The government’s view of the economy could be summed up in a
few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if
it stops moving, subsidise it. ~ Ronald Reagan
The nation is poised to embark upon a
major economic reform which will have far reaching consequences for every
Australian. The government's carbon tax may well become law but it lacks the
credibility of past economic reforms, its timing is poor and the economic pain
will not lead to any environmental gain.
The central issue the committee
sought to address is not whether a carbon tax is good or bad in economic
theory. The question before this committee and before the Parliament is whether
Australia should implement such a tax, followed by an Emissions Trading Scheme,
at a time of great uncertainty both about the economic outlook and even more so
about the nature and extent of the international abatement effort.
These questions are particularly
acute for Australia because our prosperity is based on a resource endowment
that is highly carbon-intensive. Moreover and importantly, much of that
carbon-intensity is not amenable to simple or obvious technological solutions –
for instance, there is little that can be done to reduce fugitive emissions in
It is against that backdrop that we
need to assess whether it is desirable for us to impose a carbon tax if many
other countries, including the world’s largest emitters and our major resource
competitors, do not.
The government's lack of mandate for a carbon tax
Prior to the 2010 Commonwealth Federal election the
Australian people were promised no carbon tax by the Prime Minister, the Hon.
Julia Gillard MP. Following a deal with the Greens and the Independents that
allowed it to remain in power, the government announced the establishment of
the Multi-Party Climate Change Committee. It first met on 7 October 2010, and
on 24 February 2011 the Prime Minister announced that a carbon tax would be
introduced. No specific details of the carbon tax were released at that time.
Since those events, the government has
moved with haste to implement the carbon tax. The initial detail of the tax was
released on 10 July 2011, with a complex and highly technical tranche of 19
Bills introduced into the Parliament on 13 September 2011. The government is
set to force a vote by the Parliament on these Bills in late 2011. Because of
the way they have been drafted there are major concerns about the ability of
future governments, of any political persuasion, to amend the system the
legislation will put in place.
The Australian community, which did not
vote for a carbon tax, has been given little time to consider and comment on
the 19 Bills. A rushed process has been compounded by the lack of transparency
of the modelling underpinning the reform process, where the data and models
used have not been made public nor released for scrutiny.
Shifting emissions overseas
The government’s plan imposes an
impost on the competitiveness of all Australian businesses, without the same
impost being imposed on our competitors. This will shift economic activity from
Australia to countries without a carbon tax or an emissions trading scheme. As
the Productivity Commission recently reported 'no country currently imposes an
economy-wide tax on greenhouse gas emissions or has in place an economy-wide
To reduce emissions in Australia in a
way that just shifts them overseas into areas where there will be no carbon tax
and where emissions will be higher for the same economic output is pointless.
To help overseas emitters take market share from even the most environmentally
efficient Australian business is not effective action on climate change; rather
it is an irresponsible act of economic self-harm.
As economist Professor Henry Ergas
... as well as being pointless, that action would be highly
costly. For example, economic analysis shows, and experience confirms, that world
minerals supply responds to relative prices, and does so reasonably quickly. If
we tax our minerals exports, and competing sources of supply do not, world
supply will shift to the untaxed sources, reducing our export volumes compared
to the levels they would otherwise have attained. The result will be to reduce
Australian real incomes (compared to the ‘no tax’ world), without yielding any
gain in terms of diminishing the risks of climate change.
The carbon tax will have a substantial impact on Australia,
given that our economy is based around access to relatively cheap fossil fuels.
Many Australian jobs are in industries that are carbon-intensive because our
inexpensive access to hydrocarbons is an advantage Australia has on
international markets. As the Productivity Commission stated in their
submission to the Prime Ministerial Task Group on Emissions Trading in 2007:
Independent action by Australia to substantially reduce GHG
emissions, in itself, would deliver barely discernible climate benefits, but
could be nationally very costly. Such action would therefore need to rest on
other rationales ... Australia’s high living standards derive in part from the
largely efficient use of an abundance of low cost fossil fuels, reflected in
relatively high per capita emission levels. As a result, substantially reducing
GHG emissions would be costly for the Australian community, with costs borne
mainly by consumers and the owners (and employees) of businesses that directly
or indirectly rely on the intensive use of GHG producing energy sources.
Because, as the Productivity
Commission points out, reducing Australia’s emissions would be so costly, the
government’s plan relies on purchasing billions of dollars of carbon emission
credits from overseas. Indeed, according to the government’s own modelling,
Australians would have to purchase $791.8 billion worth of carbon credits from
overseas to 2050, in today's dollars. By 2050, Australians will be purchasing
$59.5 billion worth of credits in just one year.
