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Federal

Jul 10, 2011

Carbon tax: key changes reflect the Greens, Garnaut

There are some key changes from Rudd's CPRS that reflect both the influence of the Greens and Ross Garnaut in its development.

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After the drama and inordinate political cost of abandoning the CPRS, the Government has relied heavily on the Rudd-era scheme in its “Clean Energy Future” proposal that will become Australia’s carbon pricing regime from July 1, 2012.

The CEF hews closely to the CPRS in its mature stage of operation, directing most support to households but providing extraordinarily generous assistance to emissions intensive, trade-exposed industries for a scheme that, rather than being a new tax, which actually cost the Budget about a billion dollars a year in its initial period.

However, there are some key changes that reflect both the influence of the Greens and Ross Garnaut in its development.

Crucially, in addition to assistance payments to pensioners and Family Tax Benefit recipients, the government has adopted Garnaut’s recommendation of tying compensation to tax reform, overhauling the personal income tax regime to massively increase the tax-free threshold, with corresponding increases in the current 30% tax rate to offset the increase for high income earners, who will see no tax rise or come out a few dollars ahead of where they currently are. This is designed to significantly lower effective marginal tax rates for low-income earners, encouraging participation and removing the burden of tax return lodgement from 1m taxpayers.

Expect the tax cuts to become the centre of the government’s pitch on its scheme as it emphasises help for low and middle-income families that has the imprimatur of economists eager to see a lift in participation.

Industry compensation will in this version be subject to review by the Productivity Commission in 2014-15, with the goal of lowering levels of assistance if that PC concludes that it is warranted (this also draws on the Garnaut review). There is even a provision for an earlier review by the PC if there is evidence of windfall profits by EITE industries. However, there will be no reduction in assistance before 2018 even if the PC concludes that it should be cut.

The government has also adopted a governance approach suggestive of that used in the UK, with a Climate Change Authority, headed by Bernie Fraser, to act as an independent source of advice and political pressure on what target Australia should be aiming for as the basis for its carbon price. The body — while not as powerful as the equivalent UK entity — will report every two years from 2014, and the government will be required to explain why it has not adopted the Authority’s recommendations if it declines to do so.

Neither of these bodies will actually be able to change government policy, but both will provide independent scrutiny that will embarrass future governments reluctant to lift Australia’s target or hostile to the idea of carbon pricing. As it stands, the government has retained its paltry 5% target for 2020 but lifted its 2050 target to 80% in a mostly meaningless gesture.

The scheme also differs from the CPRS in having a greater range of specific assistance programs both for emissions-intensive  and renewables and low-emissions technology — a continuation of the bizarre left-hand-right-hand dissonance that plagues overall tax policy on fossil fuels. The coal industry will, remarkably, get $1.2 billion in assistance despite earning more money than it knows what to do with from China.

There will also be handouts for the electricity industry and the direct purchasing of abatement from the electricity sector via  the closure or partial closure of emissions-intensive power generation, and handouts for the steel industry, which may actually come out ahead courtesy of a likely increase in free permits several years hence and hundreds of millions in handouts driven by the industry’s woes at the hands of the higher dollar.

And in one of the more bizarre features of the package, an independently-run Clean Energy Finance Corporation will be a $1 billion per annum government funded direct investor in renewables and low-emissions technologies (not CCS, which is firmly on the outer).

You know the cliché about things designed by committee. This has all the hallmarks of being stitched together by disparate interests, which it most certainly was.

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