How many Australians should be compensated for the carbon tax, and what's the most effective mechanism for doing it? As the government reveals more detail on its compensation package, Crikey asked some of Australia's leading economic minds.
Here's what we do know about the package of measures the federal government will roll out to compensate for the impact of its carbon tax: more than half of the revenue of the tax will be used to assist low and middle-income households, largely through tax offsets and possibly through welfare increases.
"We expect that millions of households will be better off under the carbon price arrangements and the assistance will be permanent," Climate Change Minister Greg Combet told ABC Radio
this morning, hinting that "one of the most efficient ways [of offering compensation] is through the tax and transfer system".
But how many Australians should be compensated, and what's the most effective mechanism for doing it? And will compensation wipe out the effect of pricing carbon? As Combet reveals more detail in an address to the National Press Club this afternoon, Crikey
asked some of Australia's leading economic minds...
Professor John Quiggin, School of Economics at the University of Queensland:
Returning 50% of revenue raised from the tax in compensation is probably too low. Business should get no more than 20%, so it depends how much is going into mitigation. In terms of thresholds, I'd suggest aiming a bit above the median ($66,000 annually) but not too far, aiming for 60% of households. That implies compensation of around $1000 per household among recipients, which is about right.
I wouldn't look for a strict cut off, but rather a set of mechanisms that produced a taper. The whole point is that households receive a benefit equal to the average impact, so those who use little energy will be better off. This is as it should be. There's no aggregate effect, since heavy users of energy will not be fully compensated.
A pension increase is a straightforward choice for recipients. Readjustment of income tax makes sense, but note that unless some top rates are increased, or thresholds decreased, all households will be compensated. So, a rebate tapering out at high income levels might be the best way to go. Since the tax will be ongoing indefinitely, so should the redistribution of proceeds. But it would make sense to fold this in to the general system after a few years, rather than having it separately identified for ever. Maybe when tax transmutes into a trading scheme.
There will be a direct impact on household footprint, but not much given that electricity prices have already increased sharply. The primary impact at the proposed levels will be on fuel mix in electricity. At $30/tonne it makes coal, particularly brown coal, uncompetitive relative to gas and (depending on grid capacity to deal with intermittent supply) wind.
Dr Frank Gelber, chief economist at BIS Shrapnel:
Tax reductions are the best for middle income, but what about people who pay little or no tax? They need to be given a subsidy. But households will come out OK from this. Industry will be hardest hit, especially those that have export/import factors, which we haven't considered properly yet.
There is a carbon problem, and the carbon tax or an emission trading scheme is a good intermittent measure. Australia's like a finger in the dyke, we can't fix it alone. The main game is the production side. The whole point is we're taxing carbon intensive production, which is most important, then consumption ... a user-pay principle for carbon emissions.
Adam Carr, ICAP senior economist:
At the end of the day, the carbon tax is an impost on economic activity that will not reduce carbon emissions. Basically, they're just taxing citizens and then giving half of it back. All it will do is redistribute wealth. It is just another form of progressive tax.
If they are going to go through with it, of course these people should be protected, so the threshold should be high. People on $500,000 and above should be the threshold. Given the tax is unjust on equity terms, does nothing to help the environment, reduces economic activity and kills jobs, it can't be over-compensated.
Taxing consumers and giving half of them some of it back is pointless. It won't change behaviour much. Lower income people are being compensated and rich people can afford it. People watch TV, they use lights, they listen to music and they eat food. They have a right to have children. None of this is ever going to change. Higher income people may have the money to absorb the hit, but they will buy fewer clothes, donate less to charity and eat out less -- and that means fewer jobs -- but the tax won't do anything about net pollution.
The reality for Australia is that we may pollute a lot per capita, but in absolute, overall terms we are a low polluter. Therefore, we have plenty of time to make changes. We should make bigger, long-term investments, for example into renewable energy projects. Trying to demand manage carbon emissions is a half-wit response.
Michael Knox, ABN AMRO director of strategy and chief economist:
You’ve got something that’s going to damage employment and reduce real wages. So is it more important to increase employment or substitute the loss in real wages? For me it’s more important to generate more employment because that’s where the real damage of this tax is. You really should be providing all of the compensation to minimise the loss of employment. Nobody understands that this will significantly slow growth in the economy and significantly slow employment.
The basic problem is we don’t have enough existing industries to substitute into. You needed to have a larger set of options, including the option of nuclear energy. Those options don’t exist in Australia so if you introduce a tax you’ll have a reduction in employment and a reduction in real wages.