This was published 12 years ago
Carbon plan great in theory
Too much tinkering at the edges does not represent good policy.
By Saul Eslake
LIKE almost 80 per cent of Australian economists (according to a survey of 573 of them, by the Economics Society of Australia), I think that ''price-based mechanisms - taxes, subsidies or an emissions trading scheme - as opposed to direct action, are the more appropriate mechanisms for cutting greenhouse gas emissions''.
As a result, I support the Gillard government's proposal to ''put a price on carbon'', initially in the form of a tax, and subsequently in the form of an emissions trading system - even though I will be personally worse off financially, and even though only 39 per cent of my fellow citizens support it, according to the Nielsen poll published in Monday's Age.
'If most scientists are right, as I believe they are, the largest greenhouse gas emitters will eventually embrace the need to reduce greenhouse gas emissions.'Credit: Orlando Chiodo
Putting a price on carbon is, admittedly, a harder sell since the failure of the Copenhagen talks in December 2009 to agree on a global emissions trading system. It was never likely that China, which is now the world's largest source of greenhouse gas emissions, would embrace a market-based approach.
Nor does it seem likely that the US will be putting a price on carbon emissions any time soon. That may be an illustration of how, as Winston Churchill once said, the Americans can be trusted to do ''the right thing'', after they've tried everything else.
But if most scientists are right, as I believe they are, the largest greenhouse gas emitters will eventually embrace the need to reduce greenhouse gas emissions. And when they do, they're likely to insist that the rest of the world moves with them. Australia, as one of the most carbon-intensive economies in the world would face a larger adjustment than most. We would inevitably face more of the kind of taxes that Qantas is now going to incur when it flies to Europe, if we don't have meaningful carbon abatement measures of our own. Our adjustment task will ultimately be easier if we start earlier and move more gradually - which is what the government's proposals seek to do.
And because we are moving ahead of much of the rest of the world, and in particular ahead of most of our big export competitors, it is appropriate that our emissions-intensive trade-exposed industries (such as aluminium, steel and cement) are shielded to a large extent from cost increases that their rivals in other countries do not, for now, have to face. Again, this is what the government's proposals seek to do.
Putting a price on carbon will result in significant structural change in the Australian economy. But so did the program of cutting tariffs. And so will the mining boom. Putting a price on carbon will add to inflation. But so did the introduction of the GST, and by a lot more than putting a price on carbon will.
But there are many other aspects of the government's proposals about which I am far more dubious. First, the government seems to lack the confidence in the efficacy of putting a price on carbon to deliver the necessary changes in industry and household behaviour that its rhetoric implies. Not only has the government not used the opportunity presented to wind back some of the existing direct-action measures put in place by previous governments over the past decade or so; but it is also using a fair chunk of the revenue raised by the proposed carbon tax to fund even more direct action.
This is despite the Productivity Commission, and my colleagues at the Grattan Institute, presenting clear evidence that these direct-action measures consume bucketfuls of cash to deliver spoonfuls of carbon abatement.
Worse, while the government has provided for the Productivity Commission to review the efficacy of the $9.2 billion of help to industry under its proposals, it has pointedly excluded the commission from doing the same with the more than $13 billion to be ''invested'' in ''clean energy projects''. This has the Greens' fingerprints all over it. The Greens were opposed to the provision of help to industry, and they know the Productivity Commission will recommend against continuing it, so the commission will be given the opportunity to do so; but they also know that the commission would recommend against the ''picking winners'' programs the Greens favour, so the commission will be kept away from them.
Second, the compensation package for households is flawed. I didn't support the ''over-compensation'' of pensioners and other low-income earners by the Coalition when it introduced the GST; and I don't support it by Labor in putting a price on carbon. There is some truth in Tony Abbott's assertion that this is ''income redistribution disguised as environmental policy''. It is just ludicrous that the biggest winners out of the whole package are senior citizens earning investment income of $80,000 a year - that is, people who have somewhere between $1.5 million and $2 million of income-generating assets in addition to their family home - while a single-income family with one child earning $65,000 is a net loser.
More generally, the government's tweaking of the personal income tax scales runs counter to what has been a fundamental principle of tax reform for more than 25 years - that good tax reform is about broadening the base and lowering the rates of tax. The government's proposals do the opposite - they narrow the personal income tax (by raising the tax-free threshold) and pay for it by increasing marginal tax rates. Supposedly, this is to ensure that people earning more than $80,000 a year don't derive any benefit from the increase in the tax-free threshold, while not leaving anyone earning less than $80,000 worse off. But that's only true for people whose income is unchanged.
While the government's changes do reduce effective marginal tax rates for those entering low-paid jobs, they increase the marginal rates for those entering middle-income jobs - most obviously women in white-collar or professional jobs after caring for children. And it's marginal rates of income tax, not average ones, that influence incentives and behaviour.
Third, the government's proposals are not revenue neutral. The government has gone to inordinate lengths to push expenditures that logically should fall in the 2012-13 financial year back into 2011-12, to preserve its politically (but not economically) important goal of ensuring a surplus by 2012-13, at the expense of blowing the deficit for 2011-12 out by another $2.7 billion. This more than offsets the $1.5 billion to be raised in 2011-12 by the government's flood levy on taxpayers earning more than $50,000, which the government insisted was an absolute imperative of ''good economic management'' - an insistence now much more obviously the nonsense that it was at the time.
The government will no doubt say that all these things reflect compromises that ''had to be made'' to get the whole package of proposals through Parliament. It's not for me to say that isn't so. But nor am I going to say that these compromises represent ''good policy''. They don't.
Saul Eslake is a program director with the Grattan Institute.