Australia's Carbon Tax  

Crikey has a summary of the new carbon tax introduced by the Australian government over the weekend (dubbed Australia's "Clean Energy Future" - sounds like a good title for a blog) - Carbon tax: Gillard’s ‘Clean Energy Future’ at a glance. The price is lower than I'd hoped, oil is exempt and there is lots of compensation for polluters - but its a start and the tax free threshold for income tax has been increased from $6000 to $18000 (ie. they are replacing income tax with a tax on pollution) so its a start I guess.

The government has announced its “Clean Energy Future” package to commence from July 1, 2012.

Price:

* Carbon price of $23 a tonne starting July 1, 2012, rising by 2.5% in 2013-14 and 2014-15
* Floating price from July 1, 2015
* Price floor of $15 a tonne (indexed), ceiling of $20 above the expected international price (indexed).

Pollution target:

* 5% reduction by 2020 as default position, new target of 80% reduction by 2050
* First 5 years’ caps announced in 2014 budget, extended every year by one year
* Nine-member Climate Change Authority (headed by Bernie Fraser) to recommend caps and targets and advise on all aspects of the scheme
* First report February 2014, then every two years. Government required to explain why if it does not adopt CCA targets.

Coverage:

* Stationary energy, industrial processes, fugitive emissions, emissions from non-legacy waste
* Agriculture not covered, light commercial and household transport not covered
* Other transport to face reduced business fuel tax credits outside agriculture, aviation to face higher excise;
* PC to review fuel excise arrangements regarding emissions intensity
* International permit use not permitted until >2015; maximum of 50% of international permits can be used by an entity.

Expected economic impact:

* 0.7% CPI rise in 2012-13
* GDP growth reduced by >0.1% pa
* 10% increase in electricity prices in 2012-13.

Household compensation:

* Pension to rise by 1.7%
* Self-funded retirees to receive increase in Senior Supplement
* Family Tax Benefit to rise by 1.7%.

Tax cuts:

* Two-stage increase in the tax-free threshold from $6000 to $18,200 on July 1, 2012 and $19,400 in 2015-16 – tax cut of $300pa for incomes up to $68,000
* Matching adjustment to tax rates to increase second tier (30%) to 32.5% and then to 33%; other tier rates to remain the same; no one to face a tax increase as a result of tax changes
* One million people no longer have to lodge tax return.

Industry compensation:

* $9.2 billion in compensation

Emissions intensive trade exposed industries

* Under Jobs and to receive assistance on three tiers:

1. 94.5% of free permits for industries with average baseline of a minimum 2,000t CO2-e/$m revenue or 6,000t CO2-e/$m value added
2. 66% of free permits for industries with average baseline of a minimum 1,000t CO2-e/$m revenue or 3,000t CO2-e/$m value added
3. 50% for LNG industry

* Assistance to be scaled back 1.3% pa
* Assistance to apply for at least six years
* Productivity Commission to review assistance in 2014-15 (or earlier if there is evidence of windfall gains) with the goal of assistance being wound back in 2018 to levels proposed by Garnaut Review if PC agrees

Steel Transformation Plan: $300 million for “innovation” in steel manufacturing (in addition to EITE assistance plus an additional allocation of free permits)

Coal Sector Jobs Package: $1.26 billion over six years to assist with emissions from gassy mines

Clean Technology Program: $1.2 billion to support low-emissions manufacturing

Energy Security Fund: to pay for closure of up to 2000MW of highly-emissions intensive generation capacity by 2020, provide $5.5 billion in free permits and cash to the sector to 2016-17, establish an Energy Security Council

Clean Energy Finance Corporation: to invest $10 billion over five years from 2013-14 in renewables and low emissions technologies (not Carbon Capture and Storage), run by an independent board

Australian Renewable Energy Agency to oversee $3.2b in renewables funding, in addition to any dividends from Clean Energy Finance Corporation

Fiscal impact:

* Revenue: $7.7-$8.6 billion pa to 2014-15
* Fuel tax savings: ~$600 million pa
* Household assistance: $4.1-$4.8 billion pa
* Industry compensation: $2.8-$3.3 billion pa
* Total impact: Additional cost to the budget (beyond scheme revenue) of $3.96 billion over four years including this year — spending to be accommodated within goal of return to surplus and 2% real spending cap.

