urban transport, an emissions permit system or additional tax on petrol is nothing more than a revenue-raising device, or at least an expensive and fairly pointless revenue-churning exercise if everyone is fully compensated.

    On the contrary, Ken, we have already seen a significant shift within the car market away from large cars to smaller cars, as a result of increasing petrol prices. Taxing fuel/emmissions more will further accelerate that shift – (and cause the recalcitrants that won’t shift to pay for their pollution, which ticks the equity box in my book).

  7. Niall says:

    according to an interview I heard this morning, the New Zealand cap_and_trade carbon model, which includes petrol, added less than 10% to the average cost of fuel per litre. Of course, they drive much lesser distances than we do.

  8. NPOV says:

    Tom, you’d think so, but 4WD sales are still growing rapidly.

    Realistically we need a much bigger price signal to affect the sort of buyers that think nothing of buying vehicles that average 12L/100km even with petrol at $1.70 a litre. I think there’s surely an argument for placing some of the price signal on the vehicles themselves, rather than purely on the fuel, given that placing it entirely on the fuel has some pretty regressive consequences, especially for those that can’t afford to replace their current vehicles.

  9. TerjeP says:

    Niall – I’d hazard a guess that they don’t. Australia is highly urbanised. More so that the USA. And probably more than NZ.

  10. Patrick says:

    Personally, I can see that there would be a hell of a demarcation problem, but that may not be a fatal objection. You couldn’t imagine (well, maybe you could) what kind of energy and money is already spent on transfer pricing disputes about whether this cost is attributable to those sales, etc, whether this income is connected to those costs or that. This would appear susceptible to the same thing.

    The primary problem though would appear to be that it is distortionary – but in the context where you are suggesting this as a ‘better’ distortion, maybe it is. I don’t know the answer to that.

    But arent most manufactured currently in countries that use a fair bit of nuclear power?

    I believe the primary objection is to the production of the raw materials, which would be very rarely nuclear-powered.

    Btw, I guess, NPOV, you are less sceptical about diesels now?

  11. melaleuca says:


    As Tom suggests, people are already switching to smaller cars and I suspect making less car trips. I’ve personally done both- trading down to a smaller vehicle and using the car 3 or 4 times a week rather than every day.

    Another point you overlook is this the enormous scope for reducing the weight of vehicles. Currently passengers only account for about 3% of the moving vehicle’s weight. Carbon composite fibre construction is one possibility, as per the Hypercar-

    From memory I think Rob Merkel at LP blogged on the Hypercar concept.

    ps. Hillbilly, were you serious about windfarms in Antartica?

  12. …Im not fit to tie an economists shoelaces…

    I think they all wear Grey Velcro Slip-Ons

  13. NPOV says:

    Patrick, what makes you think I was “skeptical” about diesels?

  14. Niall says:

    TerjeP…..are you saying kiwis don’t drive as far, per capita as we do, or their carbon model won’t add less that 10% to the cost of their petrol?

  15. Mark Hill says:

    I am slightly serious about this Mel. Note it was a question, not a recommendation.

    I don’t know if it is doable. But there is a lot of wind on the northern edges of Antarctica.

    Research stations already use wind power. Transmission efficiency is the problem, the infrastructure is easy enough to lay down.

    If any company wants to do it, I think we shouldn’t get in their way. It might be the way to save the Antarctic after all.

  16. Tom N. says:

    As the PC pointed out in its recent auto modelling exericse, NPOV, there are several countervailing trends in the marketplace. Still, a key trend has been towards greater fuel efficiency. Moreover, as I mentioned, there is value in making those who insist of polluting the planet pay for doing so. As for the petrol tax being regressive, I would be interested in any information to back this view up (but, even if it was, there are surely better ways of addressing vertical equity than through pollution subsidies).

  17. Mark Hill says:

    You’re right Tom. Income tax cuts and compensation in welfare payments.

  18. Ken Parish says:


    Your point about rorts and transfer pricing is well made. I know from my own professional experience with advising mining prospectors negotiating joint venture agreements that it’s very easy for big corporate miners to manipulate internal pricing transfers between associated entities to ensure that a ventue never makes a profit. There are various ways to overcome that, but it’s a real issue.

