From David Uren:
The Prime Minister yesterday invoked the need to cut living costs for his decision to replace the carbon tax with an emissions trading system 12 months earlier than scheduled in July next year, bringing an effective 75 per cent cut in the carbon price.
…Mr Rudd stressed that the deal had to be revenue neutral, with Treasurer Chris Bowen saying the household assistance package, which included tax cuts for lower-and middle-income earners and increases in family allowances and pensions, would not be touched by the budget savings.
Mr Bowen said that, as well as helping families, the change was calculated to help business deal with the end of the resources boom.
“We think this is important in terms of supporting the non-mining sector, in getting that investment up, letting manufacturing and services grow, as the mining boom comes to an end.”
Although estimates by the AI Group show that bringing in the emissions trading system early would reduce gross carbon tax revenue by as much as $6 billion, the government would have to spend less on allocating free permits to trade-exposed industries, reducing the cost to about $4bn.
The boost to company profits from the reduced carbon impost would also lift company tax revenue by as much as an extra $800 million a year, suggesting Labor would still have to find about $3bn in savings to ensure the package was revenue neutral.
Mr Bowen declined to say how much it would cost, but conceded it was “several billions”.
This will take some pressure off direct high carbon output businesses. But whether it helps households and businesses exposed to rising electricity bills will depend upon whether power companies don’t just absorb the lower costs in higher margins in anticipation of a higher trading price in a few years. No slam dunk!
If it does succeed in reducing bills then it will also succeed in slowing the shift to low carbon habits and industry. Not a great outcome.
Given the carbon price is a relative pricing mechanism, not a tax, reducing it it won’t be stimulatory for the economy in general over the forward estimates. But it could mean short term stimulus if the cuts needed to neutralise the budget effects are pushed out to 2015/16.
The benefits of this shift are far more political than economic.
