Climate

Three Airlines In Australia Just Inadvertently Demonstrated That Carbon Taxes Work

CREDIT: Shutterstock

Three airlines are in the hot seat in Australia, after failing to pass claimed savings on to their customers in the wake of a repealed carbon tax.

Back in July of this year, Australia axed its $23-per-metric-ton carbon tax. ($20.39 per metric ton in U.S. dollars.) The repeal included provisions that require companies to pass on the savings in reduced costs to their customers, and give the Australian Competition and Consumer Commission (ACCC) new powers to ensure they do so.

When the tax originally began operation in 2012, three airlines — Qantas, Virgin Australia, and Regional Express — claimed it would add millions to their costs, and they would have to pass the additional burden on to consumers in the form of higher ticket prices. But Melbourne’s Herald Sun reported on Tuesday that when he tax died, all three airlines reversed their position, claiming “they had absorbed the costs and there were no savings to be found.”

ACCC head Rod Sims is reportedly unsatisfied by the response to an initial set of letters, asking the airlines for an explanation. “The ACCC expects that if domestic airlines fully or partially recovered carbon tax costs… cost savings will be passed through to customers,” the Commission told the Herald Sun. “Those price increases now need to become price decreases, on the basis of those earlier claims,” added Bruce Billson, Australia’s Small Business Minister.

The most suspicious circumstance is arguably that of Qantas, which paid out $106 million ($94 million in U.S. dollars) to the carbon tax in 2013, and placed a “carbon tax surcharge’’ on its tickets, according to reports. The airline now claims it absorbed that $106 million bill, “and that has been clear in our financial results over the past two years.” Regional Express initially claimed the carbon tax would cost it $2 million in the first year and this would require adding $2 to each ticket. But on Monday the airline said it never went through with that plan. As for Virgin Australia, it said the tax cost it $47.9 million ($42.47 in U.S. dollars) which it did not attempt to recoup from customers, and that it is cooperating with the ACCC’s request for information.

So it’s something of a he-said-she-said situation, but the takeaway is straightforward: either the airlines are currently overcharging their customers, or the carbon tax was never a significant economic burden for the airlines to begin with.

There’s a fair amount of evidence for the latter possibility. Because they simply put a price on carbon emissions and then allow individuals and firms to decide for themselves how to react to that price, carbon taxes encourage everyone to find the most cost-effective reductions that work for them — effectively turning the entire economy into a giant laboratory for finding the most efficient emission cuts. A recent analysis out of Britain suggests that this kind of carbon reduction can force firms to find new efficiencies and improvements in their business models. This grows the economy and adds jobs, even before second-order benefits like worker health improvements are factored into the analysis. All of which is why a large sweep of economists and policy experts across the ideological spectrum favor a carbon tax as a way to tackle greenhouse gas emissions.

Furthermore, Australia plowed much of the revenue from its carbon tax back into its economy, through other tax cuts and various rebates to households to compensate for any increase in energy costs. Economic models regularly show that this approach effectively eliminates any drag from the tax on the economy as a whole, and can actually leave the distribution of income more equitable than it was before. The Canadian province of British Columbia has had a carbon tax of this sort since 2008, and all evidence so far shows its economy is doing fine, businesses are flourishing, and carbon emissions are decreasing along with fossil fuel use.

Research by the Centre for Climate Economics and Policy at Australian National University suggested the carbon tax successfully cut the country’s emissions by 0.8 percent during its first year — the biggest one-year drop in 24 years of record-keeping.