27/07/2021

(AU ABC) How The Carbon Tax Has Come Back To Haunt The Australian Government

ABC - Ian Verrender

The ill-fated Australian carbon tax lasted just two years but data suggests it had an immediate impact. (AAP: Mick Tsikas)
It was an off-the-cuff comment after a few drinks, delivered with a belly laugh from a then-senior minister a few years back.

"The difference between Labor's policy and ours is that Julia Gillard introduced a scheme where big polluters paid Australian taxpayers. Tony changed it so that Australian taxpayers pay big polluters," the minister said.

That policy, of course, was the carbon tax.
10 years of climate policy inertia

Introduced in 2012 by the Gillard government, it was dumped by the Abbott government as soon as it came to power and replaced with a more than $3 billion taxpayer subsidy, doled out to applicants that promised to cut carbon emissions.

It'd be funny if it wasn't so tragic.

But the joke now is on us and the tragedy is that it will cost us dearly.

Australian businesses are about to be whacked with a carbon tax.

Not by Canberra, but by Brussels and Washington with the increasing possibility that Ottawa, Tokyo and even London may follow suit, free trade agreements aside.

In the third turn of the wheel, Australian polluters will end up paying foreign taxpayers just for the privilege of exporting their goods.

It's a development that will hurt profits, cost jobs, and hit our export volumes and ultimately the tax take of our own government.

En masse, much of the developed world has begun mulling the idea of putting a price on carbon emissions.

They've also woken to the idea that there's no point introducing a carbon price at home if renegades like Australia don't follow suit.

So, to level the field, goods from any country without a carbon price, such as Australia, will be hit with a carbon tax.

Where did this come from?

It's all happened within the space of a few weeks.

One minute, the European Union was announcing its Carbon Border Adjustment Mechanism and the next, the United States began making similar noises.

Trade Minister Dan Tehan was aghast.

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"Australia is very concerned that the EU's Carbon Border Adjustment Mechanism is just a new form of protectionism that will undermine global free trade and impact Australian exporters and jobs," he said.

The only problem with that argument is that Australia explored the very same option back in 2012 during the carbon tax's brief life.

It was recognised then that corporations may simply shift production offshore to avoid the impost.

Oddly, despite the rapid deterioration in relations between Canberra and Beijing, our largest trading partner may end up as one of our biggest allies in this brewing storm.

For while Beijing just last Friday launched the world's largest carbon market, many believe that at best it will be ineffective and, at worst, a sham.

Its national carbon market has far too many credits, so its carbon price is way too low — around one 10th the EU carbon price.

Not only that, big energy users like steel are excluded.

Unless prices rise dramatically, there is little likelihood of any shift in behaviour or impact on emissions and the fear is that the entire strategy is little more than an artifice.

Why price carbon anyway?

Many decisions in our life come down to price.

Even when money isn't involved, we often calculate whether the benefits of embarking on a certain course of action outweigh the potential costs.

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When it comes to public policy, we learned long ago that if you want to change behaviour, say to limit the health impact of smoking, one of the easiest ways to do that is to tax goods and services — in the case of smoking, tobacco.

The higher the tax, the fewer individuals will smoke, and the less likely people will take up smoking at all.

That has a double impact on government finances.

The government brings in more revenue, at least until people give up.

More importantly, the health system costs less to run, as a harmful health factor is eliminated.

In the early 1980s, when scientists first twigged that carbon emissions were harming the environment, a group of American economists from Harvard argued that climate change was a cost that was not being recognised.

Not only was it barely visible, the real damage was only likely to be seen in generations to come, way beyond the normal investment horizon.

The fossil fuel industry railed against the proposal of a carbon tax in the US. (AP: Ben Margot/File)
Back then, they argued that a tax on carbon emissions from all sources was the most efficient way to deal with the problem and, for a while, Washington was in agreement.

It didn't take long, however, for the fossil fuel industry to take up arms against the proposal.

That's when Republicans shifted stance.

Instead of a tax, they preferred a complex market-based trading system that put a price on carbon.

The end result is that the US has never introduced a national system although various US states have carbon prices.

That's all about to change.

Here at home, there was agreement on both sides of the House that a carbon price was needed.

In 1997, then-prime minister John Howard grappled with ways to deal with carbon emissions but took almost a decade before he finally announced an emissions trading scheme in 2006.

Kevin Rudd was elected in 2007 on a platform of addressing climate change but his emissions trading scheme initiative disintegrated under the weight of political bickering between his government, the Coalition and the Greens.

From then on, climate change became toxic as then-opposition leader Tony Abbott flicked the switch from science to ideology.

Does a carbon tax work?

There's an easy answer to that.

The ill-fated Australian carbon tax lasted just two years.

But as the graph below indicates, it had an immediate impact.

Annual CO2 emissions in Australia between 1900 and 2019.
(Supplied: Global Carbon Project; Carbon Dioxide Information Analysis Centre)

Emissions dropped almost immediately after it was introduced as businesses moved to technologies that emitted less.

That price signal had an impact.

When it was dumped in 2014, carbon emissions began to rise again almost immediately.

Emissions have since levelled, possibly because of the shutdowns of some large coal-fired power stations during the past two years.

While economists believe carbon taxes are the preferred way to price emissions, politically they've been a hard sell.

No-one likes paying more tax.

According to the World Bank, about 45 countries are covered by a carbon price but few use a carbon tax.

Even the Gillard government's carbon tax was due to revert to a market-priced trading system similar to Europe's.

There's no such reluctance, however, when it comes to whacking a tax on foreigners, as we are about to discover.

What industries will be affected by the border taxes?

Mark Carney, the former head of the Bank of Canada and more recently the Bank of England, delivered a blunt assessment of our prospects last week at a conference organised by the Australian Council of Superannuation Investors.

Now the United Nations special envoy on climate change and finance, Mr Carney said the world was trending towards enforcing climate policy through trade action and Australia needed to ramp up its response.

The EU legislation is still in a rough form but will include aluminium, iron, steel, cement, natural gas, oil and coal.

The immediate impact of the carbon border taxes is unlikely to inflict major damage on Australia.

Japan plans to reduce its coal imports and the EU will tax coal higher. (Flickr: eyeweed)
Europe takes just 3 per cent of our total exports and, while our sales to the US are substantially higher, they're not carbon intensive.

The biggest problem will arise if the US imposes carbon border taxes on Chinese made goods.

As our biggest export destination, particularly for iron ore, any action against the Middle Kingdom will have an immediate impact on us.

Given the rapidly escalating tensions between the superpowers, that is highly likely.

Then there is our second biggest trading partner.

Japan late last week announced it was radically revising its emissions target ambitions and announced an accelerated plan to decrease imports of coal and LNG, two of our biggest exports.

The federal government has long been opposed to any form of carbon pricing and has yet to even commit to net zero emissions by 2050.

But the events of the past few weeks may force its hand.

Otherwise, it risks being caught on the wrong side of history at great cost to the economy.

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