The 1 July Tax Switch

I spoke in parliament last night about the tax switch on 1 July, which will see taxes rise for polluters and fall for many workers. I also mentioned the Leader of the Opposition's pythonesque scare campaign.
Carbon Pricing
18 June 2012

A few years ago a Prime Minister of Australia said the following:

‘Implementing an emissions trading scheme and setting a long-term goal for reducing emissions will be the most momentous economic decisions Australia will take in the next decade. … This is a great economic challenge for Australia as well as a great environmental challenge. Significantly reducing emissions will mean higher costs for businesses and households, there is no escaping that and anyone who pretends otherwise is not a serious participant in this hugely important public policy debate. It will change the entire cost structure of the economy. We must get this right; if we get this wrong it will do enormous damage to our economy, to jobs and to the economic wellbeing of ordinary Australians, especially low-income households.’

Of course Prime Minister John Howard was just reflecting conventional economic wisdom when he said this in 2007. The first emissions trading scheme blueprints were produced in the 1990s.

On 1 July 2012, Australia will undergo a significant tax reform. Taxes on polluters will rise and taxes on all workers earning less than $80,000 a year will fall. In an article in Nature Climate Change, ANU Professor Frank Jotzo discusses some of the key features of the carbon pricing regime that Australia will adopt on 1 July. Our carbon price will cover around 60 per cent of Australia's greenhouse gas emissions. It will be a fixed price for the first three years, moving to a floating emissions trading scheme in July 2015 'with a fixed number of permits sold at auction, international trading allowed and permits bankable'. There will be 'a floor price starting at $15 a tonne and a ceiling price starting at $20 a tonne above the expected international price'. The policy foresees future linking with the European Union 'ETS and other schemes, subject to mutually acceptable mitigation commitments and compatible design'.

Professor Jotzo points out:

‘… that most lower-income households will be overcompensated for the increase in living costs, whereas households and higher-income brackets will bear most of the net costs.’

He also points out that the package involves tax reform. He says this is rare in practice, much less at this scale. He says:

‘Most cap-and-trade schemes have handed back the bulk of the revenue to emitters, missing out on the efficiency benefits from tax reform.’

Australia is not missing out on those benefits.

The impact of the carbon price will be around 0.1 percentage points per year on Australia's average income growth and, according to Treasury modelling, that will still see average incomes grow strongly under carbon pricing, increasing by about 16 per cent from current levels by 2020. Delaying global action by three years adds another 20 per cent to the first year global mitigation cost.

Meanwhile, the Leader of the Opposition has been going around the country running a scare campaign. After Norsk Hydro's announcement that it would shut down its aluminium smelter at Kurri Kurri, Mr Abbott said that this was the fault of the carbon price. After assistance, the impact of a carbon price will be about a dollar on a tonne of aluminium. Meanwhile, the world aluminium price is down $1,000.

The Leader of the Nationals told parliament in May that the cost of servicing a domestic refrigerator would go up by $300 a year. As the Minister for Climate Change has pointed out, that would involve calling technicians to the house about every five days to replace the entire refrigerant gas.

Senator Joyce has said that the carbon price will cause the price of a leg of lamb to go up to $100, to which I can only say: Pull the other one, Barnaby.

The Leader of the Opposition has said the tax is forever; the compensation is just for today. He misses the fact that there will be regular increases in payments and that pensions, allowances and family benefits are automatically increased for the impact of any future increases in the carbon price because they are indexed in line with the consumer price index.

The Leader of the Opposition has spent the last 16 months telling businesses they face electricity price rises of 25 to 30 per cent but the Chairman of the ACCC, Rod Sims, has said he cannot see any circumstances in which this would happen.

Mr Abbott is saying 'it's going to be a python squeeze rather than a cobra strike', but as the Minister for Climate Change has pointed out the only thing pythonesque about this is the Leader of the Opposition's Monty Pythonesque hyperbole. He should in fact be more worried about the dead parrot that is their Direct Action plan. As the member for Wentworth pointed out on Q&A on 25 July 2010:

‘You won’t find an economist anywhere that will tell you anything other than that the most efficient and effective way to cut emissions is by putting a price on carbon.’

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