carbon tax
7 Mar 2011
Call A Tax A Tax
Enough with the semantics! Let's stop pretending it's not a tax and start looking at whether the government has got the details right on their proposed carbon tax, write Anna Samson and Akshay Shanker
Wayne Swan is still trying to convince us that the federal government’s proposed carbon tax is not a tax.
Whether Swan’s comments are deliberately obfuscatory or simply reflect a latent wish that Treasury had dreamt up a decent euphemism for the policy is anyone’s guess — but there’s no squirming out of this one: a carbon tax is most definitely a tax.
In this respect, Opposition Leader, Tony Abbott is correct. A tax is a tax is a tax, even when it is levied on business rather than collected from consumers at the checkout or deducted from employees’ pay-packets.
Here’s the rub. The carbon tax will undoubtedly be passed on to Australian consumers. If this weren’t the case, then the carbon tax would fail the first test of an economic policy designed to address climate change. The purpose of the tax, after all, is to influence production and consumption patterns away from perpetuating carbon-intensive industries and toward supporting cleaner, greener manufacturing processes and service delivery.
The more pertinent questions are whether or not a tax is the best policy instrument to achieve this goal and the extent to which it will affect our standard of living.
The net "costs" of a carbon tax will depend on the flexibility of production in the Australian economy, in particular, the ease with which we are able to find substitutes for carbon and develop methods for using carbon more efficiently. The process of reducing our reliance on carbon (or changing any production method for that matter) is what economists refer to as "innovation" and comprises developments in both technology and production know-how.
If innovation holds the promise of delivering good substitutes for carbon then a tax on carbon will encourage business to invest in these new technologies. This is because businesses will be able to maintain their profit margins while replacing their carbon inputs with alternatives. In this case, the costs of a carbon tax may be quite negligible. There is some evidence to suggest that it is possible that our standard of living may in fact increase as investment in research and a new technology stimulates economic growth.
On the other hand, if innovation can at best only deliver poor substitutes for carbon, then a tax may reduce incentives for business to invest in these new technologies. In other words, if business can’t find a good substitute for carbon, a carbon tax will be costly for consumers because the most efficient production methods will remain carbon-heavy ones and the tax will have merely ramped up their cost.
So which will it be? Innovation is a stochastic beast and while its trajectory may be roughly discernible, its end points tomorrow are, almost by definition, unknown today. However, even economic models adopting conservative assumptions about new technologies suggest that a carbon tax to ensure a less than 1.5 degree rise in global temperatures will only shave 1.6 per cent off global economic output.
The assumption underlying this analysis is, of course, that there is no inherent value in moving toward a less carbon-intensive production and consumption cycle. As a society we may decide that climate change poses such a big threat to our standard of living and therefore that any costs associated with reducing carbon emissions are worth it as we re-envisage how we live and work.
But it’s not good enough to implement a carbon tax that is merely likely to promote a reduction in carbon consumption while enabling us to maintain our standard of living at or close to present levels. We need to be reasonably certain that the tax will be better at achieving this outcome than other mechanisms.
Economists support a price on carbon because it creates a clear incentive to reduce emissions. Failing to price carbon while simultaneously subsiding energy-saving technologies may actually lead to increased emissions. This is because energy efficiency doesn’t replace carbon, it merely makes it cheaper to use. Unless subsidised research and development yields a complete substitute for carbon and it is cheaper than existing carbon-intensive production methods, a tax on carbon will still be necessary to reduce emissions.
In the public debate, the most competitive economic policy alternative to the carbon tax is an emissions trading scheme (ETS). While a tax merely puts a price on pollution and theoretically creates an incentive to reduce polluting, an ETS caps the amount that businesses are collectively sanctioned to pollute by issuing "pollution permits" that can be traded between individual businesses and on financial markets.
Even if we put aside the environmental justice critiques of emissions trading schemes, the economic arguments against ETSs and in favour of pollution taxes are compelling. Firstly, an ETS creates extreme volatility in the price of permits (and thus in the price of pollution), generating uncertainty for businesses and making investment decisions more precarious. The US sulphur dioxide trading scheme is a case in point.
Secondly, while an ETS establishes a market with the potential for attendant trading bubbles, a carbon tax allows the government to raise revenue by taxing a so-called market failure — otherwise known as a social "bad". This provides the government the opportunity to reduce taxes on income or profits, thereby increasing overall efficiency in the economy.
Thirdly, taxes are easier to administer than trading schemes. A smaller bureaucracy means less risk of government philandering, market manipulation or cronyism in permit distribution.
Finally, setting a discernible price on carbon by way of a tax improves efficiency of production both within Australia and relative to the rest of the world. An ETS is predicated on quotas. It is a difficult political process to allocate initial quotas across regions and industries in a way that is fair, efficient and environmentally sustainable. A tax, however, creates a common price for polluting, promoting maximum reductions in industries and regions where it is most efficient to do so.
