Worried economists call for a carbon price, a tax on coal exports, and ‘green tariffs’ to get Australia on the path to net zero

Australia’s top economists have overwhelmingly backed the reintroduction of the carbon price that helped cut Australia’s emissions between 2012 and 2014.

The government concedes that achieving its legislated emissions reduction target of 43% below 2005 levels by 2030 and net zero by 2050 will be difficult. With official forecasts showing Australia falling short, the Economic Society of Australia asked 50 leading Australian economists what should be done to speed things up.

Offered a choice that included nuclear energy, accelerated investment in large-scale batteries, and a rapid phase-out of traditionally fuelled vehicles, 30 of the 50 picked a carbon price of the kind introduced by the Gillard Labor government in 2012 and abolished by the Abbott Coalition government in 2014.

Another five said they supported an economy-wide carbon price, but wouldn’t nominate it in the survey because it would face “significant political hurdles” and would not be “politically feasible”.

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The Department of Climate Change told the government in December it was on track to fall short of its 2030 target of a 43% cut on 2005 levels, but that with “additional measures” it could get to 40%.

In October this year, Climate Change and Energy Minister Chris Bowen described the 43% target as “ambitious” and a “difficult task”.

The scheme the economists were asked about was a “cap and trade” scheme, of the type common in much of the world. In these schemes, the government sets a cap on the total number of emission permits produced each year and allows users to trade them with one another to set a price.

A carbon price by another name

The Gillard government’s scheme was initially a fixed charge per tonne of carbon emitted by big polluters. It was set to switch to a cap and trade scheme after three years, but ended up being abolished after two.

In its place, the Abbott government created a “safeguard mechanism” that currently applies only to the 219 biggest polluting facilities in Australia. It requires each to keep emissions below a government-set baseline, and allows them to trade emissions reductions with one another.

The economists were asked about expanding the mechanism to make it mimic an economy-wide carbon price. In response, 42% said they wanted to boost the number of facilities it covered, and 26% wanted to tighten the baselines to push up the price.

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All but seven of the 50 economists wanted either an economy-wide carbon price or an expanded safeguard mechanism that would act as one.

Independent economist Hugh Sibly said it might well be that nuclear, hydrogen or other sources of energy were the most efficient ways of decarbonising the economy, but it would be impossible to know until Australia started charging for emitting carbon and allowed the market to work out the cheapest way of coping.

Half of those surveyed wanted to expedite the building of new transmission lines to link places where electricity was being produced with places where it would be needed. One-third wanted expedited investment in large battery storage.

Economists including Macquarie University’s Lisa Magnani justified this by saying it was necessary for the government to move in ahead of the private sector to provide the infrastructure the private sector would need in order to decarbonise “within the time left to act seriously”.

No new mines, taxes on exports from existing mines

Many experts surveyed wanted bolder measures than those proposed by the Economic Society of Australia.

Former OECD official Adrian Blundell-Wignall said Australia’s coal exports create almost two and a half times the emissions Australians produce domestically.

“What is the point of moving to net zero on the latter while we do nothing on coal exports?” he asked.

His proposal, aired in the Australian Financial Review, is for Australia to tax exports of the metallurgical coal used to make steel, forcing up the price and reducing global demand. Australia has 55% of the market.

If higher prices brought in more tax and resulted in less burning of metallurgical coal, it would be a win-win for Australia and the world.

Mark Cully, a former chief economist at the Australian industry department, said Australia should follow the lead of France, Denmark and Sweden and ban new fossil fuel projects.

The supply restriction would push up the relative price of fossil fuels and encourage a faster global take-up of renewable energy.

Impose green tariffs on dirty imports

Australia should also join the European Union in implementing a green tariff, the so-called Carbon Border Adjustment Mechanism that imposed an emissions tax on imported goods whose emissions were not taxed in the country in which they were produced.

