Home > Economics, Environment > How Gillard could improve the carbon tax

How Gillard could improve the carbon tax

March 23, 2011

The debate about the carbon tax is so passionate and divisive that a compromise is almost certainly out of the question. But that doesn’t mean we can’t consider the thought experiment. I am on the public record as being against Gillard’s carbon tax, but after Ross Garnaut came out recently talking about linking the carbon tax with other tax cuts I started thinking about what else could be done to make the carbon tax “less bad”. The following are the demands I would put to the government if they wanted me to consider supporting their new tax…

1. The first requirement, and non-negotiable for me, is that the tax cuts must be at least as large as the new carbon tax. I believe that the federal government is already too big, and I am very strongly opposed to any policy that would further increase the size of government. If the proponents of a carbon tax really believe that the policy is vitally important then they should be willing to offer large tax cuts, even if that means they need to cut government spending.

2. My second requirement, which is also a game breaker, is that the carbon tax must not later convert into an emissions trading system (ETS). While both will have a cost to the economy, in my opinion an ETS is worse, and is likely to be an ever-growing bureaucratic and regulatory nightmare. If there must be a price on carbon dioxide, then it should remain at a low, simple, and predictable tax.

3. The rate of the carbon tax should be relatively low. I don’t mean that it has to be insignificant, but it should not be so dramatic that it has a large impact on prices. The point of the tax is to marginally change the incentives on the supply side (speed up the technological evolution in energy markets), and there is no need to drive large changes in consumer behaviour. (Note that in his report on nuclear power, Ziggy Switkowski suggested that nuclear could be cost-effective with a carbon tax as low as $15/tonne.)

4. The new tax should be linked with the removal of other wasteful climate policies, such as mandatory renewable energy and government subsidies. On this issue Garnaut is going the exact wrong way, by endorsing the idea of a $30 billion slush fund to try and pick winners. One of the arguments for a carbon tax is that it is more efficient than the current policies. Fair enough. But then it should be used to replace those other policies, not add to them. Cutting other climate spending will ensure there is enough money to provide large tax cuts (more than offsetting the new tax) and also a bit of compensation for pensioners.

5. Importantly, there should be no automatic increases in the rate of the carbon tax. Any future increases should require a new act of parliament, and should be linked to further tax cuts to ensure that the size of government doesn’t grow over time due to the carbon tax.

6. The government should consider some sort of “McKitrick clause” which means that the tax is automatically abolished if global warming doesn’t eventuate. McKitrick suggested that any carbon tax should be linked to the rate of warming in the tropical troposphere, which is supposed to be a leading indicator of man-made global warming. While a direct link might be hard to manage, some sort of “non-warming trigger” could be included. This should please both sides of the science debate, as both sides will get what they want (so long as they are right about the science).

7. We need to allow nuclear power. Despite the disaster in Japan, nuclear power is still much safer than all other major power sources, including many renewable power options. Any policy on climate change that does not include the option of nuclear power is a disingenuous policy.

8. There is another way to put a price on carbon that wouldn’t involve a new tax (or ETS) at all. Instead of adding a tax to all goods that require high levels of carbon dioxide emissions, the government could instead cut taxes on goods with relatively low levels of carbon dioxide emissions. The ultimate effect would be exactly the same as the government wants (a “price on carbon”) but it would involve no new tax and would actually reduce the size of government. This would require the government to cut some spending, which could be partially achieved by removing climate spending programs.

  1. BilB
    March 23, 2011 at 8:52 pm

    The very first thing, John Humphries, before making any demands of governemnt is that you, as an economist(?), should declare what your position on Global Warming and Climate change is. The second is that you should proffer some plausible path, suitably meeting the urgency advised by the scientific body, to environmental security that fits within your guiding economic limitations. Unless you can do this you have nothing meaningful to add to the body thought on the subject.

  2. clintonmead
    March 24, 2011 at 5:35 am

    I totally agree, except for point 8.

    The carbon tax doesn’t directly tax goods based on their level of carbon emissions, it taxes carbon emissions directly (which flows through the price of goods).

    The only way I can see to run a scheme that directly cuts taxes on goods with relatively low levels of carbon emissions is to set a baseline for these goods, which is picking winners and losers.

    What we need to do is cut taxes on all goods, and then tax carbon, not create a government bureaucracy to “benchmark” what are relatively low carbon produced goods.

    My suggestion is to abolish the GST, and use the money saved from abolishing green “direct action/industry incentive” programs and the money raised through the carbon tax to fund the state grants money which currently comes from the GST.

    Lowering taxes is good, but you still get similar administrative burden with a lowered tax than a non-lowered tax. Adding a carbon tax and lowering other taxes is going to increase administrative burden. If we are going to add a carbon tax, then we should abolish another tax.

    I think the GST would be the most popular one to eliminate, and it would save business a lot of paperwork. And as an added bonus, we wouldn’t have to hear Gerry Harvey whinging about GST free online sales anymore!

