Tuesday, September 02, 2014

The carbon tax isn't dead, just resting. Abbott's RET review points the way

Like John Howard before him Tony Abbott has set in train a series of events that will lead to a price on carbon.

Howard set up his 2006 prime ministerial emissions trading taskforce in order to kill the idea. Fairfax reported at the time it was stacked with miners, bankers and power industry representatives. Its terms of reference required it to advise on the nature and design of a workable global emissions trading system in which Australia would be able to participate.

Note the use of the word "global". Howard said the one thing it couldn't do was recommend a standalone Australia-only emissions trading scheme. Its "sole remit" was to say what shape a global scheme might take.

But once established, the taskforce was beyond his control. Its get-out clause said it could consider "additional steps that might be taken in Australia consistent with the goal of establishing such a system".

It found that it would "be difficult to reach international consensus in the near future". In the meantime, Australia should cap its emissions and should do so "at least cost".  A market-based trading system that put a price on carbon would do it at the least cost.

Howard was about to face an election. He announced the emissions trading system.

Fast forward to another prime minister keen to kill an idea. Abbott appointed a panel to examine the Renewable Energy Target that was predominantly hostile to it. But like Howard's taskforce years earlier it was staffed by public service economists charged with examining the evidence...

Last week the panel found against the RET, but in a way that has again built up the case for an emissions trading scheme. The panel found the RET had two failings. One was that it ensured new solar and wind generators grabbed business from existing (predominantly coal-fired) generators. This wasn't so much a failing as a design feature. The other was that it was an expensive way to cut emissions.

Cost matters, the panel said.

"The cost of abatement is an estimate of the cost of a policy measure in reducing carbon dioxide equivalent emissions, expressed in dollars per tonne of abatement. It is a tool that enables an assessment of the relative cost-effectiveness of different emissions reduction policies."

That tool showed the cost of using the RET to reduce emissions was $35 to $68 per tonne of carbon dioxide or equivalent.

It is, as the panel says, on the high side. But compared to what?

Compared to the carbon tax. Labor's carbon tax cost $24.15 per tonne. Half way through next year the tax was due to transition to a true emissions trading scheme which allowed polluters to buy and sell emission permits and trade them overseas pushing the cost down to around $10 per tonne.

If cost per tonne is the best tool to assess the worth of an emissions reduction scheme, Australia's planned trading system is about the best there is, certainly much better than the Coalition's yet-to-be-detailed "direct action" policy.

Direct Action establishes a fund that will award grants to companies that come up with promising emission reduction schemes.

Using the RET review's favoured measure it looks appalling. In 2010 the Audit Office calculated the cost of earlier grant-based emission reduction schemes. The average was $140 per tonne. One cost as much as $447 per tonne. And their administration was a mess.

Firms were reluctant to devote the time needed to comply with the red tape and the bureaucrats were unable to process applications quickly. The Audit Office found it commonly took two years before approved programs could start. None of the grant-based schemes managed to spend more than 40 per cent of its budget.

In an early recognition of this (and perhaps to save money) this year's budget slashed the four-year total that the Coalition was to have allocated to Direct Action from $2.55 billion to $1.15 billion. Environment minister Greg Hunt says the $2.55 billion will still be there if it is needed, but it may not be if the scheme is riddled with the delays the Audit Office found were typical of such schemes.

An emissions trading system wins hands down on the RET review panel's prefered measure.

As the taskforce that reported to John Howard late last decade discovered, such a system is by design the cheapest possible means of reducing emissions.

It charges big polluters as much for the right to pollute as is needed to achieve the reduction target, no more. Businesses that buy permits they no longer need because they have cut more emissions than expected can cash in by selling their excess permits to another business that needs them more. Businesses that find it expensive to cut their emissions will buy permits rather than pay the cost. Businesses that find it cheap will sell permits and cut emissions. It'll ensure emissions are cut by the cheapest possible means first. That's why the panel of business figures, energy companies and bankers appointed by John Howard fell in love with it.