Cully said too much of Australia’s concern was directed to energy, a sector where emissions are genuinely beginning to fall. In other sectors, emissions have plateaued or are even rising, making it “inconceivable that Australia can meet its 43% reduction target by 2030, let alone net zero by 2050, without other high-volume emissions sectors contributing”.

Frank Jotzo, director of the Centre for Climate Economics at the Australian National University, said carbon pricing has to be complemented by targeted measures aimed at industries such as transport, building, agriculture and reforestation.

He said Australia will soon need to back measures that suck carbon dioxide back out of the atmosphere, acknowledging that many emissions will continue and will therefore need to be offset in order to get to net zero.

Critical opportunity, but critical challenge

University of Tasmania economist Joaquin Vespignani said state and federal governments should “invest” in the production of the so-called critical minerals that will be needed for decarbonisation via tax deductions.

Australia has more than 20% of the proven global reserves of minerals such as lithium that are essential for clean energy production and storage.

Michael Knox of Morgans Financial noted the International Agency believed the world would need to ramp up its production of critical minerals to three times its present level by 2030.

Energy investment would need to double, and electricity transmission grids would need to roll out an extra two million kilometres of wire per year.

The Agency described the task as Herculean. Knox said it was far from certain to be achieved.

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If you’re 65 or over and want to work, you’re far better off in New Zealand than Australia

Peter Martin, Crawford School of Public Policy, Australian National University

Want to keep working after you’ve reached pension age?

The Australian government has just made it a little bit easier, increasing the amount you can earn per year from work before losing some of your pension by A$4,000 on an ongoing basis.

Late last year, it temporarily upped the so-called work bonus from $7,800 per year to $11,800 to “incentivise pensioners into the workforce”. It was part of the government’s response to its September jobs and skills summit.

It meant pensioners could earn an underwhelming $227 per week from work without harming their pension, up from the previous $150.

The rules for older workers are very different in New Zealand. In fact, if Australia adopted New Zealand’s approach, we could have an extra 500,000 willing workers – a fair chunk of them paying tax.

What’s NZ doing differently for older workers?

Last month, as part of his employment white paper, Australian Treasurer Jim Chalmers made the increase to $227 per week permanent.

Chalmers headlined the announcement: Getting more Australians back into work.

But it’s doing an underwhelming job. In Australia, 15.1% of the population aged 65 and older are in some kind of paid work, up from 14.7% a year earlier.

In contrast, in New Zealand the proportion has just hit 26%. That’s right: more than one-quarter of New Zealanders aged 65 and older are employed.

It’s a similar story if we look at how Australia and New Zealand compared to others internationally on labour force participation (which covers those in paid work plus people actively looking for it).

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New Zealand wants to see that number rise further. It has been talking about 33.1% of its population aged 65 or more in paid work, which is what Iceland has.

What is New Zealand doing for over-65s that Australia is not?

You won’t find it mentioned in either treasury’s employment white paper (released in September) or intergenerational report (released in August) – even though National Seniors Australia pointed it out in submissions.

One crucial thing New Zealand is not doing is annoying pensioners who work.

Australian pensioners in paid work get called in for discussions with Centrelink, if it looks as if they are at risk of doing too many hours and going over the $227 per week limit.

The more you work, the more your pension is cut

Pensioners who do go over the $227 per week limit lose half of every extra dollar they earn in a cut to their pension.

Plus tax, this means they lose a total of 69% of what they earn over the limit where their tax rate is 19%, and 82.5% on the portion of earnings taxed at 32.5%.

And this is after the boost designed to “incentivise pensioners into the workforce”.

Last year’s jobs summit also set up a Women’s Economic Equality Taskforce. It reported this week, drawing attention to the “disincentive rates” facing second earners (usually women) who return to work after caring for children.

It said that taking the loss of benefits, tax and childcare costs together, the penalty for returning to work was more than half of what was earned on the first three days of the week, and up to 110% of what was earned on the fourth and fifth days.

