Tough times in Australia for carbon

The development of an acceptable carbon price policy framework in Australia is proving to be both politically and socially challenging. Recent media reports indicate that the clear support from business for “carbon price certainty” has the caveat of competitiveness concerns and that public support is low, although arguably the public is never that enthusiastic about taxation.

. . . . . MINING giant Rio Tinto has added its weight to calls for Julia Gillard to reassure big polluting industries that her carbon tax plans will not damage Australia’s international competitiveness, warning it is unwise to act before China and the US. In an exclusive interview with The Weekend Australian, Rio Tinto chairman Jan du Plessis urged the Gillard government to rethink its carbon pricing policy and timing, saying it threatened the Australian economy when other leading economies appeared to be stalling on climate change action. “The question is, how and when does Australia move in the light of the disappointment of the Copenhagen conference and in light of the fact there are very few signs the big gorillas – the US and China – really are going to be moving,” the London-based Mr du Plessis said in Sydney.

 . . . . . This week, BHP Billiton chief executive Marius Kloppers warned the Prime Minister that Australia’s go-it-alone approach would be a “dead weight” on heavy polluting industries, and the nation should not penalise its “trade-exposed industries” by moving ahead of its international competitors.

There is far more opposition to a carbon tax than there is support for it, an opinion poll has found.

. . . . . the Newspoll, published in Wednesday’s The Australian newspaper, reveals 60 per cent of voters are opposed to the government’s plan to put a price on carbon next year, compared with 30 per cent who support it. Of the 60 per cent who are opposed to the tax, which Ms Gillard plans on introducing from July next year, 39 per cent of the poll’s participants said they are “strongly against” it. In comparison, of the 30 per cent who said they supported the carbon tax, only 12 per cent said they were “strongly in favour” of it.

Australia finds itself with mixed fortunes at the moment. While the resource companies benefit from a booming commodity market, they are equally struggling with costs as the Australian dollar continues to appreciate on international markets. The claim that a carbon price would further damage the competitiveness of the export based natural resources economy is making it appear that there are deep divisions in the business community over the issue, when in fact this may not be the case at all – despite the recent headlines!!

There are two fundamental principles of carbon pricing in play here and a balanced debate on these doesn’t seem to be making it into the press. Unfortunately the issue has also become politically charged with the division between the parties looking more like a chasm at the moment. Nevertheless, these principles should be discussed more widely – both feature in the recent WBCSD publication on carbon pricing which I discussed in my last post.

The first is the issue of the tax burden on society as a whole. A carbon price isn’t and never should be about increasing the net tax (revenue collection by government) burden on society, rather it should be about realigning the same level of revenue collection against a different metric, in this case carbon emissions. Introducing a carbon price into the principal domestic sectors of the economy and demonstrating an equal but compensating reduction in another revenue collection mechanism would be a bold move that clearly demonstrates to an increasingly skeptical public that this is all about change and not about revenue. The government has certainly talked about revenue neutrality, but has yet to give any real clarity as to what it means by “compensation to households”

It might be too late for a bold move, but doing so could also be a catalyst for simplification and a return to the very basics of the carbon price issue. For example, and this is purely for illustrative purposes, a $30 carbon tax in the electricity generation and personal transport sectors of the economy (nearly three quarters of energy use CO2 emissions come from these two sources, 220 MT + 70 MT out of 400 MT) would raise some $9 billion per annum. This is roughly equivalent to a reduction in Australian GST (Goods and Services Tax – VAT in the UK) from 10% to 8% (GST collects about $50 billion). GST may not be the right approach, but however such a compensating move is implemented, there is a desperate need for clarity around the principle of the approach, as discussed by WBCSD.

The goal of a carbon price is to create a change in the economy such that the market begins to differentiate between goods and services on the basis of their carbon footprint. In its generic realization, the carbon price, initially experienced by the emitter or fuel provider (e.g. by paying a tax, purchasing allowances from the government or implementing a required project), is passed through to the consumers of the product. The result is a change in the relative cost of most goods and services based on their carbon footprint, and the emergence of a new cost ranking within the economy. This will influence the purchasing decisions of consumers. Products with a high carbon footprint will be less competitive, either forcing their removal from the market, or driving manufacturers to invest in projects to lower the footprint. Any revenue raised by the government from carbon pricing, will be typically directed to the treasury as part of the overall national budget process. It should be used efficiently; for example, to offset any net change in costs to the consumer by reducing taxes. 

The second issue deals with the competitiveness of trade exposed industries. This is where much of the industry rhetoric is targeted and in fact the government has a reasonably complete and broadly fair position in this area, although an observer would struggle to know that looking at the press coverage. But there is some commentary getting out – for example in the Sydney Morning Herald this week in an opinion piece entitled “Carbon tax won’t kill the economy”. It’s worth reading the article as it’s too long to reproduce here, but the key point made at the end pretty much tells the story;

So it appears that the negotiation boils down to the gap between the government’s offer of 94.5 per cent compensation and the EITE’s call for 100 per cent. We are not too far apart here!

It’s easy to see how people can come to the, in my view, misguided conclusion that “a carbon price will kill the economy”.

If the whole economy was populated by highly emission intensive and trade exposed activities AND there was no compensation provided, perhaps then I would agree with the conclusion.

But clearly that’s not the case.

It’s not quite the case that the government is offering universal 94.5 % compensation, but there is a negotiation underway and the commentator is broadly correct with the view that the two sides are not that far apart.

This issue of trade exposure is also covered in the WBCSD publication as follows;

A transparent pass-through of operating costs to the consumer is an important feature of any market. It allows the manufacturer to adjust the sales price to maintain profitability, as new costs enter a process, or existing costs change. An increase in the sales price could only occur to the extent that the market allows the change to take place, due to competition from manufacturers with a different cost structure that may limit the potential for cost pass-through. This gives rise to one of the principal challenges of introducing carbon pricing into an economy.

Carbon pricing is being introduced piecemeal throughout the world. Some manufacturers incur the cost of carbon, while others do not, although they may be competing in the same market. A manufacturer incurring the cost of carbon is penalized, as the market price is set by a lower cost provider without the carbon price. This can result in “carbon leakage”, where a higher cost manufacturer struggles to compete, and market share is gained by a producer not subject to the carbon price. Consequently, the environmental integrity of the approach can be undermined and economic distortions introduced.

The design of a carbon pricing policy must recognize [this] issue[s]. For example, if the policy involves the use of an emissions trading system, the free allocation of a portion of the allowances to certain sectors means that they do not incur the direct cost, but retain the opportunity cost of carbon in the free allowances. The environmental goal is retained, since a fixed number of allowances are in circulation.

So the fiery debate continues in Australia and the politics gets murkier – it appears that this has become the new norm for climate change policy development in many countries. But it needn’t be, as there are clear paths open for both government and business to reach agreement and take the much needed policy forward.