The carbon tax bunyip (updated)


When Tony Windsor, MP, said that he would like to see the carbon debate in this country move beyond the words “tax” and the word “lie”, it really struck a chord with me. We seem to be stuck in this Groundhog Day style conversation where each issue is immediately translated into a one line pro or con, regardless how often we have been through the rationale previously. It’s not really a debate; it’s quickly descending into just a vituperative exchange of sound bites. Prominent thinkers in this area can’t have their views expressed without being attacked for their past or current allegiances; rather than actually discussing the contribution that they are making and its relative merits or drawbacks. Criticisms are often made on the basis of the media reaction to a report, rather than on an actual reading of the report itself.

It’s possible that democracy is not the kind of political system that’s capable of delivering true reform in addressing climate change. When you look at what China is doing in their new 5 year plan, it’s staggering how government decree can make such a seismic shift towards a cleaner economy. However, I am reminded of the historic reforms achieved in Australia previously, in the Hawke-Keating years and also the GST under Howard. These were not popular ideas at the time; the political challenge is to deliver true reform despite a level of populist antipathy or worse.

It’s my aim in this blog is to shift the debate to substantive economic analysis. The science is not at issue in this blog. Whether you believe in human induced climate change or you don’t, their is the real prospect of a carbon price and that will be my focus.

To begin with, I can help set the record straight on a number of issues relating to the pricing of carbon. It staggers me how much misunderstanding there is in the community, not just among the public but also from media commentators, contributors of letters to the nation’s papers, and even academics.

The government is not proposing a carbon tax. Rather, it is a fixed price permit system. Whether this is just semantics or a critical difference, well, you can be the judge. A carbon tax, as per an income tax or a consumption tax, is revenue collected on every tonne of carbon emitted, effectively administered by the ATO. A fixed price permit system is a precursor to a floating price emissions trading system (ETS) otherwise known as cap-and-trade. The critical difference is in the administrative machinery; an emitter (I prefer the word “emitter” over the word “polluter”) under a carbon tax must merely remit to the tax office an amount equivalent to the tax (in $/tCO2e) multiplied by its emissions in that period. Under an emissions trading system, an emitter must purchase permits to emit and then remit or surrender these permits to a regulatory authority in that period. Now, the way to implement a fixed price regime is to have the government sell an unlimited amount of permits at the fixed price, and have these automatically surrendered. It has the same effect as a carbon tax, economically, but it is machinery that would be much easier to transition to a floating price ETS.

This is something that a credentialed contributor to the AFR letter section got wrong today. There is no actual defined quantitative limit of emission reductions under a carbon tax or a fixed price permit system; however, the carbon price sends a signal throughout the economy which will affect economic decision-making and reduce emissions relative to the circumstance of a zero carbon price. The actual level of reductions will be unknown. On the other hand, under a floating price regime, such as cap-and-trade, the actual level of abatement is set by government and the price, determined by the market, becomes the dependent variable.

So, yes, a fixed price regime has many of the same effects of a carbon tax, but it is not a carbon tax. It’s interesting to note that this scheme was exactly what was proposed under the Carbon Pollution Reduction Scheme (CPRS): a fixed price period of $10/tCO2e was to be in place for one year (2011/12) and the price was to be floating thereafter. All that’s changed is that the price has gone up (looks like it’s going to start somewhere between $20/tCO2e and $30/tCO2e) and the fixed price period will be for three years or so. The logic of a fixed price period and the criteria for transition to a floating price has a lot to do with the context of the level of co-ordination of international abatement efforts, and is very clearly laid out in the Garnaut Review’s Sixth Update paper.

When voices criticise the carbon “tax”, such as in the Canberra rally yesterday, it’s not like they are arguing that an ETS would be better. I didn’t see any banners saying let’s remove the fixed price regime and go straight to emissions trading! No, they are really saying they are against the carbon price, of any form, be it a tax, a fixed price emissions trading system, or a floating price ETS. If you accept that the science is real and you want to do something about it at least cost to the economy, then the logic inexorably leads you to a carbon price. If you are against a carbon price, you either don’t accept the science (apparently this was the position of much of the rally yesterday) or you don’t accept that market price signals are superior to regulation when delivering public policy (which then has you pitted against decades of reform theory and experience across the globe).

In coming blogs, I will start debunking some of the myths of carbon pricing. The first three that I’d like to address are:

  1. A carbon price will kill the economy;
  2. A carbon price will do nothing to reduce emissions;
  3. Australian efforts in mitigation will do nothing for global abatement.