Cheap is good. Abbott's panel is pointing us back towards cheap.

In The Age and Sydney Morning Herald target="_blank"


Related Posts

. July 2014 The carbon tax is gone. Will prices come down?

. How Tony Abbott made the carbon tax work

. Carbon trading. Clive Palmer has saved the furniture


Super: It's the Coalition that helping workers

We've dodged a bullet. Had compulsory super contributions climbed as legislated, Australian workers would have lost 0.5 per cent of wages from their next pay increase, 0.5 per cent from the following one then 0.5 per cent from each of the following three. By 2019 they would be earning 2.5 per cent less than if the government had left compulsory super alone.

Labor legislated to increase compulsory super recklessly. After being stalled at 9 per cent of pay since 2002, Labor wanted to lift it to 12 per cent, lifting it at first by 0.25 per cent of pay in June 2013 and 2014 then by 0.5 per cent in each of the next five years.

Labor knew the money would come out of wage rises. Its superannuation minister Bill Shorten said so.

But he said we would get healthy wages increases nonetheless. He told Fairfax Radio in 2012 the impost was just "a quarter of a per cent"

"So I'm assuming without, you know, and again this is a forecast, I'm assuming that wages in 2013-14 will probably move somewhere between 3 and 4 per cent. I am assuming that a quarter of per cent of that 3 to 4 per cent may well go into your compulsory savings, which is concessionary taxed, so that's a plus."

It didn't sound that bad. But he was wrong.

In 2013-14 wages climbed by just 2.6 per cent. Prices climbed 3 per cent, meaning real wages went backwards.

One of the reasons they went backwards was that employers were asked to fork out an extra 0.25 per cent for super on July 2013 and knew they would be again on July 2014.

From next year they were to be asked to fork out twice as much extra each year, an extra 0.5 per cent for each of the next five years.

Had it happened, the regular imposts would have depressed wage increases and quite possibly depressed real wages for half a decade.

The Henry tax review found against any further increase in the super contributions beyond 9 per cent. It said, although 12 per cent would increase employees retirement incomes in retirement, it would do so "by reducing their standard of living before retirement".

The Coalition has pushed the whole thing out into the never never. Super contributions won't begin climbing again until 2021. After that they are legislated to climb by 0.5 per cent a year until they reach 12 per cent, but it's a fair chance they never will. Anyone who wants to save extra is welcome to. The Coalition and Clive Palmer has made it more likely they'll have the wage increases to afford it.

And those wage increases will be taxed at standard rates rather than untaxed, as it would have been extra super strengthening the government's finances.

Maintaining the low income super rebate, the income support bonus and the Schoolkids Bonus until after the next election also makes sense. People can vote on whether they want them to stay.

The compromise leaves the government $7 billion worse off than if it had got what it wanted but $10 billion better off than if it had got nothing at all. Those figures cover the next four years. The government says, a decade on, its projections look pretty much as at budget time.

In The Age and Sydney Morning Herald

Super delay will 'almost inevitably' mean higher wages, says Hockey

A delay in increasing the superannuation rate will "almost inevitably" mean higher wages, federal treasurer Treasurer Joe Hockey has said, while also conceding employers could pocket the saving instead of passing it on to workers as wage rises.

The Abbott government struck a deal with the Palmer United Party on Tuesday to make good on one of its key election promises to repeal the mining tax. As part of the bargain, the government agreed to delay the increase in the compulsory superannuation rate from 9.5 per cent to 12 per cent to 2025 instead of 2019.

Mr Hockey on Wednesday defended his deal, which is being criticised by the superannuation industry and the Labor opposition as a hit to workers, saying the delay would amount to higher wages because "either it comes into workers' pockets or goes into superannuation, it's one or the other".

"It is almost inevitable that any increase in super would come out of worker's wages therefore we, by delaying this and legislating the delay, so it is going to happen over time, by delaying this we are ensuring that workers get more money in their pockets," he told ABC radio.

