Despite the strong support for tax reform at last month’s economic reform roundtable, perhaps the most important single reform hardly rated a mention: a carbon tax – or, in the economists’ preferred euphemism, “a price on carbon”.
I don’t doubt that virtually every economist attending the meeting would have agreed that a carbon price is needed.
So why was it unmentionable? Because Anthony Albanese and his faint-hearted troops have convinced themselves that the main reason the infighting-riddled Rudd-Gillard-Rudd Labor government was sent packing at the 2013 election was Julia Gillard’s introduction of a carbon price in 2012, which that great statesman Tony Abbott repealed in 2014. Yeah, sure.
Add in Labor’s promise to make a minor change to “franking credits” at the 2019 election, the misrepresentation of which probably does most to explain why it lost, and you see why Labor’s brave warriors have concluded that any mention of tax changes brings instant political death.
But in a speech last week, Rod Sims, chair of Professor Ross Garnaut’s Superpower Institute and a former senior econocrat, decided to take his life in his hands and speak truth to power. He offered five reasons why a carbon price is both “necessary and urgent”.
For a start, our present policies won’t allow us to meet our climate targets without further piecemeal, unpopular and “hideously costly” measures. When Labor regained office in 2022, it cobbled together arrangements intended to ensure we reached our climate targets – a 43 per cent reduction in greenhouse gas emissions by 2030, and net zero emissions by 2050 – despite the absence of the obvious solution: a carbon price.
To largely eliminate our emissions, we need to transition from fossil fuels to renewable energy. Trouble is, though renewable energy is much cheaper than coal and gas, its installation costs are high – much higher than the cost of coal-fired electricity from established power stations, plus a bit of gas.
Albanese and Co introduced a “capacity investment scheme” under which the government largely underwrites the commercial viability of renewable generation and storage projects. The government picks the applications it prefers. But the scheme may involve project delays and higher electricity costs that could become a political problem for Labor.
The Labor government also took over and beefed up the Coalition’s main substitute for a carbon price, the “safeguard mechanism”, which requires various carbon-intensive industries to continuously reduce their emissions from arbitrary baselines.
Trouble is, the mechanism covers only about 30 per cent of emissions. And businesses can avoid reducing their emissions by buying “carbon credits” from other companies that have been able to reduce emissions cheaply by sequestrating carbon in soil, plants or old mines.
This would be fine if it was all rigorously measured and accounted for but, in practice, the system is full of holes, meaning net emissions aren’t really reduced.
There are various other more specific measures to reduce emissions – such as exempting electric vehicles from certain taxes – but the Productivity Commission has found them to be hugely expensive ways to reduce emissions.
All these shortcomings of the substitute arrangements would be avoided if only we had a “price on carbon”. The price – or tax – raises the cost of fossil fuels relative to the cost of renewables, thus improving the incentive to build more solar and wind farms.
So the substitutes achieve the objective much less efficiently than a carbon price would – meaning that replacing them with a tax could be expected to improve the economy’s productivity. (Productivity is the big reason economists like taxes – which are price incentives – rather than government regulation and picking winners.)
And whereas the substitute arrangements add to consumers’ energy costs, they don’t raise any revenue for the government. As with Gillard’s carbon tax, the extra cost of fossil fuels goes to the government, which it can then use to fully compensate all consumers bar the high earners.
Sims reminds us that in the two years before it was abolished, Gillard’s tax did work the way intended. Overall emissions declined by 8 per cent. Use of black coal increased relative to dirtier brown coal; gas power expanded relative to coal, and renewables expanded relative to gas.
Exit polls at the 2013 election found only 3 per cent of Coalition voters thought that scrapping the carbon tax was the most important issue the Coalition was offering. This is hardly surprising since, by then, voters knew they had been compensated with a tax cut and higher benefit payments, while honest Barnaby Joyce’s scare campaign of soaring consumer prices and “$100 lamb roasts” was bulldust.
But Sims isn’t proposing a return to the Gillard carbon tax. He advocates a simpler, more user-friendly scheme, a “carbon solutions levy” as developed by Garnaut and himself in 2024. It would be levied on only 108 sites of coal and gas production, and on petroleum imports, at the rate of the European Union’s carbon price. You see how much simpler it would be.
It would be levied on the emissions from these products, no matter where the emissions were released. So it would apply to the fossil fuels we exported, except if the receiving country had its own carbon price, such as the EU’s “carbon border adjustment mechanism,” which will take effect next year.
This tax on our exports would answer the calls for our government not to license new coal mines and gas fields. If the proposed new projects couldn’t cover the full social cost of the greenhouse gas they’d produce (that is, production cost plus the cost to society of the pollution they cause), they’d simply be unviable and they wouldn’t proceed.
At the time, Garnaut and Sims estimated that if the levy applied only to domestic emissions at the Europeans’ carbon price, it would raise about $20 billion a year, “more than enough to generously compensate households for higher electricity, gas, petrol and diesel prices”. That would leave money for repair of the budget.
Finally, Sims estimates that our present pace of reducing emissions needs to be increased by 25 per cent if we’re to meet our 2030 target. This month, Albanese will announce his target for 2035. Reintroducing a carbon price would also allow, and give credibility to, a much more ambitious target for 2035. And all it would take is a little political courage.