There remain significant questions
over whether existing international carbon trading schemes produce additional
reductions in carbon emissions. There have also been a number of cases of
corruption in these markets. Legislating for a scheme to reduce Australia’s
emissions in a way which relies so heavily on these still immature markets is
The inefficiency of the government's carbon tax
Professor Ergas also notes that
absent concerted and effective international action, including by Australia's resource
competitors, a carbon tax would merely be an extremely inefficient form of
Treasury’s climate change modelling allow one to estimate the extent of the
inefficiency. Using, for simplicity, a discount rate of zero, those estimates
imply the present value of the income loss from the carbon tax and the
subsequent ETS is approximately twice the present value of the revenue it
raises. In other words, on those estimates, the tax has an average excess
burden, defined as the income loss per unit of revenue raised, of 2. This is
four times greater than the average excess burden of the most distorting tax
identified by the Henry report, i.e. mining royalties and the crude oil excise...
In other words, this tax would be more distorting of economic activity than any
other tax we impose.
The inefficiency is even starker when
one realises that Treasury’s estimate of the income loss is based on the
assumption that credible international agreement on emissions reduction is
reached relatively soon. Indeed, in a reply to questions posed by Professor Ergas,
Treasury says that '[t]he modelling does not rely on an assumption that there
is a perfectly harmonised global emission trading scheme.'
But, it now admits, it does assume there is 'some mechanism' that 'allows
individual firms or Government’s themselves to trade abatement with other
Professor Ergas commented on this
What mechanism? No
one knows. Where is the legislation that would put such a mechanism in place?
No one knows. And what happens to the assessed costs if there is no such
mechanism? Again, no one knows. And since the models and data are not public,
nor will they, least of all the hoi polloi who will pay the price.
The carbon tax has the potential to undermine wider reforms
Over the past 30 years, the
Australian economy has gone through significant reform, which has made the
economy open to world economic pressures and has improved the performance of
infrastructure delivery, leading to lower electricity prices in particular. The
Productivity Commission estimates that National Competition Policy reforms
alone increased Australia’s GDP by 2.5 per cent.
While delivering broad-based benefits to Australia, these
reforms did impose large costs, particularly in the transition phase, on
certain towns and communities which had to adjust to the new environment.
Unfortunately, the carbon tax is set to have its biggest impact on these same
communities. Some of the hardest hit towns from the carbon tax will be the
electricity industry in the La Trobe Valley, the automotive industry in Geelong
and Adelaide and the steel industry in Whyalla, the Illawarra and Newcastle.
In addition, these communities are often at the frontline of
the so-called 'two-speed' or 'patchwork' economy. After becoming more
internationally competitive and resourceful from the opening up of the
Australian economy, they are seeing hard–won markets disappear due to a higher Australian
dollar and higher input costs, partly exacerbated by the mining boom. Imposing
a carbon tax on top of these pressures threatens to kindle an already
Accordingly, the carbon tax has the potential to undermine the
hard–fought acceptance of the economic reforms that have broadly benefited the
Australian economy over the past 30 years. Such a reaction can already be seen
in the calls for renewed industry assistance to the steel and manufacturing
industries. Large–scale renewal of industry assistance would be a retrograde
Yet, imposing a carbon tax now gives renewed potency to those
who would seek to resurrect such protections.
The overall impact on the economy – $40,000 from every Australian
Unlike previous reforms, there is no broad economic bounty from
a carbon tax that can be redistributed to offset disproportionate costs.
In total, under the government’s own modelling, the carbon tax
is likely to impose a $1 trillion cost on the Australian economy. As economist Professor
Henry Ergas explained to the committee:
... the costs Treasury estimates are anything but trivial. Indeed,
discounted at the Garnaut discount rate, they have a present value equal to $1
trillion—that is, one year of Australia's GDP.
This $1 trillion figure is about equal to the total output of
the Australian economy in one year. Or, to put it in other terms, the carbon
tax will cost every Australian, on average, $40,000.
This is likely to be an underestimate given that Treasury’s
modelling relies on the assumption that other countries will act in concert
with Australia to reduce emissions.
The government has provided no evidence that its policy
provides benefits commensurate with these costs. Indeed, without global action,
a carbon tax in Australia cannot do anything to mitigate the effects of climate
change. A carbon tax will be all economic pain for no environmental gain.
