Dispatches From the Moderate Left

Monday, August 14, 2006

Silly Subsidy

...And, one weak later, Howard looks like he's going to break and cave in to popular discontent on fuel prices with an expensive an ill-conceived subsidy on LPG conversion:
The Prime Minister is today expected to announce subsidies to encourage people to convert their cars from petrol to LPG.
...
But John Howard is set to announce a $1,000 subsidy for motorists to convert to LPG.

The package is also likely to include incentives for petrol stations to install enough LPG tanks to cope with increased demand.

That he apparently stole the policy from Labor is no indication of its desirability.

I argued in my previous post that measures to artificially reduce fuel prices might be superficially attractive but a bad idea because rising prices force people to take into account the true social cost of petrol consumption, primarily greenhouse gasses. Additionally these higher prices will spur the development of alternative fuels which is the only long term solution to a price situation which is fundamentally related to a mismatch of demand and supply of oil as India/China (among others) accelerate their economic growth.

Anyway, that's the argument with respect to petrol and it isn't much different as far as LPG gas goes. It turns out that burning LPG emits less greenhouse gasses per litre than normal petrol, 1.6kg/l compared to 2.5kg/l according to this handy government site. But you have to take into account the fact that LPG engines are less fuel efficient, by approximately 30% according to a RACQ pamphlet. Plugging those numbers into the emissions calculator on the government site I just linked tells me that a car running on LPG emits approximately 15% less carbon dioxide than a standard petrol car.

Now, that's a good thing, no doubt. It also provides an argument for prefferential tax or subsidy treatment of LPG gas on environmental and economic grounds. So what's the problem with this new subsidy? There is already extremely preferential tax treatment of LPG fuel. There is currently no federal excise tax on LPG, which is equivalent (if I read this correctly) to $.125/l or about 25% of the cost of the fuel (if it's at $.45/l). The cynic in me says that the fact that we are almost entirely LPG self-sufficient is probably the true reason for this subsidey, not environmental reasons, but that's neither here nor there. The latest subsidy was actually due to be implemented in 2011 when this concessional excise treatment was to be phased out, but now that it's been brought forward it seems pretty clear that the combination of concession and subsidy is far disproportionate to any environmental benefit flowing from having cars run on LPG.

I think the fact that the environmental arguments aren't even being mentioned in the selling of this subsidy is evidence that they aren't seen as a genuine consideration by the government. Good politics? Probably. Good policy? Not a chance.

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