Not as taxing as you thought
Australian politics has always been a bit difficult to understand, but calling the proposed carbon pricing mechanism a tax is just daft.
Europe has the biggest carbon pricing mechanism in the world. Since it started in 2005, carbon pollution permits (which they call EUAs there) have been given away to big polluters in a big "initial allocation" each year. Polluters have profited massively. At the same time, taxes on ordinary people have gone up and governments have lavished at least part of the money on subsidising renewable energy.
The Europeans are now introducing auctioning of EUAs for that initial allocation so that big polluters actually have to pay to get the permits and the money raised will be spent to reduce taxes elsewhere and boost renewable energy investments. Big European polluters, therefore, are buying pollution permits from governments, trading them to balance their books as their production changes, and using them for compliance.
Compare to the carbon pricing design announced in Australia on Sunday. Big polluters will have to buy pollution permits from the government and they will use them for compliance. The government will use the money raised to reduce taxes and invest in clean energy. Sound familiar?
The difference is that the Australian design makes big polluters pay for their permit allocations from day one. Is that a tax? Well, when you buy electricity from a government owned power company is that a tax? No, it's a price for something valuable. And we know that the Aussie way is an improvement over the Europeans' because it gets straight on with pricing pollution rather than transferring a whole lot of money to polluters as compensation for... polluting.
What we don't know is whether Australian polluters, despite facing a fixed price for the initial permit allocations until 2015, will be able to trade the permits that they have bought. It would make sense: not a lot of companies get their production forecasts perfectly right, so they might need to buy or sell some. And some businesses might want to prepare for a fully floating market from 2015 onwards by trading in advance. If this were allowed, polluters would buy their initial allocation, trade it to keep their books balanced, and use the permits for compliance. Sounds even less like a tax.
So, fundamentally, the Europeans introduced a trading scheme alongside which taxes have increased, in part to pay for clean energy investment. The Australian design introduces a pricing mechanism that is really a trading scheme but creates the opportunity for tax cuts and increased clean energy investment.
And the Australian design has a few other things. An independent, qualified regulator (to run the market properly). Clear legal definition of a permit and classification of it as a financial instrument (to keep out the fraudsters). A better target-setting mechanism that allows for running adjustments as circumstances change. Most participants in the European scheme would kill for these things.
Despite these clear deficiencies compared to the Australian design, the European system is successful. It's actually been implemented. It’s a $100 billion market. Emissions are down (unlike Australia and the US), clean energy investment is up, and green industries are growing.
The Australian design is pretty good and strangely unlike a tax. But whatever you call it, it’s about time it was actually implemented so that we can get on with beating the Europeans in reality as well as on paper.
Geoff Sinclair runs carbon trading at Standard Bank. Any opinions in this article are his own.
Comments on this article
Life cycle carbon analysis not necessary
Similar to GST, just follow the fossil carbon consumption trail through each stage. For domestic fossil fuel use, a GST surcharge would be quite simple: all that is required is knowledge of how much fossil fuel is being used, and its % carbon content which is well known to any chemist. This will give us a specific rate per item, quite simply.
Further, don't forget that Australia has a developed system of carbon accounting, which was initiated under the Keating government, I think, and prudently continued thereafter.
Regarding imported goods, then we can readily refer to the carbon accounting systems of the exporting nations, plus knowledge of the ship's fuel consumption.
All quite simple, really.
HONEST carbon tax is extremely simple to implement
For domestic fossil fuel use, a GST surcharge would be quite simple: all that is required is knowledge of how much fossil fuel is being used, and its % carbon content which is well known to any chemist.
Further, don't forget that Australia has a developed system of carbon accounting, which was initiated under the Keating government, I think, and prudently continued thereafter.
Regarding imported goods, then we can readily refer to the carbon accounting systems of the exporting nations, plus knowledge of the ship's fuel consumption.
All quite simple, really.
Re: European system successful!!
t h (whoever you are), you are picking some isolated incidents in a mass of news and using it in a pretty misleading way. please say something useful next time
Re: Here's what an HONEST carbon tax would look like
Some very interesting ideas, but horribly complicated in the implementation. My view is we need to stay in reality i.e. what's on the table at the moment, which is pretty good and if it doesn't get implemented we will just see more time and money wasted while everyone faffs around with interesting designs rather than getting on with the job.
Re: But...
Bit of a cheap shot Timothy. Banks don't actually make very much money out of the European system, believe me I'm in the middle of it and would know
Re: Here's what an HONEST carbon tax would look like
So David, is this an average rate, or a specific rate per item?
