Additional Comments by Senator Nick Xenophon
As previously stated, I support action
on climate change, however it is crucial that the scheme is credibly
internationally and sustainable domestically.
I have long advocated for an
intensity-based scheme, as proposed by leading economic consultancy, Frontier
Economics, whereby emitters are penalised for emissions above a set baseline
and rewarded if their emissions intensity is below that baseline.
This approach preserves the same
intention the Government has to reduce Australia's emissions but would not
unnecessarily raise tax revenue (or prices to consumers) in the same way the
proposed carbon tax will or the proposed emissions trading scheme that will
follow it.
It will also enable a higher emissions
reduction target – it is cheaper and greener than the Government's Clean Energy
plan.
In addition to the concerns raised to
the Interim Report, I am also concerned that, under the current legislative proposal
and based on existing modelling that has been provided by Treasury, taxpayers
may face a multi-billion dollar shortfall.
Treasury assumes a price per carbon unit
of AU$29 in 2015, however Bloomberg analysts assumes a price per carbon unit of
AU$16.
As compensation to households under the
Government's proposal is in the form of lump sum compensation, which will not
change in line with the carbon price, the concern is that carbon revenue will
fall to about half of what is predicted if Bloomberg's forecast is correct.
This means that households would, in
effect, be over-compensated and the Govt will see a significant deficit in
revenue.
For example, revenue from sale of
permits in 2014/15 is expected to be $8.6 billion.
If the price in 2015/16 is $16, as
predicted by Bloomberg, not $29 per carbon unit, then this revenue will fall to
approximately $4.7 billion.
Under the intensity-based model proposed
by Frontier Economics, this would not be an issue as compensation to households
would fall with the carbon price.
This proposition was put to Treasury
during the recent 2011 Supplementary Estimates.
Senator XENOPHON: Bloomberg New Energy Finance, with
200 analysts around the world, say that the price of carbon is going to be $16
a tonne in 2015. The Treasury modelling says $29 a tonne in 2015. If the price
in 2015 is $16, not $29, the revenue will go from $8.6 billion to $4.7 billion.
There will be a revenue shortfall of almost $4 billion. If Bloomberg is right,
there will be a significant revenue shortfall, won't there?
Dr Parkinson: If the carbon price is dramatically
different from what is assumed, and people purchase the permits from overseas,
there will be an impact on the revenue collection.
Senator XENOPHON: Are you concerned that Bloomberg New
Energy Finance—which is, I think, a reputable financial analyst with 200
analysts around the world that look at this specific issue—is making an
assumption—
Dr Parkinson: But are they talking about the European
permit price or CDM prices?
Senator XENOPHON: In terms of Bloomberg's analysis
they are talking, I think, not just about Europe but about the global carbon
prices.
Dr Parkinson: But it depends on what can actually be
brought into the Australian market.
Senator XENOPHON: Sure, but if the global price is
reduced—
Dr Parkinson: But there is not a single global price.
So if what they are saying is that the European price is lower and we do not
accept European permits then it does not matter, in a sense. The international
price that is relevant is the price of the permits that are allowed into the
Australian system. Senator, when you calculate your number, are you talking about
just the household compensation or about the value of the free permits as well?
The value of the free permits moves automatically with whatever the price is.
Senator XENOPHON: My understanding—and I will be
corrected if I am wrong—is that there was anticipated revenue of $8.6 billion
in 2015-16.
Dr Parkinson: That is net of free permits?
Senator XENOPHON: That is my understanding.
Senator Wong: That is in the bill. You will see the
fiscal tables.
Dr Parkinson: Yes, that is right. So that is the
revenue from the sale of the permits themselves. So obviously if there is less
revenue from the sale of the permits and all of the outlays remain unchanged
then there will be a fiscal impact.
Ms McCulloch: There are elements of the package that
will move with the price, so you cannot just do a straight calculation of what
the impact would be from a change in price just by looking at the simple table.
For example, some of the free permit or EITEIs assistance would move depending
on what the price was. So the amount of compensation that you provide to
industry would be linked to those changes. The other point that you need to
bear in mind is that, if the prices are different, you may have different
emissions trajectories, which would also affect the volume of revenue or the
value of the revenue.
Senator XENOPHON: I guess, Dr Parkinson, that the
concern in my question is that Bloomberg undertook this relatively recent
analysis, saying that they think that the carbon price will be much less than
what has been forecast in Treasury assumptions.
...
Senator XENOPHON: But is there not an issue there that
there is a potential downside that, given that compensation for households is
relatively fixed—the compensation for households is relatively fixed, is it
not—
Dr Parkinson: That is correct.
Senator XENOPHON: So that is one part of the package
that is relatively inflexible.
Dr Parkinson: Yes.
Senator XENOPHON: I understand the policy rationale,
but that could cause a fiscal hole if the carbon price is less.
Dr Parkinson: And that is why I said that if
everything else is constant you are correct. The bits that are constant are
around the household assistance. But, as Ms McCulloch said, it is not then just
a case where if the permit price is 10 per cent lower then it flows through automatically,
because the value of the—
Senator Wong: Because other bits move.
Dr Parkinson: Because other bits will move.
Senator XENOPHON: Yes.
Dr Parkinson: But you are right: the household
compensation component is—
Senator XENOPHON: That is relatively fixed; that is
less flexible.
Dr Parkinson: That is right. Hence, if the cost of
permits is lower, the extent to which households are compensated or overcompensated
becomes larger.
Senator XENOPHON: That is right.
Dr Parkinson: It is akin to a tax cut or a payment to
households.
Senator XENOPHON: If Bloomberg is right on that
assumption, there is a significant potential fiscal downside.
Dr Parkinson: There has always been that in the same
way that, if permit prices were higher, there was always a sense that you might
find there would be more revenue, but you would need to think about returning
that to households or what you were going to do in terms of compensation.
...
Senator XENOPHON: Yes, I appreciate that. Minister,
let us suppose that in 2015 the carbon price is much lower than has been
forecast and the biggest fiscal risk is that the amount of compensation for
households is fixed. But, if the carbon price is lower, the price impacts will
be lower. Does that mean that the compensation package could also be lower in
order to reduce the fiscal risk? In other words, if the carbon—
Senator Wong: That has been quite clearly ruled out by
the Prime Minister.
Senator XENOPHON: So, even if the carbon price
collapses, people will still get the same—
Senator Wong: The assistance is permanent.
Dr Parkinson: The compensation that comes into effect
starting in May next year is permanent.
Senator Wong: It should be recalled too—and I think
this was referenced earlier—that the assistance package has a range of public policy
objectives. You recall that one of the significant benefits in the package is
the increase in the tax-free threshold. There are obviously participation
benefits associated with that as well. We have combined the carbon price
assistance package with a package in terms of the tax and transfer system which
is designed to encourage participation and is consistent with the direction of
the Henry review. [1]
This exchange strengthens the arguments
for the Frontier Economics approach, which involves less revenue churn and
significantly less price effects on the electricity sector, while achieving
greater environmental benefits.
Finally, I reiterate my position that
any proposal for a price on carbon should not be implemented until a Federal
Election has been called and a mandate obtained for the introduction of such a
policy.
Senator
Nick Xenophon
Independent
Senator for South Australia
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