There’s a notion going around that an Australian carbon tax will raise more tax in its first three months than the EU ETS has generated in six years. Mr Seamus French’s column in The Australian on Monday included this idea. No numbers have been put forward to justify this assertion, and it can’t go unchallenged.
Firstly it should be stated that the goal of such schemes is not, and has never been, to raise taxes. Nor should the level of tax being raised be used as a measure of effectiveness. The same environmental effectiveness in terms of carbon abatement would result from an emissions trading scheme (ETS) with full allocation of permits (no auctioning) as a carbon tax (or fixed price permit system) at the same price. The ETS would raise no tax but the fixed price scheme or tax would raise the maximum amount possible. Different tax outcome, same abatement outcome.
Secondly, let’s look at the numbers. Australia’s emissions right now are about 580MT. With agriculture initially excluded and other elements being “non-covered” we could estimate that the initial liability in aggregate of emitters would be around 450MT. At a carbon price of $25/t, that’s just over $11 billion. Looking at the EU ETS, the World Bank tracks the carbon markets globally and reports that the EU ETS represented US$100b in spot/physical carbon trade in 2008 and US$118b in 2009.
So, Australian ETS for 3 months = $2.8 billion; EU ETS for one year= over $100 billion. Go figure.
Now, if it is true that the EU ETS has collected less taxes, it’s because the first two phases of the scheme (Phase I was 2005-2007, Phase II is 2008-12) were characterised by almost full allocation of permits to emitters. With next to no auctioning by government, there’s hardly any taxes raised. Note that this is recognised as one of the main design flaws of the early phases of the EU ETS, and accordingly, Phase III (2012-2020) includes full auctioning for the power generation sector from 1 January 2013. Under full allocation, emission intensive trade exposed (EITE) industries suffer the full consequences of power prices going up but have no offsetting scheme for compensation to address carbon leakage. Similarly, households must face the full impact of prices going up without any offsetting compensation. The distribution of equity in this scheme has vastly favoured the incumbent emitters. No new proposed ETS anywhere in the world has, since the EU ETS experience, been proposed with full allocation of permits, with most now favouring a large proportion of auctioning.
Thirdly, Mr French uses the CPRS framework to assess the potential treatment of EITEs under a carbon price. He claims that “most Australian exports will be paying the highest carbon costs in the world but without any ability to pass on those costs”. While that may be true to varying extents, it ignores the fact that it provided the basis for EITE compensation under the CPRS in the first place. The CPRS framework accepted that if carbon costs were levied but they couldn’t be passed on, and they represented a substantial impact on a business activity, then there was a case for allocation of permits to address the impact on competitiveness. Such compensation effectively addresses the risk of carbon leakage and therefore mitigates the risk of wisespread job losses that many naysayers are suggesting.