Carbon tax in Australia

by John Quiggin on October 12, 2011

Australia’s House of Representatives has just passed legislation for a carbon tax[1]. Passage by the Senate is assured, so that, as long as the government can survive another year (it needs the support of three independents to muster a one-vote majority), the tax will come into effect in mid-2012. The political history of this proposal is too complicated to recount, but is symbolised by the current Prime Minister (who previously dumped the policy, but has now succeeded in bringing it into effect) receiving a congratulatory kiss from the previous Prime Minister (who supported the policy but was unable to get it passed into law, and was replaced as a result of this).[2]

While the proposal is far from perfect, there’s a lot to like about it. The price of $A23/tonne is comparable to that in the EU, and should be enough to promote a wide range of reductions in CO2 emissions. Importantly in the Australian context, it should (with the support of some addition funds to allow the closure of existing power stations) end the use of brown coal (lignite) as a fuel. Brown coal produces about 50 per cent more emissions per unit of energy than anthracite bituminous (thermal) black coal, and Australia has lots of it. There will also be an incentive to continue the shift away from black coal in electricity generation and towards a combination of gas and renewables. Equally important, in the long run, will be improvements in energy efficiency. This is where price-based measures really shine, as compared to purely regulatory interventions – there are all kinds of ways to save energy and it is hard to predict, in general, which will be best.[3]

The other side of the proposal is what to do with the revenue, and in this respect the current measure is a big improvement on the emissions trading scheme that failed to get through in 2009. That scheme gave greatly excessive compensation to large emitters in a way that encouraged them to stay in operation. While the business compensation in the current scheme is still excessive in economic terms, it’s a sensible compromise politically. More important is the use of the bulk of the proceeds to raise the income tax threshold from (around) $6000 to $20000, thereby taking a million or so people out of the income tax system[4]. That’s a measure that will be hard to reverse, given that the Opposition has pledged “in blood” to repeal the tax if it win the next election.

As long as the government can last out its full term, and as long as the global economy doesn’t collapse in the meantime, the implementation of the tax will show the claims of economic disaster arising from a carbon price up as the absurdities they are. That in turn might lead to a change in leadership on the other side of politics, which also changed leaders on this issue, and may be forced to reverse this change.

fn1. More precisely, an emissions permit scheme with a price fixed for three years.
fn2. They are of opposite genders. Australia is not yet European enough for men to exchange kisses, although hugs are socially acceptable in certain contexts.
fn3. There are some easy cases, such as low-energy lightbulbs – the previous conservative government introduced a phaseout of incandescent bulbs which is now taking effect.
fn4. It will be interesting to see if our rightwing commentariat takes up the WSJ “lucky duckies” line.

{ 63 comments }

1

Tim Worstall 10.12.11 at 12:02 pm

“More important is the use of the bulk of the proceeds to raise the income tax threshold from (around) $6000 to $20000, thereby taking a million or so people out of the income tax system”

Hurrah! Someone actually doing something sensible about the whole thing.

2

Barry 10.12.11 at 12:34 pm

Which will be followed by the Australian right claiming that those people pay no taxes.

3

straightwood 10.12.11 at 1:11 pm

The charade of national politics attempting solutions to global environmental problems grows more ridiculous by the day. Compare Australia’s annual CO2 output with China’s (400 million tons vs. 7 billion) and have a laugh. There is only one biosphere, and until there is a coherent, globally enforced environmental policy, nation states will continue to demonstrate the irrelevance of local politics to global physics.

4

b9n10nt 10.12.11 at 1:31 pm

@ straightwood:

The hope, of course, is that the West best makes it’s case to Asia for a global policy by demonstrating that a local policy is locally workable and that the West has already committed itself to reductions in pollution. Perhaps more importantly, an industrial culture of energy conservation can spread from CO2 savers to wasters independently of a formal international policy regime.

The template here would be international standards for labour conditions, not that this is necessarily encouraging.

