The Australian Finally Gets Real on a Carbon Tax

From the Australian 14th September, 2010

Worried about big slugs? Try a carbon tax
By Michael Stutchbury

TONY Abbott rejects Julia Gillard’s plans to put a price on carbon emissions as a great big new tax on everything. But his populism risks saddling Australia with a crazy quilt of hidden carbon prices that will cost much more to cut emissions, whatever you think of the science.

A general carbon price – most likely a carbon tax – is needed if only to counter the crazy-quilt risk from the balance of power Greens and country independents. Even climate-change sceptic Bob Katter found common cause with the Greens’ Adam Bandt on “clean energy” bush subsidies. And this just follows the precedent of Labor’s green protectionism, including its “green car” subsidies to the motor vehicle industry.

Such crazy schemes all impose a price on cutting a tonne of carbon emissions by lifting the price of energy, soaking up tax revenue or imposing blunt and costly regulations. But these prices are typically hidden from consumers or deflected by the supposed multiple gains of “direct action” on emissions. By contrast, a general carbon price allows businesses and consumers – rather than politicians, bureaucrats and special interests – to reduce emissions at least cost.

Rudd Labor’s meek surrender to the Abbott assault underlines how an explicit carbon price is more difficult to sell politically, even if couched in an emissions trading scheme rather than a straight carbon tax. Yet the resulting investment uncertainty is pushing up electricity prices, perhaps just as much as if a generalised carbon price were in place.

Greg Combet is a sensible choice as Climate Change Minister to pull together a consensus in favour of a simpler carbon tax, rather than Penny Wong’s more complex ETS.

The Greens favour a carbon tax. So now does Ross Garnaut, who has shifted from the ETS after last December’s Copenhagen fiasco derailed any global deal to help Australia buy cheaper internationally traded emissions permits. Garnaut also figures that a carbon tax, implemented by issuing unlimited emissions permits at a fixed but gradually rising price, would avoid the risk of big carbon price swings under a politically contentious ETS. And it would puncture the rationale for crazy schemes.

  • The mandating of 20 per cent renewable energy by 2020 ensures that one-fifth of Australia’s energy use will cost more than it needs to, through the proliferation of subsidised wind farms requiring very expensive transmission lines to far-flung destinations. Without a carbon price, the renewables mandate squeezes out gas-fired energy generation as a more efficient option for reducing our dependence on coal. The Greens want to lift the renewables mandate to 30 per cent.
  • Labor’s $2.5 billion home insulation stimulus scheme shows just how much disaster can be courted by confused objectives. As a stimulus program, it ended up killing workers and burning down homes. The mixed-up objectives helped hide its very high price tag for reducing each tonne of carbon emissions.
  • The same confusion applies to Labor’s “cash for clunkers” campaign promise of a $2000 rebate for motorists who scrap their pre-1995 cars in favour of new fuel-efficient vehicles. In the US, Barack Obama’s $US3bn ($3.2bn) cash for clunkers scheme pulled forward car purchases that mostly would have happened any way. One US study estimates it created less than 3700 auto jobs at a cost of $US91 to $US301 for each tonne of saved carbon emissions. Gillard didn’t seem to comprehend the irrationality of her claim that Labor’s $395 million scheme would save one million tonnes of carbon emissions. That’s a whopping $400 a tonne, paid for by taxpayers and no doubt internally justified as reinforcing Labor’s green car subsidies.
  • Rather than manufacturing protection, Gillard’s promise to Tony Windsor to extend import protection to the ethanol industry for another five years is about rural protectionism. This all started when John Howard caved in to Dick Honan’s Manildra group to provide a one-year ethanol production subsidy in 2002 amid the threat of low-cost Brazilian imports. Now Gillard has extended the subsidy from 2015 to 2020 to get Windsor’s support at a cost of another $140m from the Renewable Energy Future Fund. But a 2008 report co-authored by Centre for International Economics director Derek Quirke found that producing ethanol fuel from wheat required $680 to $790 of subsidy for each tonne of carbon emissions saved. You could get 20 times the emissions reductions by buying carbon offsets on the Chicago Climate Exchange. And the ethanol subsidy threatens to push up feedstock costs for Australia’s beef producers.

As well as the ethanol subsidy, Gillard promised to put Windsor on her new climate change committee, which will get an update from Garnaut of his September 2008 climate-change report. It will also seek to measure the “carbon price equivalent” of post-Copenhagen emissions reduction measures in China and other developed economies.

The story here is that a Kyoto-style “target and timetable” deal for reducing emissions was never going to fly because such binding common commitments would impose very different national costs. China only offered to cut its emissions “intensity” – or emissions per unit of gross domestic product – by up to 45 per cent on business-as-usual levels by 2020.

Yet Australian National University economist Warwick McKibbin calculates that China’s offer implies comparable economic costs – in terms of the hit to its economic growth – as the absolute emissions reductions promised by the US, Europe, Japan and Australia. The implied carbon price for both China and Australia is about $US20 a tonne. This potentially reduces the “carbon leakage” costs on emissions-intensive industries because Australia would not be going alone where it matters.

And, compared with Labor’s ETS plan, the costs of a carbon tax could be eased if it were used to cut other inefficient taxes.

Lower-income earners could be compensated for higher electricity prices by reducing work disincentives as proposed by the Henry review’s income tax and benefits reforms. The Coalition has backed these reforms in principle. A revenue-neutral carbon tax wouldn’t have to be a great big new tax on everything.

And my comment to the Oz online:

Good on you Stutch. Finally a reasoned analysis of the carbon reduction situation without the stupid politics designed to play to the swinging voter and the misinformed. And from the Australian, no less! Imagine what might have been if the Oz took this as their editorial position during the Garnaut period, then the ETS debate and more recently in the election campaign. Imagine if the Oz didn’t give each and every contrarian their “equal time” and a platform for misinformation, as if there were two equal and opposing sides of the debate. We might have ended up with a workable approach to emission reduction coming on stream as the economy picks up (maybe even world’s best practice?). Now who knows when we’ll get any clarity on this issue from either side of politics. Talk about a lost opportunity and the loss of valuable time.

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