ESSA

ESSA

The Carbon Tax: Tony Abbott’s Ticking Time Bomb


David Haines

By

April 8th, 2012


On the 9th July 2010, Prime Minister Julia Gillard announced the Government’s intention to introduce a ‘carbon tax’ in order to put a price on pollution and thereby give firms an incentive to reduce carbon emissions. The carbon tax passed the House of Representatives and the Senate on the 12th October 2011 and the 8th November 2011 respectively, and consequently on the 1st July 2012 a tax of $23 per tonne of carbon emissions will come into effect.


On the 9th July 2010, Prime Minister Julia Gillard announced the Government’s intention to introduce a ‘carbon tax’ in order to put a price on pollution and thereby give firms an incentive to reduce carbon emissions. The carbon tax passed the House of Representatives and the Senate on the 12th October 2011 and the 8th November 2011 respectively, and consequently on the 1st July 2012 a tax of $23 per tonne of carbon emissions will come into effect.

Since the taxes’ inception, the Opposition leader Tony Abbott has run a highly effective campaign against the carbon tax to the severe detriment of the Prime Minister’s personal popularity as well as that of her party.

Unfortunately for her, the Prime Minister made a pre-election promise that “there will be no carbon tax under any government I lead”, a statement capitalised on by the Opposition who have accused Ms Gillard ad nauseum of being a liar and lacking integrity. Whilst the quote is irrefutable, reality is, as usual, more complex. At the last federal election the Australian people failed to elect a majority in the House of Representatives and as a consequence the Labor Party was only able to form government after first negotiating the support of the Australian Greens Party and three independent Members of Parliament. However in political reality all that matters is that a large section of the electorate no longer trusts Ms Gillard.

Aside from questions of integrity, Mr Abbott has continuously attacked the carbon tax directly, almost to the point of inciting hysteria, by labelling it as “toxic”, the end of manufacturing in Australia, as impacting Queensland coal industry worse than the January 2011 floods, irresponsible in the absence of a firm commitment from the rest of the international community, insignificant in the scheme of global emissions, and has even repeatedly called into question the expertise of climate scientists and the very notion of human induced climate change. On top of this Mr Abbott has directly appealed to the voters to help him bring down “the worst government ever” and save themselves from astronomical increases in prices, particularly in electricity bills, and mass job losses as the result of the carbon tax. He has also made a “pledge in blood” to repeal the tax when elected, and this is where Tony Abbott has potentially sown the seed of his own destruction.

Treasury modelling estimates an average weekly price increase of $9.90, as compared with average compensation of $10.10, under the assumption that the full tax will be passed on to the consumer. Microeconomic theory shows us that monetary compensation that covers the cost of pre-tax consumption levels at higher post-tax prices will make people better off because they will still substitute towards cheaper alternatives, despite receiving the money to pay for the more expensive goods and services, allowing them to pocket the difference.

On top of this the full tax will not always be passed onto the consumer because it depends upon the relative sensitivity of consumers and producers to changes in price (Economics speak: the incidence of taxation depends upon the own-price elasticities of supply and demand). If consumers are dependent on a product, there are no substitutes, and the seller can sell on the world market, then the buyer will pay all the tax (eg: petrol). However there are many products that have available alternatives or that people can simply do without, and which the seller must sell, such as perishable goods, in which case the tax will be paid by the seller. There is obviously a whole range in between these extremes which the buyers and sellers share the cost of taxation. Given that the compensation assumes that all the tax will always be passed to the consumer, the consumer (read voter) is being overcompensated.

Industry assistance will consist of carbon tax shields of 94.5% for high carbon emitting trade exposed industries, 66% for medium level emitting industries,  and 50% for the liquefied natural gas (LNG) industry, all reducing at 1.3% per year and lasting for at least 6 years, with extra going to the steel and coal industries to assist with their transition. Again the amount of assistance is based on pre-tax levels of carbon emissions giving firms the incentive to reduce their emissions faster than the 1.3% reduction in assistance and thus make a profit off the scheme. As firms lower their emissions intensity, the initial consumer price increases will be made less severe, adding to the benefit accrued to the consumer from their compensation package.