My point here is that the losses facing age pensioners who attempt to work are of a similar order – in Australia but not in New Zealand.

Australia’s rules aren’t just stopping pensioners from taking on extra hours. They seem to stop them taking up paid work at all.

There were 2.6 million Australians on the age pension in June this year. Only 83,925 reported income from working. That’s just 3.2%.

NZ pensioners keep their pensions

What’s different about New Zealand is that New Zealand’s pensioners don’t face a penalty if they work. They simply face income tax.

In New Zealand, the age pension (which is called superannuation, making it confusing for Australians) is paid to everyone of pension age. There’s no income test or assets test. You get it because you are a citizen or permanent resident.

Australia wouldn’t need to go as far as New Zealand to get the same benefit. We would simply need to ditch the pension income test in cases where that income came from paid work, leaving the assets test in place.

Then there would be no concern about working.

Half a million reasons for change

If we made that change – and if the same proportion of older Australians chose to work as New Zealanders – we would soon have an extra half a million older Australians able to step into fields such as teaching, where there are 15,500 vacancies, and health care and social assistance, where there are 68,100 vacancies.

It would cost the federal government money because it’d put more Australians of pension age on the pension.

But it’d cost less if we abolished the special tax concession for seniors and pensioners, known as the seniors and pensioners tax offset. In New Zealand, senior citizens face the same tax rates as everyone else.

And it would cost less as more pensioners earned wages and paid income tax.

Calculations prepared for National Seniors Australia by Deloitte suggest that beyond a certain point, the change would become revenue-positive – actually boosting federal coffers – as the extra income tax revenue outweighed the cost of the extra pensions.

National Seniors is calling its campaign “let pensioners work”.

Tapping into the cash economy

Importantly – and here’s where we get to a fact National Seniors might not like me mentioning – that would happen not only because more senior Australians were employed, but also because more senior Australians were employed legitimately.

It’s hard to get a handle on how many senior Australians are working and being paid in cash, which they store rather than bank to avoid tripping the income test. But we do know this.

At the end of March, there were 18 Australian $100 notes in circulation for each Australian resident, an astonishingly high proportion given the use of cash for transactions is collapsing.

In New Zealand at the end of March, there were just five New Zealand $100 notes in circulation for each New Zealand resident.

That may be just a coincidence.

But New Zealand is certainly making it easier for retirees to work legitimately, rather than stay at home or accept cash in hand.

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Where did the cars go? How heavier, costlier SUVs and utes took over Australia’s roads

If we’re upset about the price of petrol, why do we drive the vehicles we do?

SUVs (so-called sport utility vehicles) use more fuel per kilometre than standard cars – according to the International Energy Agency, up to 25% more.

They weigh more than standard cars – about 100 kilograms more.

And they emit more carbon than standard cars. In Australia, medium-size SUVs emit 14% more carbon per kilometre travelled than medium-size cars. Large SUVs emit 30% more than large cars.

Yet we’re buying them at a rate that would have been unimaginable even a decade ago.

SUVs outsell passenger cars 3 to 1

As recently as 2012, more than half the new vehicles sold in Australia were “passenger cars” – the standard low-slung cars of the type we were used to. About one-quarter were SUVs.

Back further, in the early 1990s, three-quarters of the new vehicles we bought were passenger cars, and only 8% SUVs.

Yet after an explosion in SUV sales, today every second vehicle bought is a SUV. In September, SUVs accounted for 58% of new vehicle sales. Passenger cars accounted for just 17%. This means SUVs outsell passenger cars three to one.

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Like country music, SUVs are hard to define, but you know one when you see one.

They are distinguished by being high and squarish – the words used in the official definition are “wagon body style and elevated ride height”, and generally big. They are usually four-wheel drives or all-wheel drives.

Standard passenger cars (be they hatches, sedans or wagons) sit closer to the ground, are usually lighter, and are less likely to kill or seriously injure pedestrians and cyclists, according to US insurers.

