The government’s politically costly decision to announce a series of backflips in the space of a few days, just before the Budget, seemed explicable only on the basis of a desire to find expenditure savings. The most prominent backflip, on the CPRS, seemed to fit this pattern, since Kevin Rudd’s announcement included the point that the ex-CPRS would not be included in the Budget. Surprisingly, though, senior government officials in the Budget lockup insisted that this was not the motive.
They argued, and the Budget papers state, that all the CPRS savings (at least in cash terms) had been reallocated to the Renewable Energy Future Fund, part of the expanded $5.1billion Clean Energy Initiative. Funding will be used to provide support for the development and deployment of renewable energy projects, including wind, solar and biomass.
The picture is not so clear in accrual terms. Because the CPRS involves the sale of “future vintage” permits to be used outside the forward estimates period, the associated cost to the Budget was much larger (by about $2 billion) when measured in fiscal balance (accrual) terms. The savings from scrapping the scheme are correspondingly larger in those terms.
If the government’s story is right, Rudd’s announcement was a simple, but gigantic, political blunder. The government could have left the CPRS in Senate limbo, and announced the REFF as a contingency measure until it was passed. Instead, the government more or less explicitly caved in to the opposition, saying “The Government will not introduce the CPRS until after the end of the current commitment period of the Kyoto Protocol and only when there is greater clarity on the actions of major economies including the US, China and India.”
That said, the fact that scrapping what was, in essence, a revenue measure could save the government money shows what an appalling mess the CPRS had become by the time of the final compromise with Malcolm Turnbull. If there is one benefit from the government’s mishandling of this issue, it is the opportunity to start again from scratch.
In the meantime, it’s worth thinking about the Greens’ proposal for an interim carbon tax. If such a tax were levied on consumption (including imports) rather than production, there would be no need for the extensive compensation associated with the CPRS. And a tax levied at a low rate ($10/tonne or even $5/tonne) would be virtually invisible, helping to dispel the absurd panic over this issue.
In the context of a global agreement, an emissions trading scheme based on production makes more sense than the alternatives (for example, making carbon taxes internationally comparable is just about impossible in a world of floating exchange rates). But, given that such an agreement is some way off, a carbon tax might be the way to go.