One potential issue that could arise for the Government would be if companies seize the opportunity to increase their prices under the guise of the carbon tax, despite consumer protections enforced by the Australian Competition and Consumer Commission (ACCC). Energy companies are already forecasting a 20% rise in energy bills as compared to the 10% increase modelled by the Treasury. Ironically this risk has been largely mitigated by the Opposition who called for legislation making it mandatory that household bills be itemised to show the proportion of price increases resulting from the Carbon Tax. Whatever their strategy, it appears to have backfired as the Government has readily agreed.

Going on all available information, it can be safely predicted that Australia is not on the cusp of carbon tax induced economic destruction, and that the nightmare of unemployment and financial hardship that the Opposition has been evoking will not eventuate on July 1. Worse still for Tony Abbott’s leadership is that the next federal election can be held as late as the 30th November 2013, 17 months away from the implementation of the Carbon Tax and plenty of time for the Australian people to evaluate the impact for themselves. Unless Tony Abbott is somehow able to reinterpret his “pledge in blood” to rescind the tax, and miraculously disassociate himself from the Carbon Tax issue his leadership will fast become untenable. Seventeen months down the line it will be verging on the impossible to dismantle the carbon tax. By then it is likely that carbon prices will have been implemented in more countries, the Australian economy will have already adapted, investments been made, and new industries set up, and crucially voters would have to be stripped of their monetary compensation and tax cuts.

The question is will the Prime Minister be able to regain the trust of the electorate and reverse her unpopularity, or will the party decide at some point next year that she too is unelectable? Will we be looking at two new leaders at the next federal election?

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • lolimar

    Notwithstanding, that I still don’t quite see the difference between a carbon tax /ETS, and to simply put it a tariff on less greener sources of energy, (I also don’t quite see how greenhouse gases are an externality in the usual sense). There are still some points that could be made.

    1.) The question of whether consumers face the price rise or not, is not particularly important from a welfare point of view (although I do agree it is important for the sway of voters). It is more important to know if there is a dead-weight loss, once again this will depend on if greenhouse gases are really a traditional externality.

    2.) I’m not quite sure if the “microeconomic theory” mentioned above, can be so straightforwardly be applied here. If we were to assume that consumers face the full price rise on everything, then overall there wouldn’t be significant relative price changes. It would just be an erosion of real income. Even if, there were relative price changes, we would then need to consider the substitutability of goods. I hope you aren’t going to say, yes we can fully substitute away from food towards clothes :P .

  • Jason

    Lolimar, I think you need to educate yourself a bit before you start dribbling your first year understanding of economic theories. The first point to make is that there is no tax. There is a fixed price on pollution that big polluters will pay which will eventually revert to a market (floating) price. In the first 3 years the top 500 polluters will be required to pay a ‘fixed’ price of $23 a ton on the pollution they release (some call this a carbon tax, but it’s not a tax) In 2015, the ‘market’ (business trading between each other) will determine the price based on the ‘caps’ or ‘limits’ that are set on the amount of pollution that can be released.

    How does the cap work? Every year, as the pollution limit is reduced, fewer permits are given. This effectively makes it more expensive to pollute giving companies a greater incentive to switch to low polluting technologies, products and services and/or become more efficient.

  • lolimar

    “Lolimar, I think you need to educate yourself a bit before you start dribbling your first year understanding of economic theories.”

    No need to get worked up over this. I didn’t attack the author of the article with insults, so I expect the same respect, unless that is you want to dissuade comments here, contrary to what the committee would want. Don’t expect to persuade people, if you simply insult them from the get-go.

    Yes I concede, that it isn’t exactly a tax post 2015, but between 2013-2015, it will have the same effect. In fact, the article itself discusses this policy in relation to a tax. We have producers who have to pay a cost they wouldn’t have to otherwise, the new equilibrium price will be dependent on elasticities, the cost is paid to the government and so there is a dead-weight loss.

    “How does the cap work? Every year, as the pollution limit is reduced, fewer permits are given. This effectively makes it more expensive to pollute giving companies a greater incentive to switch to low polluting technologies, products and services and/or become more efficient.”

    You have yet to show me the difference between this policy and a tariff then. If the technology was good enough, then as clean energy advocates like to say, clean-energy would be more efficient and naturally, resources would be allocated towards cleaner energy, but that has hardly been the case.

    By simply slapping an extra cost to the more carbon emission intensive energies, you reduce the need for those cleaner companies to innovate and get the better technology we need, because they can simply get by with the current technology.