No economic policy on its own can ensure a shift to less carbon-intensive society. Given that the vast majority of Australians support doing something to mitigate climate change, the Treasurer would be well advised to abandon false semantics and to defend the carbon tax for what is: the most effective economic policy instrument we have to promote the reduction of emissions.
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Great article, though I will point out that:
1: the technology already exists to move australia to a low-carbon economy, and is being utilised around the world: we don’t have to wait for innovation to get mature technology which is commercially available such as concentrated solar thermal power towers, which can provide baseload electricity more efficiently than coal.
2: the most efficient mechanism (or set of mechanisms) to reduce global emissions is a combination of a price on pollution (or carbon tax, as it were) and feed-in tariffs, to incentivise the production of energy through low-carbon means.
Details can be found here at www.beyondzeroemissions.org
Beyond Zero Emissions have formulated the Zero Carbon Australia 2020 plan, which proves that Australia can reach 100% renewable stationary energy within 10 years, at an extremely low cost to the consumer.
@Dr_Tad — http://left-flank.blogspot.com/
With respect to the authors of this article, their conclusion that “the most effective economic policy instrument we have to promote the reduction of emissions” is an odd one. A carbon tax, while almost certainly better than a cap & trade measure, is still a highly indirect form of pressure to promote economic restructuring towards a low-carbon economy.
It seems to me that Beyond Zero Emissions has provided us with a list of things to do and direct state intervention to shift the economy would be the most rapid and effective way to do it. Yet 30 years of neoliberal ideology make such talk anathema even to many committed climate campaigners on the Left. Instead there is the belief that somehow we must trick “markets” into doing the right thing, whether through taxation, subsidies or carbon permit trading.
The argument always comes back about the “efficiency” of markets, as if the GFC never happened and as if markets don’t create massive waste and misinvestment in the hunt for profitability. And we should ask “efficiency for whom”? It clearly means efficiency for big business, not ordinary people who will be expected to (once again) bear the brunt of sacrifice.
Maybe if such indirect measures could be guaranteed to drive positive economic restructuring for the public good this would be a price worth paying. Yet there is no evidence that a tax, even a very high levels, can promote the deep changes in energy production and use at the heart of modern capitalist economies needed to address this massive problem.
I’m with David Spratt that emergency state intervention, on the model of WWII public spending, would be the minimum effective response. But with the Greens and many in the climate movement stuck in the carbon price debate, we risk spending the next few years fighting over the soul of measures that will be irrelevant to menaingful action.
David Stephens
Still getting my head around the economics in the article, but just a comment on the apparent reluctance of government to call a tax a tax.
An insidious effect of years of neo-capitalist romance about free markets is the growth of taboos in the language of economics. Governments are reluctant to be seen to be taxing and will fall over themselves to avoid it or to deny that they are doing it or doing more of it - even though tax revenue is the lifeblood of government services.
Governments are also paranoically reluctant to be seen to be going into deficit, particularly by borrowing, even though, as Warwick McKibbin said recently, borrowing (and incurring debt and possibly going into deficit) should be a live option when unforeseen crises occur (floods, earthquakes, GFCs, etc.).
A propos of all this, Ken Henry’s final speech and questions included these words (not widely reported but picked up by the ABC): “We do have to find a way as a country of respecting the importance of having sustainable levels of public debt, respecting the importance of being able to present ourselves to international capital markets as a safe place for capital investment and at the same time be able to finance investments in public infrastructure which have high social benefit to cost ratios.”
Henry in his cautious way seems to be saying that occasionally debt and deficits have to be put in their proper place - important aspects of economic strategy but not the be-all and end-all. I read his remarks as a plea to get out from under this fear of bogeys. The only winners are oppositions and nay-sayers.
It saddens me to see the way in which our political leaders are still stuck in the neo-liberal mindset. Much as it pains me to say it, Abbott is right that a “tax is a tax is a tax”. But where is the leadership to say that we need to do this - it is wanted by most of the people - it will cost money now, but would cost even more if we delay. Therefore, let’s borrow the money, then pay back the debt by raising (say) the GST or some other “Tax”. What’s so hard about that?
So long as this thing, aka tax, or whatever its called, doesn’t get included when inflation is calculated, and used as a justification for interest rate increases.
douglas jones
In theory Kevin Rudd when prime minister could with only a necessary few assenting, declared Australia to be at war. The enemy Climate Change. In theory the moneys used to bail out the consequences of the criminal behaviour represented by the repeat of the great depression, (some folk still advocating a balanced budget, the action m,any argue extended the length;indeed WW2 represented government funding that so stimulated the economy that the depression passed. The deficit? well that was coped withover time.), could have been used to fund solar thermal collection and or solar panels, hot water or electricity on multiple roofs, funding a propganda campaign to have every citizen doing his/her bit, even Jones could have joined in!
