Saturday, March 19, 2011

Carbon tax, your questions answered

My colleague Shane Wright, economics editor of The West Australian:

What is the difference between an emissions trading system, a carbon tax and "direct action"?

Under an emissions trading system, a government sets a ceiling on the amount of greenhouse gases that can be emitted.

"Permits to pollute" are then sold in an open market, allowing the owner to release a set amount of greenhouse production.

Over time the government reduces the ceiling on greenhouse gases, reducing the number of licences to pollute.

The money raised by the scheme can then be used to compensate households or businesses.

Under a carbon tax, a straight fee is imposed on the production of greenhouse gases by a company.

The money raised by the tax can, like an ETS, be used for compensation measures.

Direct action can encompass a range of things including direct regulation, the government of the day investing in low emissions technologies, buying-out heavy polluters or opening tenders for subsidies/assistance programs.

Unlike the ETS or carbon tax, all the cost of direct action is borne by the budget.

And the budget is built on taxes on households and business.

What is it supposed to achieve?

The aim of both an ETS and a carbon tax is to create a financial incentive for businesses and households to cut their greenhouse gas footprints.

At present, greenhouse gases are – to use some economic lingo – externalities.

That is, a third party is forced to pay the cost of greenhouse gas. That third party is currently the environment, and the people, businesses and animals that inhabit the environment.

Like anything that is free it is being over-exploited.

A price signal – either through an ETS or tax – means a business that is a heavy emitter has an incentive to find a way to cut their emissions.

It also means households have an incentive to reduce their greenhouse footprint. It might mean cutting the use of some electrical devices or even buying new more efficient devices (such as a hybrid vehicle).

Direct action does not put a price on carbon emissions, although they can be determined. In the case of the Gillard Government’s now abandoned "cash for clunkers" program, the estimated cost per tonne of abated carbon was more than $300.

Is Australia going it alone?


The EU and its 30 member countries started an emissions trading scheme in 2005.

New Zealand’s emissions trading scheme began last year.

States in the US and Canada have introduced their own trading schemes.

India last year introduced a tax on coal as an initial measure aimed at cutting emissions.

However, while other countries such as the US do not have an ETS or carbon tax they are engaged in direct action so the cost to taxpayers is difficult to determine.

Won’t a carbon price drive Australian manufacturers offshore?

International studies on how the ETS has worked in Europe have failed to find businesses rushing to leave the continent for countries without a direct price on carbon.

The costs, so far, of an ETS are less than the cost for a firm to move operations to another country which is unlikely to have the same type of legal protections available in Europe.

Movements in the Australian dollar are much more likely to hurt domestic manufacturers.

While steel producers such as OneSteel and Blue Scope have complained about the possible impost of a carbon price, they’re biggest threats to profitability have come from the strengthening Australian dollar and the huge spike in their raw materials.

They are the same raw materials benefiting the nation’s coal and iron ore miners.

However, there may be a case for the worst emitters – the aluminium industry – to leave Australia because they currently benefit from very low electricity prices.

Have emissions trading schemes been used before?

The trading scheme proposed for greenhouse gases is based on the successful ETS created in the United States in 1990 to deal with acid rain.

The Acid Rain Program targeted sulphur oxide emissions (and later nitrogen oxide) largely from largescale American power plants, almost all of which were coal-fired power plants.

Over its 20 years of operation the amount of sulphur emissions has been cut more than 40 percent, the incidence of acid rain has fallen more than 65 percent, and the cost of the scheme was between $1 billion and $2 billion lower than had been anticipated.

Emission trading schemes are also similar to quotas on wild fish stocks. Governments set quotas on amount of fish or seafood which can be harvested and then reduce the quotas if there are signs of a collapse in stocks.

Fish quota licences are then sold among market players.

How will I be affected?

The most obvious impact will be on electricity prices which will increase.

Modelling for the Carbon Pollution Reduction Scheme showed a $20 a tonne carbon price would push up electricity prices by 16 percent. On an annual $2000 bill that’s a $320 lift.

To put it in context, Perth electricity prices have lifted 50 percent since the end of 2007.

Gas and other household fuels were modelled to lift by nine percent.

But the overall impact on the consumer price index was a much more modest 0.9 percent.

