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We need a GST-style consumption tax for carbon emissions

October 11, 2017

We need a GST-style consumption tax for carbon emissions

Alan Mitchell, The Australian Financial Review, 11 October 2017

Tony Abbott is stirring the political pot, but he is not the fundamental cause of the Turnbull government’s climate and energy policy problem.

The real problem dogging the Prime Minister and the glittering cast of energy sector executives at The Australian Financial Review National Energy Summit this week is that there is more than one perfectly defensible response to climate change, and the public remains deeply divided on which course to take. Just ask the Nationals whose constituents face high electricity prices and reduced employment in the coal industry.

Australia remains committed to the relatively stringent emission reduction targets embraced by the Abbott government in Paris. However, the decision by the United States to withdraw from the Paris accord threatens to put the other advanced economies at a competitive disadvantage.

For Australia, which is too small to make a significant difference to the global level of greenhouse gases, an obvious strategy would be to link its efforts to those of the US and the other advanced economies.

That almost certainly has always been Tony Abbott’s underlying policy strategy. He as good as admitted it at his first press conference as Liberal leader, and it explains the ease with which he can now reject his own emission-reduction targets.

The onus now is on the Turnbull government to both argue its case for doing more, and to do everything possible to minimise the cost of its policy to the nation.

Political challenge

The latter represents a major political challenge for the Prime Minister. There is much talk about the falling cost of renewable energy, particularly wind power. But the unpredictable variability of wind power and solar generation means they must be accompanied by heavy parallel investment in back-up generation, transmission, energy storage and demand management.

The former Productivity Commission chairman, Gary Banks, points out that Australia’s politicians have embraced stringent emission reduction targets while, at the same time, they have rejected the least-cost means of making the transition, including the use of gas and nuclear power.

Like the former Treasury economist, Geoff Carmody, Banks warns that the hard choices facing the country have been obscured by governments pretending that they are delivering reliable, affordable and low-emission energy when, on the politically acceptable technologies available, that is impossible.

The truth is they can achieve reliability and low emissions, but not at “affordable” prices.

Governments also have added to the cost by focusing the emission-reduction effort so heavily on the electricity generation sector. This has unnecessarily narrowed the scope for innovation.

Banks points out that in 1991 the Industry Commission warned government of the need for an economy-wide approach to reducing the use of fossil fuels, and the same recommendation has now been made again by the Finkel Review: “By 2020, the Australian government should develop a whole-of-economy emissions reduction strategy for 2050″.

Of course, the reason the current policy is still so narrowly based is that no one has had the courage to widen it.

The Turnbull government is facing some very hard decisions. The current policies almost certainly cannot reduce emissions to 26-28 per cent below their 2005 levels by 2030.

The Finkel report is part of a government review of climate policy that is due to be completed by the end of the year. That is this government’s chance for serious change.

Turnbull should start by bringing the public into the difficult decision-making process. The days of politicians pretending that they can cut greenhouse emissions painlessly must be over.

Unpalatable truth

The first unpalatable truth is that making Australia a low-emissions economy is going to be difficult and costly, and Australian households and businesses will be sharing the bill.

The second is that a broadly based, technology-neutral carbon tax or its close cousin, the equally despised emissions trading scheme, represents the lowest-cost way to reduce greenhouse emissions. That’s because they give the maximum number of people the greatest freedom to find their own ways to reduce emissions.

The Turnbull government, however, could make its carbon tax a good deal less painful than the Gillard government’s emission trading scheme, by taxing the consumption rather than the production of greenhouse emissions.

This is an innovation proposed by Carmody in Australia, but that has been widely advocated by economists in the US. The main effect of the change would be to exclude exports and protect import-competing industries from having to shoulder the burden of the tax.

It would be controversial. The Greens would complain about the big polluting multinational exporters being let off the hook, and Labor will claim it’s an extension of the GST by stealth. It would, in fact, be collected using the same accounting mechanism as the GST.

But it would help trade exposed industries, and it should take some of the pressure off the Nationals. The whole of regional Australia has an overarching exposure to global markets.

And, at least in the early years, a tax on carbon might make a worthwhile contribution to getting the budget firmly back into surplus – another challenge that the Liberals have found to be unexpectedly difficult.