But no it serves business and parliamentary ends to have pretend debate in the House. Meanwhile maybe citizens are persuaded against doing much for fear the big polluters will pick up our funds or maybe many are doing something. Who would know it is hardly in the interests of current media to attempt to find this figure. Maybe too small so small tyhe error term of surveys would swamp any meaningful figures or maybe ?.
Hi Anna and Akshay
I’m in favour of a Carbon Tax but the greatest concern I have about a carbon tax is the way it will make our taxation system less progressive.
So I think it’s a problem that you say “This provides the government the opportunity to reduce taxes on income or profits, thereby increasing overall efficiency in the economy.”
WHY ARE YOU ADVOCATING THIS??? You are assuming that progressive taxation systems are inefficient. It depends on what variable you are measuring. There is considerable evidence that more equitible societies are more functional, and cause less burdens for govt to deal with such as crime.
You also imply that a bigger bureaucracy carries a greater risk of government philandering, however you are also buying into right wing framing of the purpose of bureaucracy. A well managed bureaucracy is not a matter of scale, it is a matter of other factors such as the checks and balances within management.
Anne O’B
Anne,
Thank you for your comment.
I am not making a comment on the desireability or otherwise of progressive government policies. Infact, I agree that more equal societies more functional. I am just saying taxing a bad such as carbon is more efficient, as an economic argument, than taxing a good such as income. I feel that government could play a progressive role in achieving equity while at the same time reducing income taxes for vast middle income earners.
Leaving aside ideological arguments about the right size of government, a tax simply reduces administrative costs associated with an ETS. This is regardless of whether the administrator i.e. the state has the ideological right to be there or not! Akshay
The TV news is such a predictable bore these days. There will be Gillard, Swan or some other member of the government announcing their latest whim: Citizens’ Assembly, Cash for Klunkers; Martin Ferguson waxing lyrical about carbon sequestration and the half billion or so dropped into that black hole to date. Then there will be Abbott: Oppose, oppose, oppose; great big new tax, etc, etc, etc.
Surely we are not so abysmal as a nation as to deserve these benighted politicians.
Fortunately, relief is ever at hand: in the shape of the latest scandal to rock the ARL or AFL, or both.
Whichever way one looks at it, Australia will have to wean itself off its fossil carbon habit. Even if its combustion had no adverse effect on the global temperature, the oceans or the biosphere, it will not last at present rates of use more than about 250 years. In the c ase of oil, much less than that.
Electricity generation and transport will have to be restructured. That will cost money, and that money will be best raised by taxing fossil carbon, both in order to make alternatives price competitive and to raise revenue for smart investment in new technology. Gillard plans to replace it after a few years with a cap-and-trade scheme. That one will be a rorters’ paradise.
Bob Brown’s idea of ‘make the polluters pay’ is OK so long as the polluters don’t pass the cost on to their customers. Pigs might also fly. Stop them doing that and they will close down their operations. Yet a tax that has no effect beyond wealth redistribution will get us nowhere.
Gillard’s mob couldn’t find their way home from the pub, nor organise a chook raffle. The only trouble is that Tony (oppose, oppose, oppose) Abbott is ten times worse.
In Tony’s very own speak: “Well, you go to the market and you say look, we are looking to buy cost effective emissions reductions. What market can you offer us? And I think what they’ll offer us is tree planting, which is a good thing. They’ll offer us soil carbon which will actually produce better soils as well as reduce our emissions and they’ll offer us smart technology like for instance, the technology which is started to be employed at some power stations where they use carbon dioxide emissions from the power stations to grow algae and the algae of course is very useful for bio diesel, for fertiliser and so on. So more trees, better soil and smarter technology I think, is the best way to go here.”
(http://www.liberal.org.au/Latest-News/2011/03/07/Interview-with-Ian-Hens…)
Minor questions here of course are (1) will the soil carbon and the trees survive the next long drought and established crop-growing practices? Because if not, the scheme will just siphon taxpayers’ money into the pockets of Abbott’s big-time rural supporters. (2) How much would it cost to establish algal biodiesel on a scale sufficient to replace oil for transport fuels?
Drive far enough out the back o’Bourke and you will come to a pile of rocks in the middle of the road with a hurricane lamp on top of it, and all supervised by the lamp minder, who is employed by the Woop Woop Shire Council. He will tell you that the lamp is essential in order for motorists to see the pile of rocks. And so you ask: what’s the pile of rocks for? To put the lamp on, of course.
And what’s Gillard’s tax for? To put the price of carbon up. And who will get the money? Those who can’t afford the new price of carbon. What will Abbott’s Direct Action plan do? Like all such Coalition schemes, it will redistribute money from the poor to the rich. So the rich won’t have to pay so much in tax thereafter, leaving more to trickle down from them to the rest of us.