5

ajay 10.12.11 at 2:06 pm

b9n10nt: DNFTT

6

Daragh McDowell 10.12.11 at 2:29 pm

Of all the positive effects of this bill, I have to say I think that pushing little Jimmy Delingpole into spasms of spittle-flecked rage that are insane even by his standards ranks among the Top Three. Top Five at least.

7

Rich Puchalsky 10.12.11 at 2:33 pm

It’s a really good step that they tied the carbon tax to lowering income taxes for poorer people. That seems to be a good way of making sure that the cost isn’t borne by people who have little control over their in structural arrangements.

8

SamChevre 10.12.11 at 2:39 pm

Will this affect coal exports, or only coal burned in-country? (As Australia is the largest coal exporter in the world, taxing coal exports would have a huge impact.)

9

ajay 10.12.11 at 2:55 pm

8: as far as I can tell from the reports, it’s paid on an emissions basis – only the largest CO2 emitters are even included in the scheme – so, no, coal exports don’t count.

The income tax thing is new. Back in July they were talking about using the revenue to fund clean energy spending and offset the effect of higher electricity prices.

10

straightwood 10.12.11 at 3:18 pm

A world politically divided into nation states (some failed), each one of which sets its own environmental policy, cannot prevent a global warming catastrophe. Politicians are pretending that global environmental crises can be averted without creating the regulatory apparatus of a world government. Those who declare the formation of a globally enforced environmental policy to be impossible need to grasp that the penalty for failing to achieve the “impossible” is massive economic disruption and political strife. We confuse physics with politics at our peril.

Just as unfettered Capitalism is literally running out of gas, the political construct of the nation state is proving unsuited to addressing critical global problems of climate change and resource depletion. Clinging to ideologies that no longer promote prosperity or survival will magnify the destructive consequences of ignoring inconvenient truths.

11

jwinters 10.12.11 at 3:42 pm

It’s disappointing if the emissions tax won’t apply to coal exports (which is, after all, carbon being emitted by the country). I would think that would be a partial menas to apply the tax to nations such as China which are not yet interested in doing their part.

But as an American, I live in a nation that is not yet interested in doing its part, so I don’t have much room to do anything but cheer Australia.

12

Sev 10.12.11 at 4:03 pm

Whether the gov can survive this politically may be the most important object lesson to others. The recent troubles of the Murdoctopus can only help.

13

mds 10.12.11 at 4:04 pm

Back in July they were talking about using the revenue to fund clean energy spending and offset the effect of higher electricity prices.

Then someone wised up and realized that this was too abstract to survive demagoguery about any increase, however minor, in electricity prices, so they changed it to “Here’s a tax cut.” Now, as Professor Quiggin notes, the Opposition will have a harder time repealing the whole thing. Though I’m not sure what will keep them from simply campaigning on keeping (or extending) the tax cut while repealing the “job-destroying” carbon tax that pays for it. Perhaps the Australian public would not fall for this, but given how successfully this bill seemed to turn into “Taxing every penny of carbon produced by little old ladies on pensions,” I confess I’m skeptical.

14

Omega Centauri 10.12.11 at 4:07 pm

So if they charge for burning the stuff domestically, but exports get a free ride, what do you think will happen? I’m betting a ton of coal not burned domestically, will b just add to the exports. Now maybe the marginal lignite, isn’t worth exporting (we can hope).

(10 straightwood) With no prospects for global governance -or globally binding agreements, we have no hope other than to go at it piecemeal. To say we should wait for a global deal is really just to propose waiting until fossil fuel supplies run out. There is no quarantee, that the piecemeal approach will work -i.e. cow the unrepentant nations into complying. But, its the only chance we got, short of a miracle (cheap ubiquitous cold fusion or some other sort of free ponies for everyone). At least the fossil fuels of compliant countries will stay in the ground, so the longterm total atmospheric inventory of CO2 won’t be quite as high. And speaking of free ponies-style technology hopes, it should improve the global market for wind and solar, as the price of the fossil-fueled alternatives has risen in at least some locations.