    Here, the federal government would be creating a situation where the incentive is (in effect) to achieve the opposite. Mining companies want to ensure that a profit from any joint ventured mine is transferred away from the joint venture into associated entities they own solely. An energy company aiming to maximise advantage from a targetted lower corporate tax rate would do the opposite. It wants to shift costs away from the energy venture so that most of the profits are made by that energy venture, because it attracts a tax rate of 15% versus the normal 30%.

    There would certainly be ways in which the ATO could make it harder to achieve that (as it already does with transfer pricing) but it’s nevertheless a real potential drawback of my proposal, though only depending on your viewpoint about the ultimate objective. Fortunately my real view is that the company tax rate generally should be reduced to 15% and that this would have even stronger beneficial economic effects than a targetted regime (as it has in Ireland). Thus I don’t really have a problem if companies manage to shift costs so that a higher than anticipated proportion of their income is taxed at 15% and then retained and reinvested. That would actually be a positive outcome. I reckon any short term losses to revenue would be more than compensated by higher economic growth.

  19. Jennifer says:

    At the moment, public transport systems in our major capital cities are already running at or near capacity in the absence of substantial new capital spending, so most Australians dont genuinely have the option of switching from car to public transport.

    I agree with the commenters above that there are simple behavioural changes that don’t involve public transport usage – walk for kilometre trips, buy smaller cars etc. But also there are bigger changes if petrol is expensive enough and clearly it’s going to stay there. Move house to somewhere closer to work/school. Change your job to something closer to home. The trade off between a high paying job and the commute will change.

    If people believe that petrol prices will stay high forever, those changes will start to be made. For myself, we live in a spot where our kids have to be driven to school (too young for public transport, and we chose a school too far to walk). We could move house closer to school, but still with public transport to work. Right now, we don’t, because we like our current house, and the price of petrol isn’t (yet) painful enough.

  20. KP – I didn’t think there was consensus on the drivers for the Celtic Tiger growth. I seem to remember that some attributed a substantial amount of the euros sloshing around to Irish ability to make the most of EU handouts. Others to the demographics and education as well as the reverse diaspora as both a cause and effect of the boom.

    I’m not dismissing other factors such as the company tax rates but my, limited, understanding that the burst is (was?) not due to any single factor.

    Given that a fair few of our energy suppliers are transnationals I’d reckon that transfer pricing shennanigans would be a problem.

  21. NPOV says:

    Tom, sure, I’d accept that any regressive effects of carbon pricing can in principle be offset by changes in the tax & transfer system, but what if it turned out that, for instance, to reduce transport emissions at the rate necessary to achieve a 60% reduction by 2050, you could either do it by:

    a) pricing petrol at twice what it is now


    b) pricing petrol at 20% more than it is now, but charging 20% extra taxes on fuel-inefficient vehicles

    The latter is surely more preferable, and could even be justified by the fact that ulimately most vehicles are less efficient because they’re heavier, and heavier vehicles cause more wear & tear on roads. They’re also taller, blocking more of other drivers’ fields of vision, and tend to do more damage in accidents etc. etc.

    (BTW, we drive a heavy, fuel-inefficient vehicle – if we had had to pay 20% extra than we did, I might have had more luck talking my wife out of it! Fortunately we only drive it between 50 and 100km a week – sometimes considerably less).

  22. Patrick says:

    Ken, I think that’s a great way of looking at it. On the whole I would certainly support this idea for the same reasons as you.

    One other problem that occurs to me is that some foreign countries (Japan, Germany and the US) may regard this as an unfair tax break and seek to penalise their companies who take advantage (ie by taxing them on those profits in their home country as well).

    The other disadvantage would be that the tax saved might just mean a lower foreign tax credit for (particularly US corporations) – and no further investment in Australia. However, I would expect that this would be at least balanced by an unwinding of corporate HQ current profit-shifting to Singapore etc.

  23. TerjeP (say tay-a) says:

    Here is a link to the paper by John Humphreys which shows how a carbon tax can be implemented to reduce CO2e emissions whilst also reducing the price of petrol:-

    There is still time for Rudd to read it, see the light and come out a hero.

  24. NPOV says:

    Terje, you forgot to mention that it will simultaneously end unemployment, rid us from the shackles of tyrannical government, and usher in an era of libertarian utopia.

    Oh wait, was that the 30/30 policy?

    (Seriously, I actually think John’s proposal is sound enough, but lots of people have proposed similar ideas, and governments so far have seemed underwhelmed by the idea).

  25. Alphonse says:

    Why not rigorous user pays in the transport/energy sector?