Ross Gittins at the SMH reckons the punters will get used to it pretty quickly - Tax will be neither as good nor as bad as we're told.

SO NOW, supposedly, we know exactly what to expect when, as seems likely, the carbon tax comes into effect on July 1 next year.

The average household's costs will increase by about $10 a week. All but the top 10 per cent of households will receive tax cuts and benefit increases to compensate them for this higher cost and two-thirds of households will be fully compensated.

Uncertainty over? Don't you believe it. Now begins the search for the devil in the details. And what a frantic, spine-tingling, imaginative search it will be, led not by seekers after truth but by all those who stand to gain by convincing us disaster is about to befall us and our economy.
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There is much distrust of Julia Gillard and her assurances, particularly since she has broken her election promise not to introduce such a tax in this term. But how much trust can we place in her critics? Since the Coalition, in its day, has supported putting a price on carbon emissions, can we be sure Tony Abbott's change of heart isn't motivated primarily by desire to win back government?

We will be assailed by business people telling us how devastating the tax would be for jobs in their industry. Can we be sure they aren't exaggerating as they jockey for concessions? If we doubt the word of politicians, can we trust the predictions of business people?

This scheme is hellishly complex, so it contains much scope for apprehension, justified or otherwise. It is designed to change our behaviour without penalising most households - itself a puzzle to many people - so this will in time change the shape of the economy.

In truth, some industries will gain while others lose. We will hear at full voice from those fearing they will lose, while the winners stay mum, as do the great majority of industries that will be little affected.

Psychology sheds as much light on these questions as does economics. The safest prediction is that the tax won't be as bad as its critics fear, nor as benign as its defenders claim.

We can be sure of this because of humans' well-researched inability to accurately predict the future.

We almost always expect bad things to be worse than they prove to be and good things to be better than they prove.

And psychology teaches us another lesson: once the tax starts we will get used to it very quickly.

Crikey's Bernard Keane has a more in-depth look - Carbon tax: the policy and the politics.

This is a better package than the CPRS it is so closely modelled on, but not by a lot.

The key problem with the CPRS was that compensation for emissions intensive industries was so great and went for so long that it neutered the price signal, meaning the entire scheme was a giant money circulator that wouldn’t have started decarbonising the economy until well into the 2020s.

The same levels of assistance will apply to big polluters again, but this time the Productivity Commission will be on the case to review whether the assistance is justified and there’s an in-built bias toward reduction in assistance to the levels proposed by Ross Garnaut in his updated report if the PC agrees. But big polluters have a guarantee that their assistance won’t be cut until at least 2017, although the PC can start its 2014-15 review early if it believes there are industries making windfall gains from compensation.

In which case, the PC should start today, because it’s the scheme is a bonanza for big polluters.

There will also be an independent body to examine the case for accelerating Australia’s laughably unambitious target of 5% by 2020. The Climate Change Authority should become a potent independent source of advice that will pressure future governments inclined to recalcitrance in the key issue of how quickly we proceed with decarbonising the economy. In this regard, the increase in Australia’s emission reduction target from 60% to 80% by 2050 will become increasingly important.

So two independent sources of pressure on future governments to improve this scheme in its two critical features: how much the price signal is neutered by compensation, and how fast we should be reducing emissions. The effectiveness of these two bodies in making the case for harder and faster progress will determine the effectiveness of the scheme. Yesterday, the Greens were fairly sanguine about that, suggesting that between the 80% target and the sheer volume of money being spent on renewables, going faster won’t be a problem. We’ll see.

The other key advantage over the CPRS is the use of tax cuts aimed at addressing EMTRs for low-income earners. This isn’t merely sensible policy, it’s actually consistent with the government’s own reform efforts so far under Julia Gillard, aimed at increasing workforce participation. The Government has correctly picked up, at least partly, on Ross Garnaut’s recommendation that the Government try to get more bang for its microeconomic buck by using compensation to improve Effective Marginal Tax Rates.

