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Australia’s Carbon Tax – Right or Wrong?

Background

During this past decade, there has been much debate about climate change. One of the main points of discussion has been carbon emissions, and whether there is a need for either an emissions trading scheme or a fixed price carbon tax in Australia. The previous Labor Government had announced that as of July 2012, there would be a fixed price on carbon emissions, which was to be known as the ‘Clean Energy Plan’ (CEP). The top 500 polluters were to be subject to this price, which was to start at $23 a ton and would rise 2.5% per year until the year 2015, and then subsequently replaced with a carbon emissions trading scheme. These plans are now in danger of being scrapped, after the conservative Liberal Party won the 2013 federal election. The new government is currently in the process of trying to repeal the program when the senate reassembles in July, 2014.

Carbon Tax or Emissions Trading Scheme?

The main focus of the government in pricing carbon was to ensure and encourage industry to find alternative ‘cleaner’ methods of production. This strategy was to force the hand of the bigger polluters to find these methods, as it would impact their on the bottom line. One of the main benefits of a direct carbon tax is that it seeks to put a price on externalities that are openly affecting climate change 1). The biggest polluters would then have to pay the set price per ton of carbon that they emitted. It is believed that the top 50 polluters are responsible for 75% of total industry carbon emissions in Australia. In comparison, an emissions trading scheme (ETS) would try to limit emissions by putting a price on a right to emit. This is done by setting maximum emission limits in a certain area and then dividing this into smaller amounts, for example, one ton. These amounts are then bought by companies who need to emit as part of their business, either directly from a regulatory party or from another permit holder 2). Whilst some argue that an ETS is a superior way in which to reduce greenhouse emissions, it is worth noting that this scheme would be much harder to monitor, and can be flawed due to market speculation and unreliable or inaccurate climate change data 3). A direct carbon tax was more likely to be a superior plan because there were better incentives for emitters to find alternative and cleaner methods of production.

Should The User Pay?

The CEP aimed to directly charge the biggest polluters by setting a fixed price on carbon emissions, or what some may call a ‘carbon tax’. This tax may be referred to as a ‘Pigouvian Tax’, named after Arthur Cecil Pigou, who is known as the forefather of environmental tax. His idea was to establish a user pays principle 4). The fixed price was start at $23 per ton, increasing by 2.5% per year until the ETS in 2015, thus ensuring a dual approach to carbon pricing. The main motivation to such a scheme was to eliminate market failures. The environment, habitats, animals and people were forced to pay the price for high carbon emissions whilst the polluters themselves have not had to pay for their actions. This tax had aimed to reduce or eliminate such occurrences. This pricing of carbon would most likely have a positive impact on the environment as a whole, whilst also reducing the impact it has on vulnerable parties.

Which Option Is Better?

One of the strengths of choosing a carbon tax over the ETS, according to some economists is that fixed pricing of carbon has a higher rate of transparency, and is less likely to succumb to political pressure 5). There is also an argument to reward emission reductions instead of penalising emissions production and also that the money which is collected from the carbon tax should be invested in developing cleaner and more environmental energy production and transport instead of paying compensation to consumers. However, the carbon tax is not necessarily fool proof. Some economists also suggest that the tax may become ineffectual due to the implementation of a double dividend, by the returning of taxes paid to the government by cutting other taxes or paying compensation to consumers 6). Whilst this is a valid argument, it should be noted that even if the pricing of carbon was to be revenue-neutral, significant environmental improvement could be achieved by the bigger emitters investing in cleaner energy sources.

Overseas Trading

The government’s CEP will also allow companies to purchase carbon credits from overseas entities. This will commence when the ETS is introduced in 2015. International linking will let companies who emit high levels of carbon in one country become linked to companies in other countries who are capable of reducing their emissions. Companies in Australia will also be able to purchase carbon credits from credible international sources. The carbon credits bought cannot be used to release carbon in other countries. Whilst this is an innovative idea, the government must ensure that international permits are in fact credible. This will only become viable if the current governments of the overseas countries are willing to participate in such programs.

Who Pays?

Putting a price on carbon will have some cost impacts to producers and consumers. Even though the government concedes that the cost of energy and other day to day living expenses will rise, it has put together a compensation package for Australian households. This has been delivered in a variety of ways, including direct lump sum payments and a restructuring of the taxation system. Taxation reform came about by the increasing of the tax free threshold from $6,000 to $18,200 in the year 2012. Even though the carbon tax has impacted energy producers, the government intended to extend their support in a variety of ways. A jobs and competitiveness scheme was put in place where the government helped emission intensive companies, especially companies who face global competition. They also funded a clean technology program, where money was invested in finding alternative clean energy systems. These incentives aimed to assist companies and reduce the financial impacts that they faced. Consumers also fared reasonably well, as the compensation scheme was generous enough to leave most families better off.

Conclusion

Unfortunately the carbon tax and emissions trading scheme appears like it will be repealed by the middle of 2014. The scheme encouraged the biggest polluters to find better methods of production through the use of clean energy systems. Until this program was implemented, companies have never had to pay for the externalities caused by greenhouse gas emissions, in particular the top fifty polluters. A fixed price carbon tax appeared to be the best way to address the issues facing future carbon emissions, whilst an ETS may have been harder to monitor. Despite the suggestion that a fixed price carbon tax may actually be rendered revenue-neutral, any improvements made via the reduction of greenhouse gas emissions will be a positive for the environment as a whole, and it is difficult to put a price on such progress. The buying of international carbon credits after the ETS has commenced could have helped companies balance their production, as long as this program was strictly monitored and regulated, along with the cooperation of foreign governments. The government directly and indirectly compensated consumers for any price rises which may come about due to the CEP whilst also assisting companies that were severely affected. It was laudable that the Australian government had taken such a positive step in reducing carbon emissions.

Australia | Politics | Environment

1) Clarke, H, 2011, ‘Some Basic Economics of Carbon Taxes’, Australian Economic Review, Vol. 44, pp. 123–136
2) Redmond, D and Kendall, K, 2010, ‘Emissions Trading Schemes, Domestic Policy and the WTO’, Macquarie Journal of Business Law, Vol. 7, pp. 15-31
3) Sheehan, J, 2010, ‘Carbon Taxation versus Emissions Trading Schemes?’, Deakin Law Review, Vol. 15, No. 1, pp. 99-105
4) Pearce, D, 2012,’ Empirical Uncertainties in Climate Policy Implementation’, The Australian Economic Review, vol. 45, no. 1, pp. 114–124
5) Lloyd, P, 2012, ‘Designing a Carbon Price Policy: Introduction’, The Australian Economic Review, vol. 45, no. 1, pp. 77–85
6) Spash, C and Yo, A, 2013, ‘Deliberative monetary valuation: in search of a democratic and value plural approach to environmental policy’, Journal of Economic Surveys, Vol. 27, No. 4, pp. 768–789

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