Carbon: A Taxing Topic

I’ve had almost three weeks to digest Julia Gillard’s announcement that we will put a price on carbon in July 2012. After all that time, all I know for sure is that Greg Combet (Minister for Climate Change and Energy Efficiency) must be sick of talking about it. The poor man is everywhere, spruiking for the tax and valiantly defending Ms Gillard against Tony Abbott and the Coalition’s attacks and sound bites. For example, today’s Daily Telegraph features an op-ed piece by Mr Combet on the tax.

I’ve put off writing about the tax in part because I was hoping its pros and cons would become clearer as the days went by. Alas, the opposite is happening, and every day brings a new round of political manoeuvring that I fear is only going to be bad news for the planet.

But so many people have been asking me about it that I can procrastinate no more. I know most of my readers are not climate change economists (nor am I!) so I’ll start at the beginning.

A VERY broad architecture

On the 24th of February, Labor, the Greens, and key independents announced the “broad architecture” for an Australian carbon price, which is also called a carbon tax. From July 2012, carbon will be priced per tonne released into the atmosphere as carbon dioxide. The plan is for the fixed price to rise annually for three to five years before transitioning to an emissions trading scheme. The government has said that the money raised will go back to homes and businesses in the form of rebates, credits and grants. The framework can be found here.

And that’s pretty much all they’ve said about it.

Theoretically, the more you pollute, the more you pay. The exact price hasn’t been announced. Combet has said it will be “well south” of $45 per tonne. Some analysts have suggested a starting price around $20 to $25 per tonne. If it works the way the government envisions, businesses will have to take into account the cost of carbon in their investment decisions, which should drive more sustainable business practices and a more robust renewable energy industry.

Easy, right?

Ummm no, not so easy. If the government is able to negotiate the specifics and pass the legislation this year, there are still some major issues. A big one is Tony Abbott’s promise to repeal any carbon tax if elected – and with Gillard’s approval ratings at an all-time low, a Liberal government is looking more and more possible.

Abbott’s threat has the effect of simply making the carbon tax – and emissions trading scheme – a yes/no, binary debate, which is tragic. As Giles Parkinson said in his recent Climate Spectator article, “Not all businesses want to see a permanent escalator, but few deny that a carbon price is inevitable, and most simply want to know what the rules are so that they can get on with the business of running business.”

Another major issue is that the government hasn’t articulated a vision for a post-carbon-tax/ETS world, or even what exactly we’re trying to achieve with the tax. For example, is the purpose to migrate our electricity supply to renewable sources? Or is it to reduce our demand for energy (and as a result, reduce our emissions)?

This is where the economic theory comes in, because without a clear vision, setting the right price is incredibly hard. Most analysts agree that even a very high carbon price isn’t enough to encourage large-scale technological innovation. In a separate piece in the Climate Spectator, Andrew Dyer says, “A price of $100/tonne or higher would be required to stimulate investment in deploying new capacity using renewable technologies to produce power.” At the other end of the spectrum, Dyer says a tax in the $20/tonne region will “simply increase the cost of power to all users” as the wholesale price is passed through the supply chain.

Nor has the Gillard government been able to explain what the carbon tax will mean to the average Australian – who, by the way, supports action on climate change. The government has issued many assurances about the proceeds of the tax going back to homes and businesses, but they’ve been unable to effectively combat Abbott’s assertion that it will add $300 to household electricity bills (which is dodgy maths by the way, but that’s a subject for another time).

So, good tax or bad tax?

Good tax. Despite all my moaning above, and the inevitable concerns that arise when so little detail is available, we need a price on carbon. Australia is the largest per-capita emitter of greenhouse gas in the world, and we need to do something.

A fixed carbon price is a start, and it’s a lot better than nothing. It will give businesses some medium-term certainty and something tangible to put on the debit line. It’s a positive step in defining a long-term framework and hopefully shows the rest of the world we’re serious about addressing climate change. The proceeds of the tax, if used sensibly, can help fund further change. The cost of doing nothing, as Abbott’s Direct Action policy effectively proposes, is higher than almost any carbon tax I can imagine.

I just want more. A nominal carbon tax is a positive step but it’s not going to solve (or even meaningfully influence) climate change and our emissions issues. It’s not going to have a breakthrough effect on the renewable energy industry. And I’m frustrated that politics are diluting the proposal before it’s even been released.

But we’ll see. Maybe I’ll be pleasantly surprised.