Emissions trading ‘won’t hurt inflation’

Garry Shilson-Josling | Sydney Morning Herald

The Reserve Bank of Australia (RBA) is confident the government’s scheme to reduce greenhouse gas emissions will not cause inflation to overheat and force it to raise interest rates. Tucked away in the back of the quarterly statement on monetary policy on Friday was an analysis of the likely effect of the government’s Carbon Pollution Reduction Scheme (CPRS). The centrepiece of the CPRS is an emissions trading scheme that will ration the right to emit greenhouse gases. Trading in permits is slated to begin in September 2010. The RBA is interested in the scheme because it will drive up the price of emissions-intensive goods and services as businesses bid for increasingly scarce permits. The desired effect will be to encourage energy efficiency and a switch to alternative energy sources. The undesired effect will be a rise in the general price level. “Assuming an initial permit price of roughly $25 per tonne of carbon dioxide emitted (or the carbon dioxide equivalent of other greenhouse gases, CO2-e), the retail prices of electricity and gas are estimated to increase by around 18 per cent and 12 per cent respectively,” the RBA said. Electricity and gas together account for 2.5 per cent of the consumer price index (CPI). The RBA estimates the first round of price rises will add 0.4 percentage points to the index in the first few quarters after emissions trading begins. By way of comparison, the GST added three percentage points to the CPI over the year following its introduction in 2000 and the spike in petrol prices added 0.9 percentage points over the year to last September. The RBA said it expected price rises from the CPRS after the first round to moderate as permits were gradually rationed, despite some possible volatility now and then.

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