Australia's Carbon Tax Policies Attacked

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

14 February 2011

The policies that are most effective in driving down greenhouse gas emissions actually raise revenue rather than cost the budget money, according to a report just published by the Australia Institute.

The report refers to a range of policies recently scrapped or wound back by the Gillard government in order to ensure the budget returns quickly to surplus. These policies included the Cleaner Car Rebate, Green Car Innovation Fund, Green Start Program and the Solar Homes and Communities Plan.

The report says that to achieve a coherent policy framework there needs to be the removal of the wide range of existing subsidies and tax concessions that work to artificially reduce the price paid for fossil fuels in Australia. It says that these concessions include exempting airlines from paying fuel excise, arbitrarily allowing some mining companies to pay lower rates of tax than others and providing even giving bigger fringe benefits tax concessions to people who have company cars if they can prove that they drove their car long distances.

It suggests that while subsidies can sometimes play an important role in encouraging socially beneficial behaviour (for example encouraging people to vaccinate their children), subsidies can also encourage behaviour that is contrary to the public interest, and describes these as ‘contradictory policies’. The report claims that contradictory climate policies in Australia cost the taxpayer more than AUD9bn (USD9bn) per year, and that over the next four years these contradictory climate policies will cost taxpayers more than AUD39bn.

The report says that a price on greenhouse gas emissions needs to be introduced, providing new incentives for both producers and consumers to change their behaviour. Furthermore, it suggests that just as the removal of contradictory measures will save billions of dollars per year the introduction of a carbon price will raise tens of billions of dollars in new revenue.

The report says that the government should develop a broad suite of complementary policies designed to change behaviours that are less responsive to changes in price than would usually be assumed in economic models. For example, as landlords do not benefit from the lower electricity bills that flow from installing ceiling insulation it is highly unlikely that changes in the electricity price will lead to large changes in the energy efficiency of rental properties.

The Australia Institute concludes:

“There is no doubt that complementary policies have an important role to play in the development of an economically efficient suite of greenhouse gas emission reduction policies designed to work well in the real world. There is, however, also no doubt that successive Australian governments have shown a preference for the pursuit of so called ‘complementary policies’ despite their reluctance to either abolish contradictory subsidies or implement the carbon price that the ‘complementary policies’ are supposed to complement."

“It would seem, therefore, that the politics of taking money from polluters is far harder than the politics of spending taxpayers’ dollars on complementary measures. Presumably this relative political difficulty in taking money from polluters underpins the recent decision to scrap a range of climate policies rather than abolish the more expensive, and more damaging, contradictory policies. That said, there is also no doubt that while their objectives may be desirable some of the complementary policies that have recently been scrapped were poorly designed and unlikely to deliver any significant benefits”.

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