So common have the new larger SUVs become that Standards Australia is considering increasing the length of a standard parking bay by 20cm. It wants comments by November.

Also taking market share from smaller standard cars are what we in Australia call utes, which are standard vehicles (they used to be Falcons and Commodores) with a built-in tray attached at the rear.

Utes are categorised as commercial vehicles, even though these days they tend to have four doors rather than two. They are also just as likely to be used for moving families as equipment, even if bought with small business tax concessions.

Australia’s National Transport Commission is so concerned about the rise in sales of both SUVs and utes, it warns they are “tempering Australia’s improvement in transport emissions”.

Vehicles defined as commercial, the bulk of them utes, accounted for one in five vehicles sold a decade ago. Now they are one in four, outselling passenger cars.

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Tax only explains so much

Cars get special treatment in Australia’s tax system.

If an employer provides them and their private use is “minor, infrequent and irregular”, or if they are utes “not designed for the principal purpose of carrying passengers”, they can escape the fringe benefits tax.

And from time to time small businesses get offered instant asset writeoffs, which means that all or part of the cost of the car can be written off against tax.

But apart from perhaps helping to explain the increasing preference for utes, these concessions seem insufficient to explain the demise of the standard passenger car and the rise of the expensive (and more expensive to fuel) alternatives.

Australia’s Bureau of Infrastructure and Transport Research Economics identifies the obvious: headroom, legroom and storage space, as well as the ability to drive on bad roads as well as good.

Danger is a perverse selling point

But, in an information paper, the bureau goes on to note that SUVs “appear to be more likely to kill pedestrians than cars”.

They also appear more likely to kill the occupants of standard cars than standard cars when those cars crash, largely because they are higher – a phenomenon the insurance industry refers to as “incompatibility”.

Australia’s Bureau of Infrastructure and Transport Research Economics refers to this as the “other side of the coin”.

But I think that for buyers of SUVs, it might be the same side of the coin. That is, I think it might be becoming a perverse and macabre argument for buying SUVs.

If SUVs are becoming dominant and they put other road users at risk, it makes sense not to be one of those other road users.

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I am not suggesting that danger from SUVs is the only reason for the flood of buyers switching to SUVs. But I am suggesting it has helped contribute to a snowballing in demand for SUVs, along with fashion, and changed views about what’s normal.

I’m not sure what can be done at this stage. Higher petrol prices ought to have helped, but they don’t seem to have.

SUV purchases have increased, even as petrol prices have climbed. Extra taxes have been proposed to help curb road deaths, but they mightn’t help either. SUVs are already expensive.

Tighter standards would help

One thing we ought to do straight away is to shift the burden of decision-making from buyers to makers.

The federal government is about to roll out long-overdue fuel efficiency standards, of the kind already common in the rest of the world.

Ideally, those standards would require the entire fleet of vehicles sold by each manufacturer to meet a gradually-tightening average efficiency standard.

Putting more electric vehicles into each fleet would help. But so would increasing the efficiency of its conventionally-powered SUVs – which would mean reducing their weight, and with it, their danger to other people on the road.

The design of the scheme is up for grabs, and the Grattan Institute’s Marion Terrill has made a submission.

She says regardless of the switch to electric cars, Australians are going to be buying petrol and diesel vehicles for some time. That’s why it’s so important those cars become as fuel efficient (and, she could add, as safe) as they can be.

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No hike yet, but what happens on Melbourne Cup Day depends on petrol

If the Reserve Bank does push up interest rates again, the most likely next date is its next board meeting, on Melbourne Cup Tuesday.

The November 7 meeting is especially important because it is one of four each year in which the board has the full set of quarterly staff forecasts before it, as well as the latest detailed quarterly breakdown of inflation.

For the moment, in its first meeting with the new governor Michele Bullock in the chair, the board decided on Tuesday to keep rates on hold, pointing to “uncertainty surrounding the economic outlook”.