The need for a credible international agreement
Professor Ergas also notes that this
assumption (of early global transition to a mechanism for setting a uniform
carbon price) now plays a greater role in Treasury’s modelling than it did for
Treasury has assumed
away the problem. Indeed, it has done so even more starkly than in its work on
the Rudd government’s Carbon Pollution Reduction Scheme. Then, the base case
(against which the costs of the CPRS were assessed) involved a world without
abatement targets. This time, however, the modelling starts from the premise
that global abatement efforts are in place, even after the commitment period
for Cancun pledges ends. So the costs for Australia are only assessed assuming
global abatement will occur and persist.
As a result, Treasury’s estimates of
the economic costs of the government’s proposed scheme are likely to be a
substantial underestimate. In effect, were global agreement not reached but Australia
nonetheless imposes a carbon tax, the income loss could be two to three times
greater than Treasury’s estimates suggest. This would make the carbon tax’s
average excess burden eight or more times higher than that of any other tax we
impose. As Professor Ergas has explained:
... for every dollar
of revenue this tax raised, [the carbon tax] would reduce income by eight or
more dollars, whereas raising the same dollar of revenue by our current most
distorting tax would only cost some 70 cents of income loss. And all that for
no benefit, as unilateral abatement by Australia has no effect on the
likelihood of dangerous climate change.
In short, unless there is credible,
comprehensive action on a global scale, it is difficult to see why we would
impose such a tax.
Flaws in the government's approach
The government and its advisers have
simply evaded this obvious conclusion. Rather, their approach has been to argue
that the rest of the world is acting to deal with climate change.
It is true voluntary commitments have
been made, but the quantum of those commitments is highly uncertain, as is
whether they will be implemented. There is deep scepticism that any legally
binding agreement to reduce emissions can be reached before 2020 even by those
involved in carbon trading markets. As a World Bank survey of market
participants recently reported:
Survey respondents were not optimistic that a binding
international agreement could be achieved in the short term.
While much has been said about China,
there is no doubt that the subsidies China provides to emitters are very much
greater than any measures it imposes to reduce emissions. Moreover, despite the
glowing endorsement of China’s efforts in the Garnaut report, it is interesting
to note that while Treasury’s modelling in 2008
assumed (at pages 82 and 86) that China would join a world effort in 2015, its
latest modelling assumes (at page 42), (without even noting, much less
explaining, the change) that China will only join that effort in 2021 (at page
32). There is little realistic prospect at this point of significant action by
many of our major resource competitors.
Rather, the most realistic assessment
at this point is that we will continue to see costly, ineffective and
inefficient abatement measures adopted by a number of countries. As a result,
good sense suggests Australia must take account of the possibility that
comprehensive agreement will not be reached, and factor that into the decision.
This suggests that to act now, while the global prospect is so uncertain, is
The cost of acting now
To this, the government’s reply has
been that acting now is less expensive than acting later. This claim is
frequently made in Treasury’s report on its modelling but no evidence was presented
by Treasury to this committee that would substantiate it. Indeed, even on
Treasury’s own numbers, the opposite appears to be true, as Treasury’s estimate
of the income loss involved in meeting emissions abatement targets seems, for
the core policy scenario, some 30 to 40 percent lower now than it was at the
time of the CPRS.
A further argument put by the
government is that we need a carbon tax to reduce the uncertainties facing
investors, for instance in electricity generation. However, as Professor Ergas
and others noted in their presentations to this committee, while investors do
face uncertainties, including those associated with the future international
framework for climate change, those uncertainties cannot be wished away by an
Australian government. Rather, they are a fact of the current global situation.
The carbon tax does not eliminate these global uncertainties in any way; it
merely shifts them on to the community. It is by no means obvious that the
community is better placed to bear those risks than are global capital markets
and electricity consumers. Imposing such a tax as a means of reducing
investment risk in electricity is a case of using a sledgehammer to crack a
The government, echoed by Treasury in
its appearance before this committee, also argues that the tax will replace
more distorting alternatives. But an important effect of the substantial
revenue raised by the tax is to reduce the opportunity cost to government of
pandering to rent-seekers. As Professor Ergas has noted:
It is consequently
unsurprising that the government is not proposing to dismantle the many forms
of direct action in which it is currently engaged; on the contrary, it proposes
to greatly scale them up, throwing many billions of dollars raised by the tax at
a range of rent-seeking projects. Now, simple economics shows that, like
turning up the volume on a faulty amplifier, adding a tax to other distorting
interventions more often makes things worse than better; and if introducing the
tax actually leads to the other distortions being scaled up, then outcomes are
worse again. As a result, the supposed superiority of the tax is far from
assured. And the problems are all the more acute with an ETS, where the costs
of rent-seeking are lower and the benefits greater.
