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Paying for your emissions

By Juel Briggs - posted Thursday, 30 July 2009


The heated debate about the likelihood and severity of anthropogenic global warming (AGW) continues unabated. Among the conflicting opinions and the contradictory facts, there are some things that are reasonably certain. We know that our emissions are a drop in the ocean, at 1.5 per cent of the world’s total. The probability of Australia setting an example that will lead the world is just about zero, and so any effect that we can have on reducing world emissions is tiny.

This isn’t to say that we shouldn’t consider taking action. However, the biggest problem in reducing emissions is that our society’s technology, productivity and prosperity largely rest upon the availability of cheap and reliable energy. The by-product of the generation of this energy is, unfortunately, large amounts of carbon dioxide. Additionally, agriculture and waste disposal produce significant amounts of methane, a very powerful greenhouse gas.

Reducing emissions is not cheap; otherwise we would already be well on the way to having done it. A previous discussion in On Line Opinion gave a somewhat theoretical example of how the cost of significantly reducing emissions may be greater than society can afford. However, even at far lesser emissions reductions, adverse economic impacts are expected, with a report (PDF 788KB) from the Australian Chamber of Commerce and Industry estimating that manufacturers could expect a 4 per cent to 7 per cent reduction in profitability even under a low carbon price. In the case of agriculture (PDF 810KB), an ETS is expected to have a particularly harsh impact, for instance resulting in beef farming’s (net) costs rising by 15 per cent under the same low carbon price scenario as in the ACCI report.

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It is the conflict between the reasonably certain, national, high socio-economic cost of effective emissions reduction; with the less certain but potentially very high cost, global, enviro-economic externality of global warming that sits at the very heart of the climate/ETS debate. If we could find a way to reduce our emissions at a very low economic cost, I believe that much of this conflict would evaporate. A revenue-neutral Carbon Tax has been proposed by the CIS’s John Humphreys (PDF 301KB) as one way to achieve this.

If the carbon tax equivalent amount were deducted solely from business taxes (such as company tax and payroll tax), it could be expected that there would be very little overall economic costs to society in terms of declines in profitability, net job losses and business closures. The exception would be in emissions intensive/low labour content sectors such as aluminium smelting and agriculture, where it would be hard to balance a carbon tax with a corresponding reduction in payroll and company tax. Such an adverse economic impact in the emissions intensive sector would likely be balanced by increased employment and profitability in the low-emissions, high profitability and/or labour intensive sectors such as finance, services and hospitality.

Apart from the selective adverse impact on sectors such as agriculture (and the flow-on effect to rural communities and food prices), one disadvantage of such a revenue-neutral carbon tax is that it would not create the surplus tax income required for government investment in low-emissions technology/energy/R&D. Such funds could be raised by increasing the carbon tax beyond the “revenue neutral” position. However, this would then simply create many of the perverse outcomes that are expected from an ETS, such as carbon leakage and job losses.

To get around such problems, instead of taxing emissions at source, we could consider having a point-of-sale Carbon Consumption Tax, as proposed by Geoff Carmody. Such a Tax could be either revenue-neutral or revenue-positive. Under such a system, it would be comparatively (technically) easy to tax energy and fuel at point-of-sale to the consumer, because the carbon content of these materials can be readily calculated. For goods and services, such a tax would need to be based on the emissions that came about as a result from the entire process of the making and delivery of the product or service (not so easy).

The good thing about this system is that goods imported from countries without an ETS or carbon tax would receive the same (carbon) tax treatment as Australian made products. This solves the terrible problem that arises from a carbon emissions (source) tax or an ETS, which both act as a “prejudice” against Australian made goods and services in favour of imports from countries without an ETS/carbon tax (and as a result cause carbon-leakage and domestic job losses). The other advantage of a Carbon Consumption Tax is that our exports would be competitive in countries without a carbon tax/ETS.

The down-side for consumers is that they wouldn’t be able to buy non-carbon-taxed cheap imported goods and food, as will be possible under the government’s intended ETS (CPRS). Some people, however, may view this as an environmental upside and one that will ensure that Australian farmers and manufacturers are not unfairly disadvantaged in the domestic (and export) market.

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Such a tax is not simple like a GST, because emissions don’t just add a pre-determined percentage or quantity at each transformation stage, and the accurate allocation of emissions to products would be difficult. For instance, although total factory emissions would be known, a manufacturer of multiple products on linked production lines would generally not be able to properly allocate emissions to each product type. Besides which, the measurement, documentation, addition and audit of such information would be an expensive and complex nightmare, particularly for a product which may “pass” through many companies and processes on its way to market.

A simpler alternative is to use generic industry emissions data based on the typical “embodied emissions” for each product/service at point-of-consumer sale, as can be determined from Life Cycle Analyses. Such data is being produced by the AusLCI project, and is also available from other sources such as the Bath University database.

However, even this method gives rise to difficulties. For example, how could the taxing authority account for a window manufacturer who claims that the aluminum used on their frames was made using a high percentage of wind power, and hence that they should have lower “embodied carbon” taxes than the standard? Independent product assessment, certification and chain of custody tracking would be required to verify such claims.

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About the Author

Juel Briggs lives in Sydney and is an inveterate letter writer who has decided to step up a notch.

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