It’s uncertain about what’s happening to China’s economy; it’s uncertain about the lagged effect of the 12 increases to date; and it’s suddenly less certain about inflation.

When the board last met, the official figures showed inflation falling. Not now. And not only in Australia.

Inflation has kicked back up

After sliding throughout the Western world, inflation edged up in the US and Canada in July and August, and in Australia in August.

In the US, annual inflation plummeted from a peak of 9.1% to 3% before edging back up to 3.7%.

In Australia, the monthly measure of annual inflation dived from 8.4% to 4.9% before edging up to 5.2%.

This means inflation is moving further away from, rather than closer to, the Reserve Bank’s 2-3% target band.

The bank had been expecting it to keep falling to 4.1% by the end of this year, then to fall further to 3.3% – within spitting distance of its target – by the end of next year.

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So what will Michele Bullock and her board do next time?

The first thing to consider (and they considered it in the first meeting under Michele Bullock on Tuesday) is what’s caused the uptick in inflation.

Petrol is fuelling inflation

Statistically, all of the uptick in inflation (yes, all of the uptick) was caused by an increase in one price – what the Bureau of Statistics calls automotive fuel, and what the rest of us call petrol and diesel.

Had that price not soared an astounding 9.1% in one single month, August, the inflation rate for August would have remained steady at 4.9%.

Absent automotive fuel, in recent months annual increases in the prices of food, clothes and electricity (yes, electricity) have fallen. In the last two months, the monthly increase in rents has inched down, suggesting that, as painful as high rent increases have been, they’ll eventually subside.

The second thing to consider is whether an uptick in inflation, resulting from an increase in the price of one commodity, is reason enough to return to pushing up interest rates.

Suddenly, petrol’s $2.20 per litre or more

Oil prices have shot up because in July one of the biggest producers, Saudi Arabia, began cutting production in what its energy minister said was “a bid to stabilise” the market.

Russia has joined in. The result – bolstered by a much lower Australian dollar – has been soaring prices. We’ve even seen new records set in some places, including Brisbane’s record unleaded price of $2.38.

Melbourne’s average price exceeded $2.20 a few weeks back and is still above $2.10.

Last year, when rocketing petrol and diesel prices were part of a widespread surge in inflation after Russia invaded Ukraine (and Australia temporally cut fuel excise to wind them back), what the Reserve Bank should do was clear: push up interest rates to take the heat out of consumer spending.

But it’s different now. Rising inflation isn’t widespread, and spending per consumer is collapsing.

In August, retail spending grew just 0.2%, at a time of rapid population growth and still rapid price growth. Over the year to August, total retail spending climbed just 1.5% at a time when the population grew 2.2% and prices climbed more than 5%.

It means we are winding back spending, big time. And here’s the thing about the latest increase in petrol prices: it will wind back spending on things other than petrol even further.

Petrol could be fuelling ‘disinflation’

AMP chief economist Shane Oliver thinks the latest petrol price rises could be disinflationary. That’s right, “disinflationary”.

Just as a tax increase reduces the free money households have to spend and makes it harder for them to push up prices, an increase in the price of a purchase that’s near compulsory cuts the amount we have to spend on other things.

Offsetting this is the reality that petrol and diesel prices have risen. In time, those higher prices will feed through into higher prices for just about everything that is moved by trucks.

But the two – higher input prices and less price pressure from consumers – should to some extent offset each other, which is a reason for the Reserve Bank board to at least consider taking the latest uptick in inflation in its stride.

The announcement after Tuesday’s meeting postponed this consideration. By deciding to hold rates steady, the board said it could take “further time to assess the impact of the increase in interest rates to date and the economic outlook”.

The Reserve Bank board’s view about whether to treat what’s happening to petrol as inflationary or disinflationary (or neutral) will play an outsized role in the decision it makes about interest rates on November 7.

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