Australian Productivity Commission Mulls Carbon Tax

by Mary Swire, Tax-News.com, Hong Kong

29 March 2011

Gary Banks, Chairman of the Productivity Commission, has outlined some of his thoughts on the proposed carbon tax to be introduced in Australia in the not too distant future and the report that the Commission is currently working on.

In a presentation to a Parliament House forum hosted by the Business Council and the Australian Industry Greenhouse Network in Canberra, Banks said that the task in hand was certainly going to be “challenging.”

The Productivity Commission has been asked by the Australian government to examine and detail key emissions reduction policies in place or committed in Australia and other key economies, and estimate the ‘effective carbon price’ per tonne of CO2 faced by the electricity generation sectors in these economies, and by selected industries drawn from manufacturing and transport sectors. It has been asked to report back by the end of May this year.

The study is occurring in parallel with the ‘Garnaut Review Mk II’. Both are intended to inform the deliberations of the government and the Multi-party Climate Change Committee, as well as the wider public debate. The terms of reference suggest that effective carbon prices include both: explicit carbon prices from emissions taxes and tradeable permits, and implicit carbon prices of other measures, such as direct regulation of technologies, renewable energy targets, or subsidies for low-emissions technology. Mr Banks said that the study therefore reflects a desire to demonstrate that other countries are taking a variety of actions to reduce carbon emissions, even if most have not introduced an explicit carbon tax or an emissions trading scheme.

He told the Forum that there are high-level conceptual problems, as well as methodological issues concerning how to estimate the impacts of the many different types of climate change policy in practice – often without full information about critical parameters. He pointed out that the terms of reference embody the presumption that there are both explicit and implicit prices that can be derived and added together to get an overall effective carbon ‘price’ for each sector in each country, which can then be compared with those estimated for other countries.

“Measuring effective carbon prices would be a relatively straightforward task if all countries applied economy-wide CO2 emission taxes or quota schemes, because the carbon ‘price’ – simply equivalent to the tax rate or the market price of emission permits - would be observable, and comparable. But none do. Instead, most countries apply a myriad of less transparent, more narrowly-focussed interventions designed to assist the production and consumption of selected, less carbon-intensive technologies, or which penalise particular emissions-intensive products and processes."

He said that so far the Commission has identified 230 policies operating in Australia, over 300 in the United States (excluding many State-based schemes) and more than 100 in the United Kingdom, and that even countries that have or are committed to carbon pricing/quota schemes (such as the UK, Germany, New Zealand and some states in the US) apply them only to a limited range of emitting activities. “Once you move away from an economy-wide ‘pricing’ mechanism – to a multitude of fragmented schemes that target different products and emissions sources – comparable measurement becomes highly problematic,” he said. “Thus the threshold conceptual issue for us has been to develop a consistent approach for measuring the many different interventions. In essence, is there a way of comparing apples and oranges? Understanding how the various policies actually work is an essential first step. Despite the variety of policy instruments, all policies designed to promote lower carbon emissions must somehow either provide incentives (carrots) to abate, or disincentives (sticks) to emit CO2, or both,” said the Chairman.

He was keen to let people know that the study is complex and has limitations, but he was confident that it “will shed much light on what other countries are doing, how the various policies work, the uncertainties surrounding the efficacy of many of them, how much they achieve and at what cost”.

Julia Gillard, Prime Minister, meanwhile has no intention of backing down on her plans for a carbon tax. Speaking on a visit to the biggest wind farm in New South Wales she said: “The government is committed to a renewable energy target, that 20% of the energy we use comes from renewable energy sources by 2020, but that renewable energy target was always designed to work with a price on carbon."

“If we are going to drive this clean energy future we must price carbon, and here is a practical example of the difference that it can make. This is one of the reasons that I am so determined to price carbon. It will drive a clean energy future for this country. We will see more energy coming from sources like wind, solar, tide and hot rocks."

“We are a country that is blessed with renewable energy sources. We’ve got to get on with using this clean energy and to do that we have to price carbon.”

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