  3. March 24, 2011 at 7:09 am

    @BilB — Being an economist doesn’t mean that I need to state my position on science. That’s a non-sequitur. But since you ask, I believe that humans are contributing to a moderate global warming trend, broadly in line with IPCC projections. The path to new technology will be determined by the market. And most importantly, public policy should only be introduced if the benefits exceed the costs.

    @Clinton — I know that the *current* proposal is for a production-based tax, but that doesn’t mean a consumption-based tax is impossible. Geoff Carmody has been proposing a consumption-based tax for a while, and I think his arguments are worth considering. As for which tax to abolish… I vote that we abolish the federal income tax.

    • clintonmead
      March 24, 2011 at 7:29 am

      Can you explain and/or link me to Geoff Carmody’s proposal?

  4. March 24, 2011 at 7:40 am

    Ziggy $15/tonne link is broken. Is it a typo, or is the government trying to prevent debate?

  5. March 24, 2011 at 8:01 am

    @Clinton — if you google “Geoff Carmody carbon tax” you’ll get plenty of hits. Here’s one I just picked at random: http://www.onlineopinion.com.au/view.asp?article=8307

    @Mikel — thanks, fixed now.

  6. TerjeP
    March 24, 2011 at 12:21 pm

    Unless we do point 7 I think anything else we do to reduce emissions is pretty much an act of near futility. Also I think the case for doing nothing other than adaptation is strong. It may be better to accommodate this problem rather than mitigate it.

  7. BilB
    March 24, 2011 at 9:40 pm

    This is where you go way off the rails right at the start, John.

    “The path to new technology will be determined by the market”

    The thing here is that the market created the Gloabal Warming and Climate Change problem and maintains it as an escalating and uncontrollably consequence of its very strength. Blurting out such an assertion in the face of the overwhelming reality of runaway fossil fuel consumption is mindblowingly naive.

    Can you prove your claim, or is this the dogma that keeps the libertarian dream alive?

  8. March 25, 2011 at 3:18 am

    @BilB — I’m not sure what claim you want me to prove. My comment about the market & technology was a normative statement of preference, based on my belief that the market tends to lead to quicker (and better) technological innovation than any other alternative.

    The reason for my belief is the past 200 years, where market based systems have continuously lead to more innovation, and government “picking winners” has been shown ineffective time and time again. The theory rests on the idea that the market has an incentive to innovate (because you can make money from new technology) but politicians have conflicting incentives (because they get more votes by being populist & helping special interest groups).

    I think your confusion comes from comparing the market system with a magical utopia. With that comparison, of course the market loses. But if you compare the market system with the actual alternative (government planning) then it performs quite well.

  9. BilB
    March 25, 2011 at 5:21 am

    What you’ve done here, John, is make a generalised self held view on markets and technology in relation to a specific problem and need. What we are experiencing with Global Warming is applied technology success overshoot. ie the market has been so successful in utilising fossil fuel energy that all other alternative forms of energy supply have been overshaddowed and are therefore unavailable at time when they are very much needed for a variety of reasons.

    Your belief is that market driven innovation will solve the problem. There are 2 aspects to this, certainty and timing. Market driven innovation MAY provide an answer to Global Warming, but if it does it is unlikely to achieve this in time to prevent the Destructive Climate Change that will most likely destroy market integrity. The problem is that CO2 emissions are increasing already past the point of no return and the market has not yet recieved the signal to change direction. The only signal to change direction yet visible is that of declining oil availability. But that decline is so far only projected, and will not apply a conclusive signal for another 10 years. At that point the time remaining before system collapse will be just another 10 to 20 years. Not enough time to develop and apply solutions before industry, and the markets it serves grinds to a halt.

    The best and most visible analogy of how this plays out is with the Japanese Nuclear Disaster. Every thing has worked reasonably well for decades, but once a crisis driven failure arose it has compounded and spiralled out of control. Your thinking reflects that of that industry’s executive.

  10. March 25, 2011 at 6:01 am

    @BilB — It is true that I hold my own views, though I think the same could be said of everybody. What is more important is the validity of my views. The idea that the market tends to result in more innovation that the political approach has much to recommend it — both theoretically and empirically. I would go so far as to say that the overwhelming conclusion of the evidence is that markets result in more innovation, and if you believe otherwise, I suggest the burden of proof rests with you.

    I know that politicians picking winners seems like a good strategy. It’s the easiest thing in the world to say “politicians should make things better”. But unfortunately, the world isn’t that simple, and politicians aren’t always as perfect as you seem to assume. When you have to chose between two imperfect options, it’s smart to pick the least worst.

    You say that I think the market will “solve” the problem. That is a strange use of words. What I said is that the market will lead to innovation. Neither I, nor any other free-market economist, has ever claimed that the market will create nirvana. Only proponents of big-government believe in nirvana fallacies.

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