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‘Backflipping’ to credible policies is good politics

By Geoff Carmody - posted Thursday, 24 June 2010


Credible economic policies seem largely to have gone missing in Australia. Resource taxation, environmental policy, and a robust Budget deficit reduction strategy, are examples.

Policy consultation is absent, or a “dialogue of the deaf”. Advertised policies seem poorly designed.

This is bad economics, bad for Australia’s international reputation, and probably bad politics.

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Devising a package of reforms covering several key areas may improve chances of better outcomes. A package covering (i) mining taxation, (ii) credible environmental policy, and (iii) a robust Budget deficit reduction path, might overcome the current damaging policy impasse.

The first component should cover mining taxation. The Resource Super Profits Tax (RSPT) won’t apply until 2012. Can’t we have urgent, meaningful consultations between the Government and the mining industry instead of a charade? Most elements of the RSPT should be negotiable. These include application to existing mines, “grandfathering” or transition arrangements for them, the tax rate, the carry-forward rate for expenses, etc.

Non-negotiable items are (i) profits-based taxes should replace existing state royalties, and (ii) minerals tax reforms should be revenue-neutral. On these points the government and miners seemed to agree (before the present trust-destroying shambles unfolded).

The second component restores shattered environmental policy credibility. The CPRS was a mongrel, made less sensible by the Rudd/Turnbull modifications. Abandoning it was good policy. Leaving an emissions price hole filled by a hodge-podge of “direct action” cosmetics is bad policy.

Whether for climate change mitigation or resource conservation reasons, there’s a case for putting a comprehensive price on greenhouse gas emissions. A carbon tax best does the job. It should start at say, $20-$30 per tonne of emissions, increasing on a predictable path. This is the economy-wide signal that will unleash emission abatement responses as the market accepts the emissions price is “locked in”. As the emissions price increases, the need for costly, ineffective, cosmetic, “green” patch-up policies disappears. Resulting savings will support budget deficit reductions.

The new emissions abatement policy should have two core features. First, the carbon tax should have no exemptions. Second, it should apply to Australian consumption of greenhouse gas emissions, not production. This can be done by having the carbon tax operate in tandem with our GST system, using “carbon tax input credits” to flow the price signal down the supply chain, as with the GST. Exports are zero-rated (and taxed by the buyers of our exports). Imports are taxed like their locally produced competing products. Such taxes are WTO-compliant.

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This second feature is crucial.

We know countries won’t cut emissions simultaneously. We’ve also learned that trying to impose a model that screws “first movers” and benefits “late movers” will fail. “First movers” need assurance early action won’t damage their competiveness, losing jobs and industry offshore to “late movers”, while not reducing global emissions at all. The evidence on this is clear. Are governments listening? A national consumption policy approach eliminates trade competitiveness as a deterrent to “first mover” action. We can lead by example, the rest of the world can follow, and no country loses competitiveness.

If we can’t get the rest of the world to follow, we might as well do nothing anyway.

This model allows the government and the Opposition credibly to pursue their promised 5 per cent emissions reduction target, regardless of Copenhagen, rather than, as now, just “talking the talk”.

The third component in the package is a credible, robust, Budget deficit reduction path. Overseas, there’s a financial and public debt storm brewing. We’d better be in good shape to weather it.

The RSPT is dodgy Budget financing. Its proceeds are being spent several times (for example, to “encourage” West Australia and Queensland to support this tax, in addition to recent promises to spend it in other ways). Crucially, the revenue expected from it assumes no adverse industry reactions, despite concerns it will reduce new mining investment, activity and tax revenue.

More robust deficit reduction measures exist. A consumption-based carbon tax will raise a lot of revenue as it raises the price of emissions. Only a small part of this should be a net revenue gain to the Commonwealth Budget. Most should be used to finance income (and other) tax cuts and increased social welfare benefits.

The carbon tax is not designed to cut real incomes, especially for lower income groups. It is intended to raise the price of emissions-intensive products relative to “greener” products. That signal changes consumer behaviour and production technology across the economy. But some of the revenue raised could be used to help reduce the Budget deficit.

Two other measures would help restore policy credibility on climate change and Budget deficit reduction. First, reinstate excise indexation for petroleum products. This stops their real prices falling under what is effectively an increasing emissions subsidy. In two to three years, excise indexation cumulates to a $1,000 million annual improvement in the Budget bottom line, rising by an extra $300 million or so each year after that.

Second, abandon or quickly phase out the current FBT concessions for motor vehicle use. These subsidise more emissions. This would raise another $1,000 million (plus) a year towards Budget deficit reduction.

A deal on this policy package requires restored trust and “good faith” negotiations.

Some assert the Government can’t reverse its position on the RSPT, (or other positions). They say more “backflips” would destroy its credibility. This is nonsense. The best people make mistakes, and learn from them. Some younger people have to learn that adjusting positions in the light of evidence shows strength, not weakness. Most older people “get it” from experience.

The Government should assess the evidence, and, as necessary, change its mind. That’s what smart people would do. Ask John Maynard Keynes.

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First published in the Australian Financial Review on June 16, 2010.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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All articles by Geoff Carmody

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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