In response to the Garnaut Report, Terry McCrann today claims that the government will collect “$30billion” from the carbon tax if the price reaches $70. This is a scare campaign being run by much of the Murdoch press. McCrann’s reasons that:
In theory, the price is then set by the market. But if we are to achieve the change in energy sources that is needed to get the 5 per cent cut in emissions, the effective tax will have to go to at least $70 a tonne.
Firstly, where does this number come from? It’s easy to throw around high numbers, but what’s the basis in reality? The Treasury modelling suggests that a price around $20-30/t (Garnaut recommends $26/t) can reduce our emissions to 5% below 2000 levels by 2020. This will be partly due to lower emission energy sources and partly from a range of abatement in many other sectors.
Secondly, the price wouldn’t get to $70/t, because due to international linkages we would be importing permits/credits from overseas. What this means is that the local price of permits would be capped by the international price which is currently trading around the €15/t mark, but presumably will track higher by 2020. Australia’s permit price could only track up to $70/t if international prices tracked up to this level, which would mean that there was true international action on reducing emissions, which is in Australia’s strong national interest, as Garnaut points out.
That means that whether or not we pay it as a tax, we WILL be paying that sort of sum. Which will feed into the price of everything – including health and education and food that were and still are excluded for the GST. At $70 a tonne, Canberra would reap close to $30 billion – to be ‘returned.’
No, we won’t. The price will be capped by international traded price for carbon abatement. But since when were health and education emission intensive sectors of the economy? Even food (given that agriculture will be initially excluded) won’t be significantly affected. The main impact is in electricity prices, and to a much lesser extent petrol prices.
Also, once the emissions trading system transitions from fixed price to floating price, Canberra won’t be receiving this amount of revenue. Rather than 100% of permits being sold by the government, it will be more like half, because some of the permits will be allocated to emitters for free (as they have done in every other ETS in operation around the world) and the remainder will be auctioned. So the $30b figure is actually closer to a half of a half of this (half price and half auctioned).
Significantly, Garnaut proposes that the emissions trading scheme be internationally linked to allow the “import of abatement.” What does that mean? Two things. Australian emitters could buy their permits from overseas. So Australia could keep emitting – that our targeted 5 per cent emissions cut actually occurs elsewhere. Indeed presumably if we were prepared to pay the 21st century version of Danegeld, we could increase our emissions. By buying even more foreign permits.
Yes, that’s right, and this is not a uniquely Garnaut idea. Every proposal in this country for an ETS (eg Shergold, CPRS etc) going back a long while have proposed international linking to other schemes. The EU ETS, operating since 2005, has always had as a core principle that abatement can be purchased from other countries where it is more cost-effective than local abatement. It is an understood principle that any country’s emissions level is a sum of its internal production combined with its import/export of abatement. So some of Australia’s abatement will happen locally, and some of it will be imported from offshore. This is what international trade is all about: we export those goods for which we have a sustainable competitive advantage (eg resources) and we import those goods for which we don’t (eg cheap white goods, and greenhouse abatement to the extent it is cheaper than local abatement). The main thing here is to make sure that there aren’t import restrictions placed on this trade (as the Greens and some NGOs would advocate) because that would seriously increase the economic cost of meeting any given abatement target.
How this would be ‘integrated’ with the need for revenue to flow to Canberra for permits, was not explained.
Not explained because the point of the scheme is to reduce emissions, not for revenue to flow to Canberra. Although the CPRS wasn’t budget neutral, the Shergold scheme (under Howard) and the current MPCCC proposals have budget neutrality as a core principle.
Meanwhile, Peter van Oselen may be a fine political historian, but his grasp of economics leaves a little to be desired.
Blanchett said “everyone will benefit if we protect the environment”. Yes, but does a carbon tax do that? It won’t if it causes no fiscal pain to consumers, because the whole point of a carbon tax is that it creates a price pressure on the use of dirty energy, thereby encouraging consumers and businesses to change their ways.
Take with one hand (carbon tax), give with the other (compensation). The result? No price pressure or incentive for people to change their energy use.
It’s the price signal that changes behaviour, not “fiscal pain”. If you are exactly compensated (or even if you are over or under compensated), you are better off by the amount of the compensation and then worse off by the amount of the cost increase. But you can do something to respond to the higher prices (ie energy efficiency, solar panels etc).
For example, if you use 8MWh of power and your power price goes up from $200/MWh to $230/MWh, that’s a $240 per year increase. Now if you get $240 as a lump sum (increased pension, lower tax, specific handout etc) you start off being no better or worse off. But if you then save 1 MWh through energy efficiency or solar panels etc, you save $230 rather than $200. The incentive is stronger to reduce emissions, and you are better off. The argument is the same whether you got $200, $300 or even no compensation. You are still better off if you reduce your consumption, regardless of your starting point. The compensation level defines your level of wealth, but it’s the price signal that encourages a change in behaviour.
Moreover, the reduction of compensation by higher price is NOT the main point of the carbon price, although it will clearly be an impact. Due to the low price elasticity of demand, this is high cost abatement. The main point of a carbon price is to reduce the greenhouse intensity of our power supply, and because clean energy costs more than “dirty” energy, power prices need to go up to give effect to the switch. And that’s where the environmental benefit comes from.