15

Omega Centauri 10.12.11 at 4:09 pm

Damm those automatic strikethroughs. I think they come from backspaces or some other sort of editing. Can’t the site owners do something about this annoying problem?

16

QB 10.12.11 at 4:16 pm

“Brown coal produces about 50 per cent more emissions per unit of energy than anthracite (black coal).”

What’s your source for that? According to http://205.254.135.24/cneaf/coal/quarterly/co2_article/co2.html table FE4, based on data from U.S. coals, anthracite actually has higher CO2 emissions per unit of energy than lignite, confirming a “long-recognized finding.”

Lignite does have higher sulfur emissions than harder coals, but that’s a separate issue.

17

Tim Worstall 10.12.11 at 4:17 pm

“So if they charge for burning the stuff domestically, but exports get a free ride, what do you think will happen?”

Taxes on consumption should probably be levied where consumption occurs, no?

18

Watson Ladd 10.12.11 at 4:33 pm

I think the tax should be on production and imports. If the only way to evade the tax is to make a giant hole in the ground that’s probably going to get noticed. I don’t think the ultimate distribution of the tax is dependent on where it is levied, and point of production seems to me easier to enforce because there are fewer of those points then consumption points.

19

John Quiggin 10.12.11 at 5:04 pm

@QB Wikipedia is a convenient source. Looking at your link, it appears as if the analysis of chemical constituents may not have taken account of moisture content. The conclusion is the opposite of everything I’ve read.

@Omega Centauri Lignite is almost never shipped far from the point of extraction, because of low energy density and high moisture content.

20

John Quiggin 10.12.11 at 5:10 pm

The choice of production or consumption basis is complicated. I have a student working on the topic at present. There are three possible choices
(a) Tax fossil fuels at the point of extraction
(b) Tax emissions where they are generated
(c) Tax consumption on the basis of embodied carbon

From a national viewpoint, and assuming a preference to tax imports rather then exports, Australia would prefer a tax on consumption as long as we don’t have a full global agreement, since we stay competitive in the coal market and could tax imported manufactures. On the other hand, with a global agreement, a tax at the point of extraction would be much better, since we would keep the revenue.

21

John Quiggin 10.12.11 at 5:20 pm

@Straightwood. I knew I should have sent in that ballot for the One World Government. Seriously, it’s not correct to focus on the need for a global agreement. In reality, given that the EU has already moved, the only countries that really matter are the US and China. If those two countries adopt a carbon price or equivalent measures, the handful of developed country holdouts will have little choice but to fall in line, and there will be plenty of time to work out a deal with the remaining LDCs who only account for a small share of emissions at present.

Of course, Australia (and New Zealand) don’t count for much in terms of influence on these superpowers, but at least the influence we have is now being used in the right direction.

And there is nothing special about CO2 emissions in this context. Australia is too small to matter in almost any international issue. But if every small country routinely acted as a free rider, very few international agreements would work at all well.

22

straightwood 10.12.11 at 6:52 pm

@20

Current probabilities for legislating carbon caps in the USA and China are near zero.

FYI, the total world CO2 contribution of China, the USA, and the EU is 55%.

23

SamChevre 10.12.11 at 6:57 pm

From a national viewpoint, and assuming a preference to tax imports rather then exports, Australia would prefer a tax on consumption as long as we don’t have a full global agreement, since we stay competitive in the coal market and could tax imported manufactures.

It was my impression that taxing imported manufactures would be very difficult due to the international free trade treaties. (If it were plausible, it would rather significantly affect my judgment on the likely usefulness of a carbon tax in the US.)

24

understudy 10.12.11 at 7:11 pm

“It was my impression that taxing imported manufactures would be very difficult due to the international free trade treaties.”

