The Carbon Tax: Tony Abbott’s Ticking Time Bomb

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?