No Carbon Tax in Australia

No Carbon tax? Yes, you read correctly. Julia Gillard has announced the commencement of a price on carbon on July 1, 2012, not a carbon tax.

And while there is now much debate about how last year Julia Gillard promised not to implement a carbon tax (see, e.g., Sydney Morning Herald, or ABC Online)…

Here is what she actually said:

So there you have it. No carbon tax. She did not rule out a price on carbon per se. Gillard is not talking about a carbon tax, it’s a hybrid model based on emissions trading by implementing a safety valve. They are going to fix the price, but it is up to companies to either obtain permits from the government at a pre-set price, or from the marketplace. The transition carbon price model is based on Garnaut’s 2008 recommendations.

Despite the transitional period of fixed-price permits, fully tradable permits for use from 2013 should be sold into the market in small quantities from 2010 (or even sooner). This will support the development of forward markets and provide guidance to market participants on future prices.

So technically, she didn’t break any promises. As it stands, it could be considered to be like a tax, but it is not. The fixed price provides some certainty in the cost of compliance and lower administrative costs, making it possibly easier to plan long-term investments, that is, if the tax rate remains fixed or known for the period of the investment. The key is to abandon the safety valve as soon as possible in order to not distort the functioning of an emissions trading/ cap-and-trade system.

If there is no limit on the amount of emission or any assurance over the quantity of reductions, there is a risk of potentially sacrificing environmental certainty for price certainty. In line with scientific evidence warning about the ‘stronger-than‑expected’ and ‘sooner‑than-expected’ effects of climate change and urging significant emissions reduction, emissions trading has the advantage of setting a cap on overall emissions, and therefore controlling and providing certainty on the quantity of emissions directly.

As for the cost argument, there are most likely going to be, e.g., free allocation of allowances to emissions-intensive trade-exposed industries, as well as billions of dollars to be granted to eligible coal‑fired power plants, as was suggested under the CPRS. There appear to be sufficient means in place to avoid any significant price volatility. But rather than complaining to companies about their grandfathering/ strategic behaviour, production subsidies, and windfall profits, it’s just all about the policy. What people, politicians, business and the public alike do not seem to understand, the reduced competitiveness of emission-intensive technologies is the intended outcome of a price on carbon!

A revolt, as predicted by Tony Abbott, seems like an exaggerated response. Australia is already trailing the rest of the world in climate change policy and risks becoming uncompetitive. With either policy, tax or ETS, it is questionable whether political gamesmanship in the form of debates on industry support or exemption would be eliminated. There would still be the temptation to change taxes or push through politically motivated manipulations designed to benefit certain companies or industry sectors, undermining any long-term certainty and hindering necessary investments in low-carbon technologies.

It is a step in the right direction. After 3 years of going in circles, they’re finally seem to be  implementing Garnaut’s recommendations. Not that these are necessarily a silver bullet, but it’s a start.