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Boot-strapping on a carbon tax

By Alan Moran - posted Monday, 11 April 2011


Australia accounts for a trivial share of global emissions. Abatement action can only be meaningful if it is part of an international movement.

But the likelihood of this is receding. The US is abandoning its efforts at the federal level. Individual states, the latest ones being New Hampshire and New Mexico, are reneging on previous emission reduction commitments. Of other countries, China is targeting only greater energy efficiency, an inescapable corollary of modernization, while Japan has said it will go no further in reducing its emissions.

Carbon tax or alternative action fails to pass a cost:benefit test for the world as a whole and still less for Australia.

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For the world as a whole, independent economic analyses provide very different estimates from the 12 per cent income sacrifices forecast by government sponsored studies like that of Garnaut or the UK Stern report. The dozen or so peer reviewed studies estimate that a doubling of emissions would bring costs over the course of a century in the range of plus or minus 2.5 per cent. The major costs are associated with the IPCC forecast 20-80 cm increase in sea levels that economic analysts take as given. Offsetting these claimed negatives are positives in the retreat of permafrost and increased growing seasons. Many areas, like Russia, would make unambiguous gains from warming.

And when we think of these relatively minor costs (or benefits) we need to recognise that they take place over the course of a century in which real incomes are forecast to double. Measures which shut-out the cheapest forms of energy would seriously reduce this expected increase in global income levels.

For Australia, greenhouse action to ensure that global emissions are brought to a world average level entails a reduction of domestic emissions by 80 per cent. Treasury forecasts increases in costs of $860 a year for a $30 carbon tax and this would not take us close to the 80 per cent reduction to bring us to a global average.

It is the consumer, not, as the Government’s media infers, corporate Australia, that pays the costs of the carbon tax. Costs are passed on in price increases or are reflected in lower levels of competitiveness of our industries.

Already we are spending $3 billion a year on promoting climate change and subsidising carbon-reducing technologies. In addition we have the renewable policy which requires 20 per cent of electricity to come from high cost renewables by 2020. On conservative assumptions this will cost $2.7 billion a year. A carbon tax at $30 per tonne levied only on electricity would raise a further $6 billion ($15 billion if it is on all emissions).

Garnaut wants to allocate revenues from the tax mainly to compensating the poor and promoting R&D. He also advocates some form of cushioning effect on the most vulnerable export and import competing sectors. But the complexities this entails are enormous in view of overseas producers’ vast differences in the carbon intensity of their electricity.

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Garnaut opposes compensation for the generators. It is doubtful the Government will agree, especially since generators severely disadvantaged by a new tax would have a good claim to have been expropriated and seek compensation.

In also claiming the tax, if used judiciously, will raise national productivity, Garnaut , clearly dismisses the views of Winston Churchill who said, “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

Churchill’s colourful description actually understates the absurdity of a tax as a wealth generator. Even without other problems, a tax requires the deadweight of a bureaucracy to administer it and to redistribute the funds it raises. And, if a $26 per tonne enhanced productivity just think what wonders $260 per tonne would do!

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About the Author

Alan Moran is the principle of Regulatory Economics.

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