That’s the good news.

The bad news is that, like the CPRS, the biggest polluters will get the biggest handouts. The coal industry will get a staggering $1.2 billion from taxpayers in straight cash - an outrageous cave-in to the industry that is responsible, more than any other, for Australia’s contribution to global warming. The steel industry will get $300 million plus an increase in free permits above and beyond the 94.5% it will already get.

And the Clean Energy Finance Corporation may turned out to be problematic. Why is a government investing directly in an industry? What at happens if and when investments in renewables and low-emissions technology go bad? On the other hand, like the new ARENA, having industry and financial expertise guiding government spending on renewables rather than bureaucrats and ministers might achieve more than years of sub-par renewables industry policy has.

And buying abatement from the electricity sector is the kind of policy garbage we’re used to from the Opposition — clear government winner-picking. It’s an implicit acknowledgement that a low carbon price and heavy compensation won’t drive a rapid transition to less emissions-intensive electricity generation.

Indeed, courtesy of the Greens and a low carbon price, between the purchase of electricity generation abatement, the investment in renewables and the Government’s carbon farming initiative, there is much “direct action” about this plan. That means taxpayers will, yet again, be spending far too much to buy abatement - although this lacks the sheer lunacy of Greg Hunt’s “soil magic”, a plan in which the majority of Australia’s carbon abatement task would be achieved by a process owing more to Old Moore’s Almanack and biodynamic farming than science or economics. ...

This is about as voter-friendly a package as you can get while still doing something about climate change. With tax cuts for low income earners, generous overcompensation for pensions recipients and handouts to rentseekers to mute claims of job losses, the package minimises the potential for scare campaigns and special pleading.

The Guardian has an article by Richard Flanagan on the tax - Australia's carbon tax is a brave start by a government still gripped by fear.

Australia's Black Saturday fires of February 2009 burned over a million acres of land and killed 173 people. It happened because of record high temperatures and a 20% drop in rainfall over the previous 12 years. It was what climate experts had been predicting for some years: the megafire. A megafire is hell come to earth.

The energy equivalent to 1,500 Hiroshima-sized atomic bombs was released in a fire storm that saw rivers of flame – sometimes rising 100 metres in the air – flowing through the countryside, generating winds of up to 120km an hour with new fires spotlighting 35km ahead of the main fire front.

Black Saturday reminded many Australians of what they know only too well: that of all the advanced economies, Australia is perhaps the one most vulnerable to climate change. And yet support for action on climate change, which was a key factor in the ending of 11 years of conservative government in 2007, has now largely collapsed.

In a story of ironies, a Labor government rarely characterised in recent times by either vision or courage has just announced a raft of measures, centred on a carbon tax, to reduce Australia's carbon emissions, an act at once brave and visionary. It was, though, forced on them by others.

It has been the strangest of battles that has already claimed two opposition leaders and one prime minister. And depending on who wins it, the rictus smile of Australian public life – behind which has hidden for years a paralysis of thought and action and has seen the coal and iron ore barons, the shock jocks and the Murdoch press seeming to set the political agenda as much as parliament – will continue or begin to break. ...

That there is to be any action at all is to the credit of the Greens, who won the balance of power in the Australian senate in that election and made the carbon tax the condition of their support for Gillard's minority Labor party. But the package of measures now announced are far from what the Greens argue is necessary to combat climate change by a nation which in spite of its small (22 million) population is one of the world's top 20 carbon polluters.

Perhaps it could not be otherwise. Australia has avoided recession because of its resource industries. Unemployment is under 5%. The coal, iron and gas barons combine massive wealth with a certain psychological dominance – without us, where would Australia be? – which is implicit in all their public posturing and pressurising. They interpret national interest as their profit and loss ledger and that, they regard, along with their successful bullying of public life, as being under attack from a carbon tax.

Along with Abbott's Liberals, they are keenly aware of Labor's tenuous hold on power. Gillard's minority government survives on just a one-seat margin and is languishing in the polls at 27%. Whoever wins the carbon tax battle wins government at the next election.