It is, which is why domestic Aussie steel production (which is relatively clean from a total pollution standpoint) will be shrinking, replaced by dirtier steel produced in China and Korea. In the US, it would be called “environmental racism” to put all the polluting plants in a poor, non-white community, in Australia, it is “green” …

25

Kevin Donoghue 10.12.11 at 7:20 pm

All credit to Australians, or at least those who made this happen. Also to straightwood if s/he sorts out the USA and China.

26

Martin Bento 10.12.11 at 7:36 pm

straightwood wrote:

“Current probabilities for legislating carbon caps in the USA and China are near zero.”

as opposed to the bright prospects for World Government in the necessary timeframe. Look, you can advocate for what you consider the ideal approach or you can advocate what you think is most pragmatically possible. But it is ridiculous to argue that a pie-in-the-sky approach is necessary because difficult but certainly more achievable are, well, too difficult.

27

John Quiggin 10.12.11 at 8:08 pm

@ Straightwood, And the rest of the OECD + Russia account for most of the remaining 45 per cent.

I would say, the more in that group who act, the better, in terms of improving the chances of the US and China moving. But, unlike you, I’m not familiar with the workings of the World Government, so maybe you can spell out how you think Australia’s action will be counterproductive.

28

Chaz 10.12.11 at 8:28 pm

I think that imposing trade penalties on shirking countries will be essential to pulling this off globally. First, it is essential to ensure that domestic industries, once subject to a carbon penalty, will not be undermined by free-riding foreign competitors. It is both economic and political suicide not to address that problem. Sarkozy has advocated carbon tariffs repeatedly for this reason. Second, it is the only way to get holdout nations to comply. As their trade partners adopt stricter carbon restrictions, the cost advantage to free-riders increases, giving them a huge economic incentive to continue shirking their responsibility. Putting a trade penalty on the carbon content of their exports wipes out that incentive.

That still does not penalize excessive carbon emissions involved in their domestic consumption. Many developing countries, such as China, are still happy to trade away the global climate for local development. Therefore, we could take things a step further, and impose broad additional tariffs as penalties for excessive domestic-oriented emissions, including emissions that are not connected to the good in question. In that case holdout countries would have to choose between adopting some pollution controls, or giving up their trade with compliant nations (requiring a near-autarkic economy). For an export-oriented country like China, or a small developing country, autarky would mean economic ruin, so that’s not much of a choice. Meanwhile, the US and EU have the credibility to make that threat: cutting the cord to China all at once would be disruptive, but beyond the short term they do not provide anything which we cannot get elsewhere. This is a huge point of leverage which we have over China, and we really don’t have any others.

We should not be deterred by the existing trade agreements. Those agreements can and will be revised if necessary. The WTO already has provisions to allow tariffs in some cases of “unfair” trade practices. If the US and EU demand amendments to add insufficient greenhouse gas restrictions (or excessive aggregate output) to the list of violations, it will get done. The US and the EU easily have enough leverage to accomplish that; if some nations were utterly intransigent and scuttled the deal, we could just kill the WTO entirely. Then the US and EU can start WTO2 with the appropriate new rules, and invite everyone to join all over again. And every country who wants to trade with the US and EU (that is, every country) would sign up.

Of course, before the US does this we’ll need to put restrictions in place ourselves!

29

straightwood 10.12.11 at 8:47 pm

maybe you can spell out how you think Australia’s action will be counterproductive.

Such actions are counterproductive because they provide placebo treatment rather than sound remedies. The Australians now believe that they have addressed a global problem. They have not.

I don’t think the idea of a world government will be considered ludicrous when the agricultural regions of the temperate zones begin turning into deserts, but by then it will be too late.

30

Omega Centauri 10.12.11 at 9:12 pm

Chaz @98.
I’ve been more than half expecting some sort of consumer boycott of developed countries that refuse to deal with carbon emissions. That doesn’t have the same sort of legal restrictions as trade action. And could could still create pressure, as when the CEOs of affected corporations start contacting their lobbyists. Of course I expect the first target to be the US (maybe including Canada if they keep developing tar sands). Do you think this is likely/feasible?

