Taxing Carbon In Australia

A somewhat strange and complicated series of political events has led Australia to the adoption of a carbon tax. John Quiggin, the blogosphere’s favorite Australian economist, delivers the analysis:

While the proposal is far from perfect, there’s a lot to like about it. The price of $A23/tonne is comparable to that in the EU, and should be enough to promote a wide range of reductions in CO2 emissions. Importantly in the Australian context, it should (with the support of some addition funds to allow the closure of existing power stations) end the use of brown coal (lignite) as a fuel. Brown coal produces about 50 per cent more emissions per unit of energy than anthracite (black coal), and Australia has lots of it. There will also be an incentive to continue the shift away from black coal in electricity generation and towards a combination of gas and renewables. Equally important, in the long run, will be improvements in energy efficiency. This is where price-based measures really shine, as compared to purely regulatory interventions — there are all kinds of ways to save energy and it is hard to predict, in general, which will be best.

The other side of the proposal is what to do with the revenue, and in this respect the current measure is a big improvement on the emissions trading scheme that failed to get through in 2009. That scheme gave greatly excessive compensation to large emitters in a way that encouraged them to stay in operation. While the business compensation in the current scheme is still excessive in economic terms, it’s a sensible compromise politically. More important is the use of the bulk of the proceeds to raise the income tax threshold from (around) $6000 to $20000, thereby taking a million or so people out of the income tax system. That’s a measure that will be hard to reverse, given that the Opposition has pledged “in blood” to repeal the tax if it win the next election.

Pricing carbon in order to enact offsetting tax cuts is generally considered the least politically plausible option in the United States context. Better to use the funds to buy off some polluters, and then once you’re doing that as a matter of coalition politics, you need to funnel subsidies into clean industries. But as Quiggin notes, the offset has a lot to recommend it as a matter of policy sustainability. If you do the tax-and-buyoff approach, there’s nothing stopping the bought-off incumbents from turning around and lobbying for relaxed regulations. By contrast, precisely because shifting the tax base is so politically challenging it’s also very hard to switch it back. Once the new system is in place for a few years, people will take steps to increase their personal energy efficiency and the “tax hike for making it cheaper to lazily forget to switch your lights off” deal isn’t going to look very appealing.