But Mr Hockey accepted employers could choose to keep the saving rather than pass it onto workers but said that scenario would still lead to a stronger economy.

"If it stays with employers the best way to grow superannuation in Australia is to have a stronger economy because ultimately superannuation is invested back into the economy," he said.

And he rejected as "ridiculous" the superannuation industry's claims that the delay would amount to $128 billion less in retirement savings by 2025 because of the way the estimate was calculated.

"That's ridiculous, how do you know?" Mr Hockey said.

"Ultimately it comes out of worker's pockets and in order to calculate that figure the superannuation industry has worked off a basis at what they expect wages to grow at over the next few years.

"So I'm sorry you can't claim on the one hand that it's one figure and use apples to calculate one figure and oranges to calculate another."

Mr Hockey quoted Labor leader Bill Shorten who as superannuation minister in the former Labor government in 2012 agreed that the evidence shows super increases are paid for by "absorbing money out of wage increases".

Mr Shorten said on Wednesday that the government's "political broken promise" would have "catastrophic consequences" and "rob Australians to the tune of $128 billion" in retirement savings.

He said he stood by his argument that superannuation was paid for by employees but rejected the Treasurer's assurances that the delay would lead to wage rises.

"I don't trust this government to support increasing workers wages," Mr Shorten told ABC radio.

"Superannuation is part of the increases which occur in worker's wages because of the increase in productive value of the enterprises at which they work, [we have] always stuck to that."

But Mr Shorten said generous tax arrangements and interest paid on super meant workers would be better off saving the equivalent pay rise rather than cashing it now and rejected the government's claim that the delay did not amount to an "adverse change", accusing the government of breaking an election promise.

In The Age and Sydney Morning Herald

Hockey wants to decide super contribution rates himself

Treasurer Joe Hockey wants to take upon himself the power to set superannuation contributions, introducing a bill that would give him control over the rate rather than Parliament.

Superannuation contributions at present are set to climb from 9.5 per cent of salary to 12 per cent over the next five years. The Coalition wants to delay the next scheduled  0.5 percentage point increase for three years to ease pressure on the budget.

Rushed through the House of Representatives on Monday as part of the mining tax repeal bill, a new provision would give the Treasurer the power to adjust or delay adjustments to the rate without further reference to Parliament. 

A spokeswoman for Mr Hockey said the measure would give businesses "certainty" about what would happen to contribution rates, making them no longer subject to votes in the Senate.

The new provision, itself yet to be considered by the Senate, includes safeguards requiring the Treasurer to only adjust the rate up and not to delay any previously scheduled for more than four years.

Labor treasury spokesman Chris Bowen said it would enable the Treasurer and his successors to delay 12 per cent super until 2034 if they wanted to. The present law delivers 12 per cent in 2019.

"We know that the Liberal and National parties hate compulsory super. Tony Abbott called it a con job," Mr Bowen said. "The government will take any excuse to delay further the moves from 9 per cent.

"The move to lift super to 12 per cent was carefully calibrated, gradual, and was carefully thought through in consultation with all involved. What's going on here is that the government really doesn't want to see super get to 12 despite their promise of no adverse changes."

Although super contributions are made by employers in lieu of wage rises, increases in the contribution rate hurt the budget because of the heavy tax concessions associated with super.

The legislation also allows the Treasurer to delay or not proceed with certain parts of the mining tax repeal bill, making it easier to strike a deal with independents in the Senate.

The mining tax repeal bill abolishes the low-income super contribution, the low-income bonus, the schoolkids bonus and a number of concessions for business on the ground that they were to be funded from mining revenue.

After the bill passed the House, the leader of the Palmer United Party, Clive Palmer, tweeted that it would not pass the Senate if it abolished the low-income super contribution and schoolkids bonus.

In The Age and Sydney Morning Herald