Improving Gillard’s carbon tax

Published in The Drum ABC Online on 25 March 2011 under the title “How Julia Gillard could improve the carbon tax”.

The debate about the carbon tax is so passionate and divisive that a compromise is almost certainly out of the question.

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.

Author: John Humphreys

Chief Economist at The Australian Taxpayers Alliance, Sessional Lecturer at the University of Queensland, and National President of the Liberal Democrats.

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