    Once again, whether greenhouse gases are really a simple externality is a very important consideration. Carbon dioxide isn’t a bad thing, too much of it is.

  • Lachlan Walden

    Definitely a very well-written article providing a unique insight into how the federal political landscape may just end up playing out over the next few years! Good stuff :)

    While I am hoping that the factors that you outline may be able to have a substantial impact on the ALP’s election chances next year and potentially save the carbon tax from Abbott’s reckless policy platform, it’s unfortunately probably quite optimistic in terms of the Australian people suddenly – after being comprehensively hypnotised by Abbott’s ‘toxic tax’ mantra for almost two years – being able to recognise the carbon price as the most appropriate mechanism for dealing with climate change once the sky doesn’t fall in.

    @ Lolimar:

    “You have yet to show me the difference between this policy and a tariff then. If the technology was good enough, then as clean energy advocates like to say, clean-energy would be more efficient and naturally, resources would be allocated towards cleaner energy, but that has hardly been the case.”

    -No, it hasn’t been the case because of the ‘market failure’. It’s for this very reason that we need a price on carbon!

    “By simply slapping an extra cost to the more carbon emission intensive energies, you reduce the need for those cleaner companies to innovate and get the better technology we need, because they can simply get by with the current technology.”

    -A price on carbon is always going to be the most economically efficient way of reducing emissions – the “cleaner companies” will still have incentive to reduce emissions as they will be able to pocket the difference between the compensation (or increased market prices) and their costs of production.

    “Carbon dioxide isn’t a bad thing, too much of it is.”

    -Are you suggesting that we don’t have too much of it?! It’s basically irrefutable that carbon dioxide emissions from economic activity and production are having a negative impact on the world’s environment to the extent where unless action is taken economic growth will be profoundly limited in the future.

  • lolimar

    Looks like we’re getting some comments and discussion which is good!

    -A price on carbon is always going to be the most economically efficient way of reducing emissions – the “cleaner companies” will still have incentive to reduce emissions as they will be able to pocket the difference between the compensation (or increased market prices) and their costs of production.

    http://www.economist.com/node/21548962 , currently there is a small incentive, but not much. Firms are profit maximising, but relatively risk-averse, it will take more than a carbon price to get the innovation and technology we need . This was a problem that was identified by scientists, they should have a larger role in solving it. When it comes to research, collaboration is most effective, and I don’t think you’ll find firms willing to freely share the tech that gives them the competitive edge.

    “-Are you suggesting that we don’t have too much of it?! It’s basically irrefutable that carbon dioxide emissions from economic activity and production are having a negative impact on the world’s environment to the extent where unless action is taken economic growth will be profoundly limited in the future.”

    Umm I didn’t say that at all. Yes I agree, we have too much of it. But don’t get caught up into thinking carbon dioxide = bad immediately. It’s not. Plants need it for photosynthesis. Does that mean that the carbon dioxide which is needed for that process is a cost? Humans produce it directly all the time, does that mean we should tax humans for breathing? Therefore we should treat only the level of excess carbon dioxide emissions as the cost.

  • http://www.linkedin.com/pub/dean-pagonis/1b/117/319 Dean Pagonis

    Lachlan,

    “…and potentially save the carbon tax from Abbott’s reckless policy platform”

    Could you tell me the extent of Abbott’s policy platform? When I last checked, he hadn’t released his policies for the next election. You can’t say that unwinding the carbon tax, NBN and the mining tax are his ‘policy platform’ – they are just three ‘policies’.

    I am not defending Abbott in any way at all on this issue – I support market-based mechanisms such as the CPRS given they are the most economically efficient way of bringing behavioural change in the economy. I am simply making the point that can’t make rash comments like that before you know the full extent of his position in all areas of policy – you might agree with the rest of his platform by the time the next election comes around.

  • Lachlan Walden

    @ Lolimar:

    “Therefore we should treat only the level of excess carbon dioxide emissions as the cost.”

    -This is exactly what introducing a price on carbon will do!

    @ Dean:

    “Could you tell me the extent of Abbott’s policy platform? When I last checked, he hadn’t released his policies for the next election. You can’t say that unwinding the carbon tax, NBN and the mining tax are his ‘policy platform’ – they are just three ‘policies’.”