Finally, the government has argued
that the carbon tax is a form of insurance. But insurance makes the community
better-off when adverse events occur. In contrast, this tax will make us worse
off should our abatement efforts prove ineffective because other, far larger,
emitters continue to increase their emissions, as seems likely. As a
consequence of being worse off, we will be even more poorly placed to adjust
and adapt to harmful climate change, should it occur.
In other words, this is not a tax that
helps achieve our goals but compromises them; that rather than make our
prosperity and future safer, endangers it; and that is merely an instance of
politics seeking to triumph over prudence and sensible economics.
Uncertainty in the global economy
Since the announcement to introduce the
carbon tax on 24 February 2011, the world economy has re–entered a period of
uncertainty and pessimism driven by sovereign debt concerns in Europe and the
United States of America. As just one example of this increasing gloom, the
Australian stock market has lost almost a quarter of its value since the
government announced the carbon tax. Despite the re–emergence of a troubling global
economic outlook, the government appears determined to press ahead regardless
of the risk to the Australian economy from another tax.
The committee is opposed to the carbon
tax, but not to action in relation to climate change. The committee's view is
that this is not the time to proceed with the tax and certainly not in its
The publicly available information from
the Treasury modelling that underpins the carbon tax, as well as modelling
commissioned by the governments of New South Wales, Victoria, Queensland and
Western Australia, all point to reduced growth and a hit to employment. Despite
the potential cost to the economy and the uncertain global economic environment,
the government is determined to proceed.
The evidence provided to the committee
paints a compelling picture. The views of Australian businesses gathered by
this inquiry present a gloomy picture of the impact of the government's carbon
tax. The industries that generate our nation's prosperity in mining,
agriculture and manufacturing will be hit with a tax that their competitors
will not be paying.
Under the government's carbon tax, Australian
businesses will bear a cost impost that is self–inflicted and will add to the
pressure for them to relocate, most likely to where such a tax is not payable
and where production methods lead to higher emissions.
In the absence of a truly effective global
agreement, Australian businesses and those that depend on them will pay the
price as jobs and investment move offshore. Countries that opt out of
contributing to tackling climate change will be the gainers, while Australian
businesses battling global economic uncertainty, a high dollar and ever rising
taxes will face challenging times.
If all this was not enough, in the
course of the inquiry, the committee has been made aware of a number of quite
significant shortcomings with the modelling conducted by Treasury:
it has not modelled the quite probable scenario where Australia
imposes an economy-wide carbon tax and other countries, particularly its
resource competitors, do not;
the modelling significantly underestimates the costs of the tax,
by not modelling the transactional macroeconomic costs of the tax;
it has not performed a cost-benefit analysis of the effect of
imposing a carbon tax or completed a proper Regulatory Impact Statement as
required by best practice;
it assumes that the economy will maintain full employment;
its estimate of the effects of changes to the Renewable Energy
Target scheme is at odds with analysis conducted for the New South Wales and
the decision not to release modelling of the impact of a carbon
tax on specific regions of Australia, unlike the modelling released by some
State governments; and
it has not allowed public scrutiny of its full models, datasets
and specifications, in contrast to the approach taken by the Productivity
Commission with its modelling.
It is the Committee's view that the carbon tax should be
opposed and the legislation defeated in the Parliament as:
there is no electoral mandate for the carbon tax;
the modelling that supports it is based on a number of highly contestable
it is likely to undermine Australian businesses' ability to
compete in the global economy;
it will have significant adverse effects on particular sectors
and regions, with a particularly disproportionate impact on regional Australia;
the effect of the policy on the cost of living, and on jobs is
likely to be higher than the government's current estimates indicate;
there is considerable evidence that the carbon tax will not
result in any real environmental gain, despite imposing a significant cost on
the economy over the next thirty years.
The Committee recommends that the
carbon tax be opposed by the Parliament.
Committee recommends that if the Parliament believes that it should proceed
with the carbon tax, any provisions in the legislation designed to bind future
governments seeking to prevent them from amending or rescinding the scheme be
The Committee recommends that if the Parliament believes
that it should proceed with the carbon tax, that it does so once current global
economic circumstances have improved and there is a legally binding global
agreement on tackling climate change.
The Committee recommends that, should the government remain
committed to proceeding with its carbon tax, before any vote the Senate should
government release all of its modelling, including the actual models, datasets
and specifications used by the Treasury, to allow third party review;
government establish an Independent Expert Panel to review its modelling
approach and framework;
Productivity Commission be asked to undertake a cost-benefit analysis of the
proposed carbon tax;
legislation should be amended to ensure that any increase in the tax or
lowering of the emissions cap be made a disallowable instrument and to ensure
that carbon permits are not private property.
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