An average rate does little to encourage changes to purchasing behaviour. It just increase prices.
Per Item rate means we need to do a Lifecycle carbon analysis for every item sold in Australia.
If you use a general item basket, say all Washing Machines are X%, what happens if I can produce a washing machine with half the carbon usage? Do I get suffer the same tax rate?
It is all about Incentives, and any scheme will have winners and losers.
Here's what an HONEST carbon tax would look like
The economically efficient way to price carbon is via a fossil carbon consumption tax, implemented as a surcharge on the GST.
* Administratively efficient, and inexpensive: minor modification to an existing tax (GST).
* Revenue-neutrality: using the revenue from this GST surcharge to cut other taxes allows each carbon emitter to choose what investment to make in low/zero emission technology and equipment, and when. This will afford nay-sayers no opportunity to complain.
* No need to 'compensate' trade-exposed industries:
** Carbon taxation of imports: Border Adjustment Tax can include the fossil fuel used to ship imported goods (and foodstuffs) to Australia.
** ZERO RATE EXPORTS, including coal.
* Minimal requirement for regulation, no need for administration of emission permits: after introducing the tax, increase the rate of tax over a few years until the desired amount of emission reduction is effected. If new science tells us to cut emissions further, just increase the tax rate.
* Targetted: would not be imposed on biofuels because they are not fossil fuels.
Each year, increase the rate of the tax, with adjustments to other taxes to maintain revenue-neutrality, until the desired emission reductions are achieved. If new science tells us to cut further, then continue the year-by-year rate increases in fossil carbon consumption tax.
When fossil carbon consumption declines so that further tax gains are not possible, the tax will have done its job. Other taxes can then be phased back in.
Its only drawback is, it's too fair to appeal to rent-seekers.
Taxing Ignorance .................
We have energy sercurity.... About 300 years worth.... Called Coal....
But...
It's called a credit margin, it's proportional to the amount of credit exposure the bank takes on, so basically it is equivelent to an interest charge on a loan, for the life of the financial instrument. At a corporate level, it's pretty small. A online share broker takes more, without the credit risk on the company.....
European system successful!!
Gabriele Steinhauser, AP Business Writer, On Tuesday April 19, 2011, 11:54 am EDT
BRUSSELS (AP) -- Three months after the European Union shut down spot trading in emission certificates following cyber thefts in several countries, the last of the bloc's national carbon registries will reopen on Wednesday.
The European Commission, the EU's executive, said Tuesday that Lithuania's registry -- which like the other national registries manages companies' and traders' carbon accounts -- will reopen Wednesday afternoon, meaning emission certificates can again be moved between accounts in all 30 states participating the EU's cap-and-trade scheme.
However, market participants say that huge problems remain in the market, where spot volumes are down more than a third since January.
The Commission on Jan. 19 suspended all spot trading in emissions certificates after thieves hacked into accounts in five national registries and stole some 2 million allowances valued at about euro30 million. It has been readmitting registries that have upgraded their security standards over the past months.
The cyber raids revealed massive security holes in some registries and showed how the fragmentation of the carbon market made it almost impossible to track down the stolen certificates or decide who owned them after they were found.
The closure was also an embarrassing setback for the EU, which pioneered the so-called cap-and-trade system, its main tool in the fight against climate change.
Yeah right - we're simply setting up traders, hedge funds and others for a monster money factory and set the stage for GFC mark 2.
Taxing Ignorance .................
Firstly Timothy, I'm not an economist. However, I do find Geoff's analysis compelling. The price on CO2 pollution is NOT a tax. It's a way of exposing the real social and economic cost of the decades of pollution visited on the planet by uncontrolled CO2 emissions. These 'externalities' cost us billions in health and environmental damage. Guess who's been paying for that? Tax payers!!! Funny about that. :-) This has been done through government subsidies to fossil fuel based industry ($12 billion in the past year) and health and environment infrastructure and services. Now THAT is a tax!! Did you not know about this?
The Federal Government's new Clean Energy Future policy will allow Australia to break free from our bondage to fossil fuel and transition to 100% renewables as fast, as painlessly and as economically beneficially as possible. It will give us the opportunity to have energy security, no longer to be pushed around by increasing fossil fuel prices and their diminishing availability. We will be world market leaders, the envy of ALL countries on this planet.
BRING IT ON!!!!
But....
What do you call the slice that the Banksters will take from each "credit" ? It's a "taxing" question ! What percentage of the market is going to end up as bonuses for the traders in this new gold rush ? A lot of money is going to slosh around and the aboslute best Australia can expect is a drop of 1/4,000 of a degree.