    -While Abbott hasn’t released all his policies, I would suggest that he has certainly indicated his intentions for being voted into power to the degree of them being appropriately labelled as a ‘policy platform’. Since when were commitments to unwind fundamental reforms such as the CP, NBN and mining tax not policies and since when did policies of such significance not make up a ‘policy platform’?! That’s not to mention his other commitments such as a more comprehensive paid parental leave scheme (accompanied with a 1.5 percentage point increase in company tax for the nation’s largest 3200 firms as well as a $100 million top-up from the budget) and extending childcare subsidies to nannies.

    Additionally, I would like to make the point that Abbott is unique in that pretty much his whole strategy and thus ‘policy platform’ has always been about saying ‘no’ to basically all of the ALP’s reforms. Furthermore, both Abbott and Gillard have very little scope to make further major policy commitments for the coming 2013 election due to severe fiscal constraints so I personally doubt that their policy platforms will be extended substantially more from their current state.

  • http://www.linkedin.com/pub/dean-pagonis/1b/117/319 Dean Pagonis

    1. unwinding previous government policies is hardly policy itself; the policies are what they are replaced with eg. Direct Action Plan instead of CP, the technology reforms which we will hear about from Malcolm Turnbull (he has mentioned a mix of technologies) as opposed to NBN, and of course he is removing the ‘mining’ tax (which it isn’t, its a tax on coal and iron ore). Again, not advocating any of these positions, just making a point that removing previous government policy is hardly ‘public policy’ – it’s like saying removing Work Choices was policy, instead of saying the Fair Work Act was Rudd’s IR policy after the 2007 election. That’s my view anyway.

    2. Extending child care subsidies is not a policy – Tony Abbott said he is having it reviewed by the Productivity Commission.

    3. So Abbott is unique in opposing government policy as an opposition leader? This is standard practice by opposition leaders in Australian politics. It is a political tactic used given they don’t have alternative policy on every issue.

    4. Despite having little fiscal scope, you don’t have to spend money to advocate alternative reforms – you can shift funding from one program to another. We had heard very little from Abbott on health, education, welfare, defence spending, infrastructure spending (which could replace NBN spending) – they make up quite a substantial part of the budget and there has been very little on those issues.

  • lolimar

    woops lol! Still, I think that there is a lack of attention on research and development.

    With regards to the policy platform, I can see where Dean is coming from, but there’s something to be said, that it’s a serious problem for Abbott if this is how voters perceive his ‘policy platform’.

  • Michael

    @lolimar,
    As you said, carbon dioxide is naturally occurring, and necessary for plant growth etc. However the amount of carbon dioxide that plants need is adequately provided as a waste product of breathing, by all animals. The co2 that we are taxing, the excess, is surplus to requirements, and in this case is directly harmful. No one is suggesting all co2 is an externality, but the co2 produced by economic activity is. All of it. We need to actively reduce our emissions from economic activity to next to nothing in order to allow the planet to start the long and painful process of taking some of the co2 out of the atmosphere.

    @dean,
    as far as I understand it, Abbott is still talking up his ridiculous Direct Action plan, which isn’t backed by anyone of any repute, scientist or economist. That sounds like a policy to me. It’s an absolute non-answer to one of the most serious questions we face, and gives the impression that Abbott has neither read any scientific literature on the topic, nor has he listened to any of the eminent scientists who speak publicly about it. As someone said (can’t remember who, maybe Nick Minchin on his retirement?) in an article on the issue a little while ago, it’s the kind of solution you have when you don’t think there’s a problem and you want something you can roll back at an instant with very little loss.

  • http://www.linkedin.com/pub/dean-pagonis/1b/117/319 Dean Pagonis

    @michael
    If you read my last comment, I clearly stated that the Direct Action plan is a policy. My argument was that rescinding the carbon tax cannot be called policy in itself.

    You are probably right about his policy being an ineffective one, but you are looking to closely at the economics and too little at the politics of this. This is clever politics on Abbott’s side, because he is taking the populist route. It doesn’t win your vote, but there are many narrow-minded people who are not across the issues that will vote for Abbott. I think David’s article makes a great point about how the politics changes after the policy is implemented on 1st July, and he may well be right. Only time will tell.

    Like I said in my previous comment, I am not advocating his position at all, I am just making a simple point about what is policy and what isn’t.

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