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Carbon Tax - Gillardís Major Error

A recent message I circulated included a report in the (London) Daily Telegraph of 31 March 2011 that President Sarkozy had decided to scrap his proposal to implement a carbon tax. Several recipients of my message responded (correctly) that this had been announced in March last year and it was also noted that France is a participant in the European Union’s ETS (it appears the DT simply repeated the March 2010 report in its March 2011 report).

However, the dropping of the tax proposal by the French still remains highly relevant to the Gillard government’s proposal of 24 February to impose such a tax in Australia for 3-5 years and then to move to an ETS. Why start with a tax on carbon when both the EU and France were forced to abandon their proposal for such a tax?

There is more than one possible reason for the EU/French decision but a major one was probably that governments realised that it would be wise politically to avoid being on the front line and, instead, being able to say that the carbon price is being set by the market. Of course, although an ETS trading scheme would set the price from day to day, the main determining factor in any such scheme is the level of emissions set by governments. But, if the government is not (overtly) responsible for setting the price (or tax rate), that reduces the scope for political debate and dissention. This is particularly relevant if the price or tax rate set has only limited effects on emissions (as is likely if set at, say, only $30 a tonne) and it then has to be raised. That would then be portrayed as an increase in taxes by the government.

Another reason for dropping the tax , as indicated by the comments of the leading French business organisation, was probably that businesses saw it as having adverse effects on their international competiveness unless extensive exemptions were granted - and that would require much “bargaining” with the government.

Gillard’s statement of 24 February gives no substantive reason for opting for the tax route and makes no mention of international competitiveness. True, the document accompanying the statement by the Multi-Party Climate Change Committee does have a heading “Assistance on ‘other matters’ still to be determined” (under which it refers to “the principle of competitiveness recognised that the overall package should take appropriate account of impacts on the competitiveness of all Australian industries”). But taking “appropriate account” of international competitiveness effects scarcely leaves a feeling of confidence in circumstances where Australia would be one of few with a carbon tax as such. None of China, Japan or the US have such a tax and, although some countries have given carbon reduction as the reason for imposing or increasing taxes, that may be used as little more than an excuse for raising revenue.

Also, some such taxes apply to only a limited range of products, such as oil/petrol. In Sweden, for instance, a tax of $US150 per tonne applies to oil, coal, natural gas, lpg, petrol and aviation fuel used domestically but, with exemptions, 96% of revenue comes from oil.

Australian businesses exposed to international competition certainly have no assurances that they will be adequately protected by exemptions or other means.

Leaving aside the point that there is no basis for acting to reduce emissions, it is difficult to avoid the conclusion that, in opting for the tax route for 3-5 years, Gillard has made a major political error. As the EU and France judged, the tax route is probably the worst political route to take if you are really serious about establishing an emissions reduction scheme. It is no surprise, then, that the recent ACCI survey shows 59% against a carbon tax, with over half believing it would not help the environment.

Now that Gillard is stuck on a carbon tax for at least the next three years (and assuming no change of government) her government will need to bargain with business on measures to protect international competitiveness. If she doesn’t it is quite likely that a situation will develop similar to the mining tax, where she had in the end to reduce the tax for big miners to international levels. Following the address to the National Press Club by the Chairman of Bluescope Steel on “An Industry Sector under Siege”, the CEO of Anglo-American (the world’s fourth-biggest miner with plans to build more coal mines in Australia) has flown to Australia for discussions with Gillard and to inform her that the carbon tax plans would impose more onerous conditions than “anywhere else in the world”.

Climate Change Minister Combet has already been engaged in public exchanges with the Minerals Council on whether compensation mooted under the “old” (Rudd) emissions trading scheme would be satisfactory under the tax. The Minerals Council claims that the competitiveness safeguards under the “old” Australian scheme are “vastly inferior” to those developed for the European Union's emissions trading scheme, which (it claims) should be the benchmark for protecting exports. Combet asserts the EU's scheme is in fact tougher on emissions intensive industries than anything the Government is proposing.

Discussion with the Minerals Council suggests Combet is wrong and indicates that the Gillard government faces a period of bargaining with a range of businesses (many more industries than minerals are affected by international competition) that is likely to be politically disruptive.

As this document shows, the EU provides many exemptions from having to reduce emissions, including even for those manufacturing underwear! But note that it includes the iron and steel industry.

Finally, I recommend reading Part II of the article in Quadrant for April on the “Intelligent Voter’s Guide to Global Warming”. Apart from explaining many of the issues in language that is understandable to non-scientists, such as myself, it also includes some material not widely publicised and highlights some of the problems with both an ETS and a Tax system for reducing emissions

Des Moore

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