Gillard, on her side, has to placate her coalition of Greens and independent rural MPs, soothe an electorate worried about cost of living increases, and throw enough protection money at the big resource companies to stop them fully setting their dogs on her. The measures thus contain a large reform of tax in favour of the poor and large subsidies to big business to compensate for reduced profits. Her dilemma is that the only package she can get up in consequence is one that fails to deliver the very change that is needed.

And so, though designed with mechanisms for increasing decarbonisation, the tax begins life as modest in its impact, riddled with compromises, exclusions, bribes to both voters and corporations, a low carbon price of $23 (£15) a tonne and a very low carbon emission reduction target of 5% by 2020 – about half that required to stabilise carbon emissions at 550 parts per million (ppm), if other countries take comparable action.

The government's own climate change adviser, Ross Garnaut, has calculated that halting the growth in emissions at 550ppm-650ppm would lead to an average temperature rise of 3C to 4C – a rise with disastrous implications for Australia. Selling such a convoluted raft of measures is difficult: former Labor prime minister Bob Hawke has compared it to making "ice cream out of a bucket of shit''.

And selling it is a prime minister with the speech and appearance of a dying metronome – sometimes seeming so inept it has been said she couldn't sell the wheel – dragging along behind her a Labor party that must now present the measure Labor didn't want as Labor's achievement.

It may be that the carbon tax is the final chapter in the strange death of Labor Australia. A once great reforming tradition is now too often the captive of fears and dogmas generated in the service of corporate Australia; under attack from the right by an able populist leader, who has never been burdened by the need for consistency or coherence and rarely challenged on either; and from the left by the increasingly popular Green party.

Many arguments are already being made against the tax. The best argument that can be made for it is that, like all great reforms, it is a historic beginning. And perhaps it is the hope implicit in the carbon tax that is its most important feature.

Among many other reforms, Australians pioneered the secret ballot and universal suffrage. Whether Australia still has the courage it once had, or whether it has simply become the United Arab Emirates of the west, content to roll on for a decade or two more glossing over its fundamental problems while brown coal and fracked gas continues to keep the country afloat, remains to be seen.

The carbon tax thus looms over Australia as a large question: does Australia have the desire to move into the 21st century, or will it continue its retreat into a past as a colonial quarry for the empires of others, its public life ever more run at the dictate of large corporations, its people ever more fearful of the megafires of the future?

Crikey's "Rooted" blog has the final word, explaining why the tax is a good thing - Why a price on pollution is worth it.

Yesterday the Sunday Telegraph ran a headline about Tim Tams and Weet-Bix — and how Gillard would use them as ‘typical Aussie’ products that would rise only a fraction under the carbon price. Today as I open the newspaper I can see that the headlines are similar: how much will this cost? What will the compensation be? Who will be better off when we introduce a policy to put a price on pollution?

The government even has a calculator on its website where you can work out how much it will cost you (I’ll be $33 better off, in case you were wondering).

But despite the government banging on and on about the fact that Australian families won’t be worse off under a carbon price, people still aren’t listening, because we have forgotten to talk about the ‘why’.

Why are we doing this in the first place?

Many polls have shown that people are willing to pay something to clean up our environment and invest in the future, because they can see that the outcome is worthwhile. But in this climate debate we have got sucked into the cost frame and stopped talking about what we’re trying to achieve — and people won’t pay for something if they don’t understand the point of it.

So let’s talk about what is worth paying for:

Powering Australia by 100% renewable energy is worth it.

Cleaning up our skies so we can breathe easier is worth it.

Shutting down the most inefficient power stations in the world, is worth it.

Stopping our biggest polluters pumping tonnes of pollution into the atmosphere for free, is worth it.

And ensuring that our kids still have a planet to live on in the future, is definitely worth it.

The policy announced yesterday, with $10 billion of new money for clean energy projects, and increasing the government’s emission reduction target from 60% to 80% by 2050 is a really great step in the right direction, and we need all politicians to support it, because it will start getting us to the future we want to see.