To say that a carbon tax or similar scheme is regressive is not totally true. The households that will be most adversely affected are the households that already consume much energy. Mostly, they consume energy because they can afford it.
Someone who can afford to buy flourescent light bulbs will pay less for electricity than someone who can’t. The person who insists on using a collection of powerful light bulbs to achieve an effect that can’t be achieved by one bulb will pay more carbon tax than either.
Someone who can afford a new efficient heater for their main living area will pay less for energy than someone who can’t. The person who insists on heating their entire house to at least twenty-eight degrees even on the coldest winter days will pay more carbon tax than either.
Assuming that petrol is similarly taxed, someone who can afford to keep their car roadworthy will pay less to drive the same distance than someone who can’t. The person who insists on driving everywhere will pay more than someone who looks at alternatives to driving. The person who drives a big four-wheel-drive or muscle-car will pay more than those in more frugal vehicles.
The households that consume the most energy are likely to consider that the money that they spend on energy is theirs to spend. Like with calls to reduce the existing petrol taxes, they’ll resent the government for taxing their consumption.
The big consumers of energy will protest against increases in tax on their energy bills. They’ll argue that it’s hurting the poor. Helping the poor would be better achieved by providing means for them to lower their consumption of energy than by guaranteeing cheap energy to the loud-mouthed big consumers.
@Dr_Tad — http://left-flank.blogspot.com/
Anne O’B is right, and Ashkay dodges the issue. The article presumes that the first priority in the choice of climate action measures is the efficiency of private capital accumulation. This is just neoliberalism dressed up in a progressive veneer.
I think the only reason it is so hegemonic among left-leaning people is that the Greens, the one party that might be expected to have a better position, is even more in thrall to market mechanisms that the authors. Christine Milne has been a passionate advocate of cap & trade for years.
The ideological element is important because carbon abatement is not a technical question. It has been deeply tied to wealthy, powerful and unaccountable capitalist interests demanding that the burden for any change be distributed among ordinary people. This article in essence defends such an approach while trying to appear to treat it as a politics-free, technical economics question.
Dr Tad, you may be right. Taxes and cap and trade schemes could be as bad as each other.I think that some of the most exciting areas of research involve Behavioral economists who use quantitative tools to challenge the very mechanistic view of markets that Marx, smith, Keynes and the neoclassical schools take for granted. This is not an area I am very familiar with, but think is very relevant. I also saw a talk by BJorn Lomburg today, and he too presented a case for not taxing, but instead investing heavily in R&D as this may yield a new technology that completely substitutes for carbon. Or maybe a form of direct regulation, as you suggested, is the way to give us more efficient outcomes, in terms of better lives and opportunity for the public, jutice and environmental sustainabilty.
Public policy has rich scope for rational debate. UNfortunately even though we are going round and round in circles with a debate, the version in the mainstream media and politics is not very rational.
Whether you attempt to mitigate carbon pollution by investing in R&D, reforrestation, geosequestration or development of new more efficent infrastructure, it inevitably costs money.
If Lomburg calls for increased government expenditure, the source of the money also needs to be determined. This means either cancelling other expenditure or increasing tax. Why not base a new tax on carbon pollution? Truly, we do end up going around in circles.
The government has attempted to regulate consumption in the past, in the form of petrol and water rationing. With water rationing, the government has concentrated on ordinary people/domestic use of water, much of which was wasteful. I suspect that the same happened with petrol rationing. To deprive industrial users of water so that ordinary people could hose their patios or water their garden in the middle of the day would mean putting extravagance before meeting society’s basic needs.
Climate change is not the capitalist conspiracy (or “crap”, as Tony Abbott put it) that Dr Tad suggests it to be. There is technically no question that there is carbon pollution. There is sufficient belief amongst the scientific community that the Greenhouse Effect is real. Natural disasters like droughts, floods and cyclones do appear to be becoming more severe in the past decade, and meteorological data could be used to confirm that.
The clearest indication that the planet is warming is the continuous rise to date of mean sea level, and the best source I know on this is http://sealevel.colorado.edu/.
The best summary of Tony Abbott’s position was given us by Age journalist Shaun Carney:
Abbott’s statement of belief in man-made climate change is well-rehearsed - a form of words as cleverly constructed as John Howard’s ”I’ll be leader for as long as the Liberal Party decides it wants me” trope. Broken down, it amounts to: ”I believe climate change is real but I don’t believe in it much and I think that dedicated believers are detestable whackers, so I really identify with people who don’t believe in climate change; and my way of dealing with it won’t cost anything.”
http://www.theage.com.au/opinion/politics/it-may-seem-crazy-brave-but-pm…