Sunday, June 03, 2007

Sunday dollars + sense: A tax on carbon could be just the beginning

We are about to get a carbon tax by another name. The new word for it is “emissions trading”. But the result is the same. Any business that wants to spew carbon into the air will have to pay for the privilege, and the government will keep the revenue.

(There are exceptions. Existing polluters will get given a swag of pollution permits. But even they will have to buy some new ones and if they want to expand they will have to buy lots of them.)

Economists love this sort of tax. It penalises the sort of things we want to stop...
A tax on junk food would be another example. Most taxes penalise things we actually want to encourage. Like work.

The whole idea of taxing wages, or for that matter the interest earned on our savings is counterproductive for a government that wants to encourage us to work and encourage us to save.

That’s why the Prime Minister’s taskforce should have gone further. It has recommended that at least in the early years the money raised from selling emission permits be spent on research and energy efficiency.

But what if instead, the price of a carbon permit was set much higher, and the money used instead to cut income tax.

Then we would get a double benefit, we would be discouraging something we want less of – carbon emissions – and discouraging less something we want more of – work.

There would be another benefit as well. It would buy support for carbon trading. Sure we might all be paying more for our power, but we would grumble less because we would have more to spend.

It would be even better if the tax cuts were directed low-income earners, especially stay-at-home mums. For a number of reasons. One is that low-income families will suffer the most from the switch to carbon trading. A doubling in their electricity bills will hurt.

Another is that that stay-at-home mums are the people most likely get into work or to do extra work if it is made more worth their while. (Despite what I am continually told about all those high income earners out there who would love to put in extra hours if only the top rate was cut.)

The move to carbon trading could be the start of something really big. It is already big, but it could be better.