Who cares about carbon taxes?

It is hard to believe that despite the fact that we have cap and trade legislation both here and in the US substantively near completion that there is still lobbying for a carbon tax. But there is and in today’s AFR, CEDA’s Michael Porter tries to make the case. His argument comes from this CEDA collection of papers that is sadly gated but, as a member of CEDA’s Research Advisory Council, I have been given access to it. Many of the papers are broadly sensible especially my colleague Gary Sampson’s call for border adjustments to deal with trade exposed industries (something that I thought was the way to go but so many shouted down because of the association with tariffs).

But the case for a carbon tax seems to me to be weak. As I understand it there are several broad claims. First, that the carbon tax might be administratively easy to put in place — a slight adjustment to the GST. That may be true but in this case, wouldn’t it be more broadly based rather than put on the top 1000 companies? And it doesn’t save anything in terms of auditing assessment of carbon-added. Second, and related to the first in some respect is the notion of gaming. A carbon tax is supposedly easier to make broad-based with limited exceptions. But I can’t see why this should be. After all, there is no GST in fresh food. Taxes aren’t immune to gaming. We need to rally against the gaming itself rather than the form of climate change policy. Third, some price certainty on carbon might be useful as a transition. But, guess what? The Government already agrees. The carbon price will be fixed initially. We have a transitional tax.

Finally, there is some notion that all of the financial derivatives that a cap and trade system would permit would lead to horrible market chaos — another GFC based on carbon no less. This is perhaps the most surprising thing to come from a CEDA report as it is basically a claim that markets don’t work and a system with a stronger government hand would. Now, I don’t doubt that issues might come in terms of futures markets in carbon but I am also worried what might happen if they are not there. The futures markets allow firms to plan on the future input cost of carbon and to hedge. We would no less want them to do that than for them to be not permitted to hedge commodity or other prices.

Think of it this way. Suppose that we felt the same about oil — which we did only two years ago by the way (remember the oil speculators pushing up the price). Then what we should do with our oil reserves (say in the Bass Strait) is to allow anyone to mine them — that is, eliminate property rights entirely — and require them to pay the government a fixed oil tax on their extraction. That way, the oil price in Australia is pegged to this level and there is no need for nasty financial markets.

Think I am being disingenuous? Well, that is precisely the same as asking for no property rights on carbon and a payment for use. In my opinion, the anti-market rationale for going the tax route is overplayed and the benefits of letting us find out the true price and allow a future price path to evolve is underplayed.

One thought on “Who cares about carbon taxes?”

  1. Joshua,
    I’m glad you meantioned the gaming issue with regards to taxes because I’ve always been baffled as to whycommentators didn’t also mention it appling to a carbon tax. Not only does it apply to exemptions but it would also apply to the revenue recycling/ I’m no fan of grandfathered credits but tax rebates or cash handouts to EITEIs would always occur under a carbon tax as they will under an ETS – even if we had fully auctioned credits.
    The other thing which is overlooed with regards to carbon taxes is the difficulty in setting the rate. At least with an auction, a company can calculate the costs of emission reductions and then bid for permits from that price up – in other words, the market price is set based on the marginal cost of abatement. With a carbon tax, the Government has to guess what level to set it at to achieve the same outcome, unfortunately, the Government can onlymake an educated guess on this but will never have the rela figures for industry to assess this on because of the gaming issue (case in point is the free allocation of permits under the initial EU scheme – that was an ETS but the allocation decision was made on similar grounds to how a carbon tax would be set.
    The final point, and this is related to the second one, is that a Tax can’t cap emissions. It can guide them towards a target but if the tax is too low – we will overshoot; too high and we will have even lower emissions than planned but additional economic burdens.
    So sure, a Tax sounds simple and is easy to administer once introduced, but the black box Government work should be considered as well and the black box stuff for a carbon tax is far more critical to its success than anything under a C&T system.


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