For policy purists, aficionados of political irony and anyone who wants to see a genuine start in decarbonising the Australian economy, the key question about the product of the government’s climate change committee is just how much the carbon price scheme will mimic the CPRS.
As of now, the indications are it will look a lot like the scheme Julia Gillard and Wayne Swan convinced Kevin Rudd to dump.
The Rudd scheme, which underwent several rounds of modification before its abandonment, would have started with a one-year fixed price. The government’s proposed scheme will kick off with a three-year fixed price, although that may be extended as far as five years.
It would also have applied to the 1000 biggest polluters. This week, Gillard said the carbon price scheme would apply to the 1000 biggest polluters.
Last week, Ross Garnaut gave his imprimatur to using the initial industry compensation model developed by the government for the CPRS, which was made significantly more generous in 2009 in response to the GFC, and made more generous still by amendments agreed with Malcolm Turnbull. Garnaut proposes that compensation model only for the first three years of the scheme, while the Productivity Commission works out a set of principles for compensation for trade-exposed industries.
On household compensation, Garnaut spoke about tax cuts, as well as compensation via the transfer payments system, as a way of linking the carbon price scheme to productivity reforms. And this is where the plot thickens. Yesterday Laura Tingle reported that government sources had dismissed linking the carbon price scheme to the Henry Tax Review recommendations. That was sufficiently exciting for the opposition that it kicked off question time with a question about it. But the opposition tactics committee appeared not to have read beyond the Fin’s front page. While the piece was headlined “Labor snubs Garnaut tax plan”, Tingle made clear “some form of tax cut is still on the table”.
Parenthetically, that the opposition chose to lead off that way yesterday was a dead giveaway of how worried it is about the capacity of even this ineffectual government to sell a carbon price using tax cuts. If the government wanted an indication of how potent using tax cuts might be, it should look at Tony Abbott’s enthusiasm in seizing on even a press report that they may not happen.
But back to issue: last night, Garnaut issued a “clarification”:
“There is an opportunity for the revenue to be returned to households in productivity-raising reforms of the tax and social security system. There are multiple ways in which this could be achieved. In releasing my report last week, I said that the Henry Review provided a possible model for returning the revenue. However it is done, it is important that the changes increase incentives for labour force participation.”
It gets more complicated if you go back to the CPRS and look at the household assistance measures. In addition to transfer payments, primarily via Family Tax Benefit A and B changes, the CPRS White Paper talked about how “low- and middle-income working households will also receive a tax cut to assist with the expected overall increase in the cost of living flowing from the scheme”.
So tax cuts were in the CPRS? Well, no. The “tax cut” in the white paper (apart from the cut in excise to match the impact of the CPRS on petrol) was actually an increase in the Low Income Tax Offset, which cuts out at about $67,000, only a shade above average annual earnings.
Increasing the LITO reduces low- and middle-income earners’ tax, but it’s not a real tax cut like a cut in the personal income tax rate is. It’s limited, unlike a personal income tax cut, which gives you more the more you earn. You get no benefit from the LITO if you earn even a little above average weekly earnings.
There’s already been one media story about the LITO again, linked to some nice headlines for the government about tax cuts, in the News Ltd Sunday tabloids. But beware governments bearing “tax cuts”.
The one key difference between the carbon price scheme and the CPRS you can be assured of will be the name. It won’t be called the CPRS, indeed, may not even have the sort of four-letter acronym the Rudd government loved the bandy around.
On current indications, however, it will be a collation of various versions of the Rudd government scheme, the dumping of which destroyed Kevin Rudd’s prime ministership, at the hands of one of those most opposed to it, Julia Gillard.
But go further back to the end of 2009. It was about that time that Greg Combet — then a newcomer belatedly brought in to try to fix the grand stuff-up Penny Wong had made of selling the CPRS — warned that if a CPRS agreed between Labor and the Turnbull Liberals didn’t pass, industry would never see such a generous scheme again. And while the carbon price scheme might look a lot like the CPRS, its compensation arrangements won’t, if the Greens have anything to do with it. The Garnaut proposal for a limited-period CPRS compensation model might be the best that industry gets.
Under the final version of the CPRS, the one Tony Abbott walked away from, the biggest polluters would have been looked after with free permits until well into the 2020s. Under the Garnaut model, they wouldn’t make it to 2016. Instead, the Productivity Commission will devise the compensation, and you can rest assured the PC won’t be anywhere near as generous to rent seekers as the Rudd government was or this government would like to be.
Hopefully the big polluters will remember to thank Abbott when they next bump into him.