While agriculture will be excluded, there may be a small increase in some food prices due to higher priced inputs (largely fertiliser).

Will petrol prices go up?

No decision has been made on whether petrol will be included.

Under the CPRS the impact of the carbon price on petrol was to be offset by a cut in fuel excise so that for the first few years of its operation there was no price impact.

Who will be compensated?

The Government has said low and middle income earners will be compensated fully for the price impacts of a carbon price.

Based on the CPRS model pensioners and low income earners were likely to get more compensation than the expected costs of the carbon price.

Trade-exposed and emission intensive businesses are likely to be compensated, especially until other countries introduce their own carbon reduction schemes.

Electricity suppliers are also likely to get assistance to make the transition out of emission-heavy fuel sources or to compensate for the decline in the value of their existing infrastructure.

Why don’t we build nuclear power plants instead?

Australians benefit from particularly low cost power – most of which comes from carbon intensive coal.

Nuclear power, by any measure, is a much more expensive power option. On some measures it is much more costly than renewable energy sources including wind, solar and tidal.

For nuclear power to compete in Australia would require a carbon price, or direct government subsidies that would then have an impact on taxpayers.

What if Australia doesn’t introduce a carbon price?

Not introducing a carbon price means any efforts to cut greenhouse gas emissions will have to depend on the government of the day.

Any of those efforts have to be paid by taxpayers.

There are also threats, largely out of Europe, that tariffs could be imposed on the imports from countries that do not have an explicit carbon price. The EU accounts for more than 10 percent of Australia’s exports.

Shane continues...

No matter how you look at the climate change political debate, one fact stands out – Australians will end up paying to deal with a warming globe.

The political battle, however, is over how we pay for the bipartisan policy position that Australia should cut its greenhouse gas emissions by five percent by 2020.

The carbon price proposal from Julia Gillard and her cross-party climate change committee aims at making the cost of dealing with carbon pollution obvious.

Be it through an initial flat price on carbon, or through the second stage emissions trading scheme, consumers and business will know the true cost of greenhouse gases.

The only full economic modelling of a carbon price on Australia, done for the now abandoned Carbon Pollution Reduction Scheme, put that cost in terms of an overall increase in prices at about one percent.

By contrast, the introduction of the GST in 2000 lifted prices by about five percent.

Of course, that overall one percent increase masks some big price rises. Electricity prices would rise by about 16 per cent or more than $300 a year.

However, the cash raised by the trading scheme/tax is already earmarked to go back to help offset costs. Pensioners and low income earners will certainly get more in handouts than they pay in higher prices.

The other side being pushed by the coalition (which, under John Howard, backed an emissions trading scheme), the direct action option, will have a cost.

It’s just that cost will be hidden in the overall budget, which ultimately means taxpayers will have higher taxes than they would otherwise be.

So far government "direction action" programs have proven to be far more expensive than a market approach to carbon reduction, while there are doubts over the viability of a key element of the coalition’s proposals involving direct payments to farmers.

While the Opposition claims the Government’s plan will push up the cost of living, the Government claims the Opposition’s proposal will cost Australians an extra $720 per household in higher taxes.

It is an argument largely over the transparency of the cost of encouraging businesses and consumers to find ways to reduce their carbon footprint.

And then there is the science underpinning the whole argument.

The decade 2000-2010 was the warmest on record. That followed the previous warmest which was 1990-2000, which was preceded by the former record holder, 1980-1990.

The Government’s greenhouse gas tsar Ross Garnaut, who has reviewed the available scientific evidence since his initial report in 2008, this week reported the situation is getting worse.

The projections made earlier this decade about increasing temperatures, more intense weather events, ice-melts have proven to have been under-estimated.

Professor Garnaut was also blunt in his assessment of the arguments put up by some arguing that climate change is not occurring.

"The review said that to ignore the wisdom of mainstream science and hold on to the hopes held out by the small minority of genuine scientific sceptics, let alone to give credence to the wild claims of climate change dissenters, would be to hide from reality," he said.

"It would be imprudent beyond the normal limits of human irrationality."

Related Posts

. Suddenly tax cuts are back. Garnaut at the Press Club

. Easy listening. Why power prices are really climbing

. Why we need a carbon tax, by the Coalition's environment spokesman