Leslie Nielson, Economics Section
Introduction
The Garnaut Climate Change Review favoured the establishment of
a broadly applied carbon tax in preference to a heavily compromised
emissions trading scheme. Further, it proposed the introduction of
a carbon tax as an interim measure pending the establishment of an
effective emissions trading scheme. The Australian Greens in
particular support this approach.
What are emissions taxes?
The Organisation for Economic Co-operation and Development
(OECD) defines environmentally related taxes as any compulsory,
unrequited payment to government, levied on tax-bases deemed to be
of particular environmental relevance. The relevant tax-bases
include energy products, motor vehicles, waste, measured or
estimated emissions, and natural resources. For example, a
surcharge may be placed on every litre of petrol sold. Taxes are
unrequited in the sense that benefits provided by government to
taxpayers are not normally in proportion to the tax payments. In
theory, environmentally related taxes should be set at a level
equal to the ‘external’ environmental cost of a
particular product or activity such as air or noise pollution.
Where are they used?
Such taxes are extensively used in Europe, mainly in the
transport and energy sectors. They are suitable for situations
where direct emissions are difficult to monitor, or administrative
simplicity is a highly desirable policy feature (say where the
administrative capacity of a government is very low in relation to
an economy as a whole or in relation to a particular sector). The
Nordic countries are the most consistent users of environmental
taxes.
Advantages
Environmental taxes have been argued to have the following
advantages:
- they are predictable in their costs. Relatively stable price
signals can help business and consumers plan energy spending and
provide greater certainty for investments in energy efficiency that
have large initial costs
- they create a permanent and stable incentive to adopt a
least-cost way of reducing emissions and continued technical
innovation
- their effect is not susceptible to ‘strategic’
behavior by firms and non-government organisations that could
potentially distort an emissions trading market
- they put a limit on the costs of emissions reduction
- they can be implemented relatively quickly and are
comparatively simple to administer
- they are efficient in that they are transparent, simple and can
have a wide coverage and
- they are a revenue source. To ensure that the introduction of
an emissions tax remains revenue-neutral other taxes can be
reduced, or the proceeds of the carbon tax redirected to those most
affected.
Disadvantages
Emissions taxes as a means of controlling greenhouse gas
emissions also have some disadvantages:
- while emissions taxes work well in conditions of certainty,
they are less effective in conditions where the response to a tax
on emissions is unknown, which leads to a lack of certainty over
the amount of emissions reduction
- there are no guarantees that emissions will decline if
consumption of the goods and services that produce emissions
remains relatively unresponsive to price increases (that is,
price-inelastic)
- the level at which the tax is set to produce the best outcomes
cannot be known in advance. Thus the tax may have to go through
several changes before having the desired effect. This makes it
politically vulnerable, restricting the capacity for the best tax
level to be found
- if the tax is set at too high a level, activities that are
particularly sensitive to it may relocate to a location that does
not have such imposts
- depending on how the tax is applied, it may lock a firm into
one particular emissions reduction method simply to reduce the tax
imposed, rather than the environmental harm occurring. For example,
a tax on firms that do not use smokestack scrubbers may only lead
to the increased use of such devices. It will not lead to fuel
substitution or better combustion processes
- effective emissions reductions require effective international
action. The reality of widely differing and volatile exchange rates
and differing administrative capacities makes a co-ordinated and
effective set of emissions taxes on an international scale a
difficult objective to achieve. To date emissions taxes have not
received much support as the internationally preferred method of
controlling greenhouse gas emissions. The international community
appears to prefer the cap-and-trade approach
- they are potentially regressive. The impact of a flat carbon
tax will be highest on the lowest income households. This effect is
offset to some degree by the higher consumption of wealthier
households and
- they are a tax, and therefore are politically unpopular by
their very nature.
The nature of climate change impacts and long-term
effectiveness
Emissions taxes should be set at a level equal to the external
cost of the good or service provided. Not only is this hard to
calculate accurately, but there is the significant possibility that
this cost might rapidly increase. The progression of expected
climate change impacts is not linear; rather, impacts may become
increasingly severe. This means that the external cost of
greenhouse gas emissions will increase. This rate of increase may
well be at a faster rate than any tax can be adjusted to match.
Library publications and key documents
L Nielson, Emissions control: your policy
choices, Background note, Parliamentary Library,
Canberra,
10 May 2010, http://www.aph.gov.au/library/pubs/BN/eco/EmisisonsControl.pdf