    – address traffic with road use pricing
    – address CO2 emission with a tax on fossil fuel (equal rate no matter whether coal, oil, whatever)
    – address road wear with a tonnage/mileage-based charge (bearing in mind that wear varies as the 4th power of axle weight)
    – address third party insurance with a mileage-based charge plus excesses for the accident-prone
    – address administration costs (including provision of anonymised GPS for above charging purposes) with a flat registration fee

    No particular faith in today’s rigged markets, or a market semi-unrigged by carbon pricing alone, but a rigorously unrigged market capturing all externalities would go some way to doing the job.

    Compensatory measures should also start with removal of adjustment disincentives. Nobody should pay stamp duty when they trade a public transport poor residence for a public transport rich one (or perhaps never under a price ceiling). FBT should not favour employer-subsidised car costs over employer-subsidised public transport costs.

    None of this is to deny that positive compensation – decidedly not by way of car use subsidy – will be needed for the poor stuck in the unserviced burbs, or that crash investment in mass transit and rail freight funded by energy taxes is not essential.

  26. NPOV says:

    Alphonse, they’re all pretty sound ideas that I’ve advocated before.
    Of course at some point the administrative costs might outweigh any economic advantages. However technology is pretty good at measuring simple things like weight and km-driven and tying it to automatic payments.

    I’d also like to see private motor vehicle insurance providers offer per-km-based insurance. I believe they do in the UK.

    All this could add up to it being considerably cheaper to buy a compact fuel-efficient vehicle and use it only for difficult-to-substitute trips than it is today, but considerably more expensive to buy a large fuel-inefficient difficult and use it for everything (including driving the kids 5 minutes to school).

    The primary concern might be the effect it would have on businesses that currently rely on heavy road-based transport that don’t have viable alternatives. Making business-usage exempt would be foolish, as people would inevitably find ways of classifying most of their driving as for business needs, and at any rate, there are plenty of opportunities for businesses to reduce their fuel usage too, given the right economic incentives. But it should be possible to avoid the scenario of putting large numbers of companies that have no realistic choice other than to truck goods around out of business.

  27. NPOV says:

    (oops, that’s should be “fuel-efficient vehicle” not “fuel-efficient difficult”)

  28. Tel says:

    Interesting that no one considers motorcycles and lightweight motor scooters to be viable transport. When you look on the road, you see probably 80% of cars only carry one person. Even on roads where there is a T2 lane, mostly that lane is empty. If you are only going to carry one person, why have seating for five plus a whole heap of steel to lug around? We already have excellent fuel-efficient technology that you can buy cheaply and have done for years so why is no one using it?

    The answer is that people feel safer on the road with all that steel around them. The reason they need such protection is because of all the other people on the road driving heavy vehicles with poor visibility and little or no interest in the survival of other motorists. Then one person buys a massive 4WD SUV and becomes the biggest thing on the road and the person next to them feels threatened so they also buy a big SUV to feel important again. Thus, there is a high perceived value in the safety and self-importance that comes with being the biggest and heaviest thing on the road — much higher than the cost of petrol.

    I would think that this is a classic tragedy of the commons. The only way to fix it is to directly tax vehicles for the space they occupy on the road and the proportion of danger that they impose on other road users — or much higher fuel prices.

  29. NPOV says:

    Tel, yep there was a survey about that not long ago. Something like 75% of U.S. drivers said they would be happy with a smaller car – but only if everybody else drove smaller cars. No-one’s willing to be the first to change.

    It’s not just the safety either, it’s the supposed ‘prestige’ attached to being able to afford a bigger vehicle.

    FWIW, I read recently that scooter sales have been rising pretty dramatically in Australia. In many European cities they are almost as common as cars of course.

  30. Mark Hill says:


    What was the point of 24? You can see the empirical merit of a carbon tax and income tax cuts and the 30/30 but you are prejudiced?

    Thanks for sharing.

  31. NPOV says:

    Mark, it’s because I see merit in such plans that it bothers me that many LDP-types seem to think they are miracle policies that governments would be mad not to adopt. If I thought they were worthless I wouldn’t care.

  32. Mark Hill says:

    There are no miracle policies. Just less bad ones.

  33. Mark Hill says:

    But that said, there are some shocking policies. Ours is unremarkable. Others are simply disasterous.

  34. Patrick says:

    Of course at some point the administrative costs might outweigh any economic advantages. However technology is pretty good at measuring simple things like weight and km-driven and tying it to automatic payments.

