The consensus on putting a carbon price on petrol is that it won’t do a great deal to curb private motor vehicle use. In the scheme of things, six cents a litre won’t make a great deal of difference to people’s driving habits — if you’ve got to drive to work, you’ve got to drive to work. Thus, the omission of petrol from the carbon pricing scheme agreed by Labor, the Greens and the independents won’t have much effect. Even Ross Garnaut suggested the impact be offset by a one-off cut in petrol excise.

That’s the theory. Reality is a little more complicated.

Among other things, the Productivity Commission‘s recent report looked at how effective fuel taxes and biofuels were at curbing carbon emissions from fuel use, and had a go at calculating what different countries’ fuel taxes and biofuel subsidies yielded in terms of emissions abatement.

Biofuel is a complete dud everywhere (except China, due to lack of information), exorbitantly expensive and primarily a tool to protect favoured industries.

Fuel taxes, though, varied in impact from country to country. In the US, fuel taxes yielded carbon abatement at $19 a tonne — making it notionally cheaper than the likely $20 a tonne carbon price Australia would kick off with under the putative scheme next year. In China, fuel taxes yielded abatement at $20-$23 a tonne. But in the UK, fuel taxes only yielded abatement at $130 a tonne — way too expensive for serious contemplation, unless you’re Tony Abbott and think economists don’t know what they’re talking about.

The key, the PC decided, was that in countries with lower fuel taxes, fuel tax-based abatement was cheaper than in countries with higher fuel taxes.

This makes intuitive sense: if petrol prices are low — such as in the US — then even a relatively small increase is going to drive some people off the road at the margins of usage; if petrol prices are high, like they are in the UK, the same sized increase isn’t going to do anywhere near as much, giving you a higher abatement cost. The PC says:

This suggests that, at relatively high tax rates, there can be significant costs incurred reducing an additional tonne of emissions. This suggests that the marginal cost of reducing emissions becomes higher as more emissions are abated (in other words, abatement may be cheaper per tonne at lower levels of the fuel tax than are presently in place).

Where was Australia in all this? Kind of in the middle, like our fuel taxes: our fuel taxes purchase abatement for, the PC calculated, $57-$59 a tonne — making it much more expensive than the government’s initial carbon price, but probably in the ballpark of where it should be if we are going to achieve anything more ambitious than a 5% reduction in emissions by 2020, and certainly cheaper than many of the other abatement or renewables programs we’ve got that cost well north of $100 a tonne.

Business is arguing something different, saying that excluding private motoring from the scheme shifts the cost of reducing emissions onto other sectors of the economy. That’s true, but it’s only really a problem for industries that can’t pass on that cost — other industries such as the road transport industry will pass on the costs to their customer, who in turn will pass it on to consumers. We’ll still pay most of the cost of abatement, it’s just that we won’t be able to see it as easily — just the way the politicians like it.

In foregoing a price on petrol, then, the government is trading off some more expensive, but still plausible, opportunities for abatement for the political benefit of undermining Tony Abbott’s increasingly bizarre campaign against a carbon price. Given how inept this government is, it’s probably not a bad trade-off, especially if it secures independent support for the scheme, but it’s not as simple as it might appear.

Where the government is being eminently sensible is in — as the AFR revealed — imposing a carbon price on business fuel use via a reduction in fuel tax concessions. This is a small start towards addressing one the fundamental problems of an Australian carbon pricing scheme — that it initially will be smaller than the $10 billion+ concessions and subsidies currently built into the tax system that favour fossil fuel use.

A carbon pricing scheme accompanied by a roll-back of at least some of the pro-carbon features of the tax system would provide a double benefit while boosting tax revenue. In that context, the PC review agreed to by the government at the behest of the Greens to investigate shifting fuel taxation to a basis that incorporates emissions intensity will be a useful tool in the long-term fight to decarbonise our tax system.

Business won’t like it, of course. But that doesn’t tell us anything useful about the benefits or otherwise of the carbon pricing scheme.