How to Repeal the Carbon Tax
October 25, 2011
The carbon tax is an economic failure. It is also an environmental failure.
This grand failure comes from the simple fact that while it is enormously expensive, the tax singularly fails to clean up either Australia or the world. In short, it doesn't do the job because at its heart it is merely an inefficient electricity tax.
Instead of cleaning up Australia, under the tax our emissions will go up from 578 million tonnes to 621 million tonnes between now and 2020. In the meantime, Australians will have paid a lot of money for not much effect.
- First, there is $105 billion of taxes out to 2020-21 largely paid for in electricity, gas and diesel price rises.
- Second, there is a further $15bn in direct government expenditure. This includes $10bn of unfunded expenditure to buy shares in speculative energy companies that the private sector will not support. It also includes $3bn in other energy programs and $2bn to close down power stations.
- Third, there is a further $4bn budget deficit in the tax and transfer payments associated with the package in just its first three years.
- And fourth, there is the purchase of at least $8bn in foreign carbon credits to 2020. In 2020 alone, Australian companies will have to purchase $3.5bn in foreign carbon credits on top of the carbon tax.
All up that makes at least $132bn in expenditure out to 2020. After 2020 though, the figures get worse. The government's own modelling shows expenditure on foreign carbon credits alone will rise annually to $57bn or 1.5 per cent of gross domestic product a year by 2050.
This enormous cost comes from the fact that the carbon tax relies on taxing electricity. This, however, is the least efficient way to reduce emissions, as the Nobel economic laureates Finn Kydland, Thomas Schelling and Vernon Smith have concluded.
Indeed, the government's own modelling highlights that the tax will immediately cause electricity prices to jump 10 per cent compared with a "no carbon tax" world. The NSW Treasury estimates the initial effect will be 15 per cent and the Electricity Supply Association says 20 per cent. What is certain is the tax will drive electricity prices higher each and every year thereafter.
The real issue, though, is not whether the tax will lift electricity prices - that fact is settled - but whether lifting electricity prices is an effective mechanism to reduce emissions. Otherwise it is simply pain without gain.
The problem with an electricity tax is it is ineffective on both demand and supply sides.
On the demand side, the government has acknowledged that power companies will simply pass higher electricity prices on to consumers. Electricity, however, is an essential service and therefore largely inelastic for consumers. Indeed, a 50 per cent price rise for NSW's seven million residents across a five-year period produced a bare 6 per cent decrease in per capita consumption. Rather than a radical recrafting of society, small businesses and families simply end up paying higher and higher electricity prices.
On the supply side, the tax is designed to lift the cost of the general energy supply rather than to reduce the costs of renewable energy. However, the gap between the costs of general and renewable energy is so great that the tax doesn't actually change production. That is why the carbon tax in itself is not expected to close down a single power station between now and 2020. Similarly, the tax is not expected to create one watt of additional renewable energy beyond the existing 20 per cent target.
This brings me to the environmental failure of the tax, which is that it raises prices without reducing emissions. Indeed, under the ALP's carbon tax Australia's emissions will go up by 43 million tonnes between now and 2020 and will be almost constant for the next 40 years.
That is why 100 million tonnes of credits will have to be purchased overseas in 2020 alone. Therefore, while the carbon tax raises a minimum of $9bn in 2020, the tax itself delivers only about 40 million tonnes of actual abatement that year. Other measures have to account for 75 per cent of emissions reduction. This means that for the tax itself, there is a staggering $225 cost per tonne of domestic CO2 abatement.
Unfortunately, not only does the tax fail to clean up Australia, it also does very little for the world. In sectors such as steel, aluminium and methanol production, we are simply going to see a shift of production from the Western world to the developing world.
Against that background it is both straightforward and sensible to repeal the carbon tax. This repeal gives certainty for business by applying three principles.
First, the tax can be repealed quickly. In that context the next election will be a referendum on a tax that most people believe has no mandate. If the ALP loses that election it is almost impossible it could ignore such a mandate again. Its present position that elections are irrelevant is by definition unsustainable.
Removing the tax accordingly can be done within six months if the ALP respects the mandate or 12 months if not.
While a joint sitting is not our preferred option, our advice is that if necessary, it can be done in a little more than eight months at a minimum and in well under 12 months practically. In short, the tax can and will be removed early in the life of a Coalition government.
Second, there is no need for or risk of compensation by abolishing the tax. We do not have to cancel or abolish any permits; they remain the property of the business in question. All that happens is that businesses stop having to pay any further tax going forward.
Third, if the carbon tax is defeated it will, in my view, be off the agenda in Australia until at least 2040 and possibly indefinitely. Political memories are strong and will be reinforced by the trend away from a carbon tax in the US, Canada, China, Japan and India.
More than two decades ago I co-authored a thesis on the use of market-based mechanisms to reduce pollution.
While it was not a thesis about carbon pricing or climate change - as some have tried to tell me - it did teach me that you have to choose the right tool for the right problem.
It is precisely because of this work that I believe the right way to address climate change is reverse auctions, which give incentive to find the lowest cost abatement. The wrong way is an electricity tax that drives up the operating costs of the whole economy while failing to clean up the problem.
The Hon Greg Hunt MP is Shadow Minister for Climate Action, Environment and Heritage
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