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Federal

Jul 10, 2011

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. It's certainly as voter-friendly a policy as pricing carbon was ever going to be.

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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.

So how does it stack up against the criteria Crikey suggested last week?

Will it be seen as a serious contribution to the cause of an international agreement on climate change? Yes.

Will it enable Australia to reduce its emissions by 5% by 2020? That partly depends on the PC and the new Climate Change Authority. If they recommend cuts in assistance and more ambitious targets, and governments accept those recommendations, yes.

Is the industry compensation fair? In the case of the coal industry, far from being fair, it’s an almost criminal act of fiscal indulgence. In the case of the more-deserving steel industry, the support goes overboard into outright protectionism. The package is no better than the CPRS and in some ways worse.

Is the household compensation fair? On the whole, yes, and efficient, too. There could be less indulgence of middle-income households, but this is a big improvement on the CPRS.

Does it provide for future adaptation or funding for overseas victims of climate change? No, but then these issues just aren’t on the policy radar currently.

I thought the CPRS was a wretched package that didn’t deserve to be passed. This is a better package on the whole, but that is conditional on the ability of the PC and the CCA to embarrass future governments into better policy. It’s a lineball call, but on balance, it deserves passage, especially since it’s the only serious game in town for this generation of politicians.

The politics …

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.

As we all know, this government is so inept it’s likely to botch the selling of the package and leave people convinced they’ll be ruined by it.

Still, by targeting assistance at the steel industry, the coal industry and the coal-reliant electricity sector, Labor is keeping one eye on its heartland, even if it will have trouble with the road transport industry (which is still getting a good deal under road pricing arrangements). The government wants to extend a carbon price to heavy vehicles in 2014 but this has not been agreed by the Multi-Party Committee on Climate Change (read, the independents).

And the package relies far more heavily than the CPRS did on tax cuts to deliver compensation, giving the government a potent selling point — two, actually, because the lift in the tax-free threshold will  be over two years.

Expect the opposition, though, to emphasise that the current 30% tax rate will be going up, even though no one will be out of pocket and most people up to very high incomes will come out ahead, albeit only marginally for higher earners.

The package also defers some of the politically difficult decisions. The PC will review compensation for industry in 2014-15, and there’s no way it will conclude that the absurdly generous arrangements in this package are justified. And Bernie Fraser will be at the head of the new Climate Change Authority, presumably making the case that the wide range of actions being undertaken overseas mean Australia has no choice but to lift its target from 5%.

But the basic political issue was resolved on Friday, not today. That’s when Andrew Wilkie said he’ll be supporting the package. With his support, and that of the independents and the Greens, this package will become law. Australia will have a carbon price in less than 12 months.

However well or (more likely) poorly the government sells this package over the next fortnight — and Julia Gillard’s performance in that period is crucial to her leadership — the future of this government, whether led by her or not, will depend on the implementation of this package. That’s a point it never reached under Kevin Rudd.

*CRIKEY: For Keane’s number crunch on the carbon tax, go here: Carbon tax: Gillard’s ‘Clean Energy Future’ at a glance.

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