    Every German truck participates in such a scheme. Amongst other things they monitor driver-road time for compliance with regulations, but they also capture tolling details.

    I hate greenies (as you may have noticed) but I would approve of such a scheme, provided the revenue offset tax cuts and the bottom quintile was fully compensated. I would expect that the charges could be designed so that 100 per cent of the necessary revenue could be provided by the top 80.

  35. NPOV says:

    What is it exactly that you hate about me then, Patrick? ;-)

  36. Hal9000 says:

    Since most Australian cars drive most of their km in cities with commuters behind the wheel, what about a congestion charge a la London? The funds so derived could be used to improve public transport by, for example, lowering fares, providing secure park-and-ride services, commissioning more trains and buses, extending rail and tram lines etc. And improving cycle infrastructure.

    It’s clear that a pricing signal of this sort works – in Brisbane the council and government have reduced the availability and jacked up the price of car parks for commuters – $30 a day now at South Bank – which has the side benefit of meaning that short-term parking is now available. Unfortunately the creaky public transport system is unable to cope with the extra demand and the parking policy generates no revenue for new infrastructure. It also doesn’t address the executive types in their V8s and SUVs who get to park in their buildings at corporate expense by making them pay. A congestion charge would only apply in peak hours, so people could still drive to shop or meet appointments in the CBD – uses for which cars are well suited – without incurring it.

  37. Mark Hill says:

    But will the users of public transport pay for their congestion?

  38. NPOV says:

    Fair point – except that public transport is generally scheduled and predictable in advance. Still, I wouldn’t have any issue with buses and trams having to pay congestion taxes.

  39. Tel says:

    Let’s do a few numbers. Take 100 SUV’s with a (generous) average of 1.5 people per vehicle (that’s 150 people) and put them into buses. So we could fit 50 people into a bus, but that gets uncomfortable and probably not realistic when you think that any public transport system has to run some empty seats around, so let’s fit 25 people into a bus. Now what causes more congestion, 6 buses or 100 SUVs? You can shake those figures around a bit but public transport is always going to come out more efficient.

    My real issue is that we have this constant hype about innovation. Innovation is the powerhouse of Capitalism. Innovation is what creates all the wealth, blah, blah, blah. Yet here we have a real world problem with well understood, well researched and well established solutions that already exist. We don’t need any innovation (certainly not from an Engineering or Physics perspective). Sure the nanowire Lithium sounds interesting (sounds flammable too) and sure you can keep squeezing more efficiency out of a solar cell (up to the thermodynamic limit) and there’s supercapacitors, engine management, regenerative braking and all that good stuff for research — all pointless if people are simply unwilling to actually use it.

    As for viable alternatives, you have to look at it from a large scale point of view. Yes, our public transport systems have existing bottlenecks but no, the individual commuter really can’t be responsible for ironing out those bottlenecks. Only those in a position to manage the system at a reasonable scale have the ability to improve the capacity, and only then if the political incentive is there to do so.

    For example (again, a Sydney example), the new Winsor road running Northwest from the city has a fully separate parallel road (called “T-Way” officially and “MT-Way” unofficially) purely built for bus transport. However, a bus runs past only every 20 minutes or so, meaning that about 99.95% of the time any given piece of that road is completely vacant. Strangely, you would think that someone spending a large amount of money on a strip of road would also spend money on something to drive up and down that road. Instead they spent some millions on an “innovative” ticket system (to replace the perfectly functional existing ticket system) and then discovered that the old ticket system actually worked and the new one didn’t.

    In a nutshell: you can’t solve bad management by throwing more innovation at the problem and all the technology in the world won’t change the attitudes of people who aren’t interested. Our obsession with innovation is fundamentally an exercise in procrastination while we hope that some boffin will magically fix our social problems.

  40. Just Me says:

    NPOV said:
    FWIW, I read recently that scooter sales have been rising pretty dramatically in Australia. In many European cities they are almost as common as cars of course.

    Sales of scooters and motorcycles have been rising about 25% a year for some time in Oz, and many other countries are experiencing similar or higher rates.

    For liquid fuel efficiency (fuel consumed per kilometre per commuter), they are the hands down winner. They also make very efficient use of road and parking space.

  41. Patrick says:

    Only those in a position to manage the system at a reasonable scale have the ability to improve the capacity, and only then if the political incentive is there to do so.

    Hmm, can’t think where that’s leading..

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