31

Jeff R. 10.12.11 at 9:17 pm

You know, that’s an awful low threshold. And a lot of people to be under it. (Although that could include a fair number of students and second incomes in a family with a decent first one.) Even as a guy who things that it’s unhealthy for the government to pretend that a family of four with median income isn’t paying income taxes, I got no problem with a threshold like that.

(And does that mean that everyone making more than that gets $2,000 off their tax bill as well? Move that from ‘hard to reverse’ to ‘impossible’ if so…)

32

Salient 10.12.11 at 9:31 pm

The Australians now believe that they have addressed a global problem.

…I guess? The verb ‘address’ is very slippery. It’s fair to say it “addresses” hunger every time I go raid a grocery store ‘football game day’ sale and drop a few sacks of bread and canned goods at the food bank. (Pro tip: managers will happily help you bypass the maximum item limit if you inform them that this is what you’re doing.) Someones are going less hungry, and that’s awesome. But at the same time if you suggested I believe myself to have “addressed a global problem” (of hunger/poverty) …I’d probably just look at you funny?

Maybe food banks are a placebo getting in the way of real change, and if we all just let people go without food then real change would happen, like a riot. S’ok. I support ‘placebos’ that leave hungry people less hungry, or air-breathers less congested, or one million low-income people less oppressed. And if you don’t, out of a sense of ideological purity, that’s okay. (It’s not like you’re taking action to stop them. In fact, when I see you throw your weight behind some particular initiative, you can bet I’ll be inclined to throw in with you.)

In the U.S. Medicare is, and was when created, basically a sickeningly paltry bandaid on the desperate national need for access to health care. It doesn’t hardly begin to “address” the problem that nearly every single desperate suffering household in America faces in some form or another — access to sufficient health care and maintenance to avoid easily preventable suffering. But Medicare is also awesome.

The Australians now believe that they have done something awesome. They have!

33

Lemuel Pitkin 10.12.11 at 10:14 pm

Good for Oz!

I’m curious, was there much debate about the merits of a carbon tax vs. auctioned carbon permits? You’re certainly right about the advantages of a price-based mechanism over straight regulation, but among environmental economics types there seems to be a lot of debate about whether taxes or permits are a better mechanism to set a price on emissions.

34

QB 10.12.11 at 11:05 pm

“Looking at your link, it appears as if the analysis of chemical constituents may not have taken account of moisture content. The conclusion is the opposite of everything I’ve read.”

Well… read more :).

See Quick and Glick, “Carbon dioxide from coal combustion: variation with rank of US coal”, Fuel 79 (2000) 803–812. They explicitly account for moisture content, and conclude that lignite and anthracite emission factors are about the same, around 100 kg CO2 / net GJ.

See Quick and Brill, “Provincial variation of carbon emissions from bituminous coal: influence of inertinite and other factors”, Int. J. Coal Geology 49 (2002) 263-275, which observes that if you were to ignore water content in the analysis, it would change the results for lignite by at most 10%.

Now, lignites have about 10% worse CO2 emissions per unit energy than bituminous coals, and that’s a more relevant comparison, since anthracite is too expensive to burn in power plants. But 50% worse? Still wondering where you get that.

35

engels 10.12.11 at 11:15 pm

More important is the use of the bulk of the proceeds to raise the income tax threshold from (around) $6000 to $20000, thereby taking a million or so people out of the income tax system[4]

Is this the same deal as Nick Clegg’s much-trumpeted ‘progressive’ move to ‘take low-earners out of the tax system’? So in effect anyone who earns over $20 000 has been given an extra $14 000 of tax free income, anyone who earns between $6 000 amd $20 000 has been given something less than that, and anyone who earns less than $6 000 has been given nothing at all. And this is something to be pleased with… why, exactly?

36

snuh 10.12.11 at 11:16 pm

…which is why domestic Aussie steel production (which is relatively clean from a total pollution standpoint) will be shrinking, replaced by dirtier steel produced in China and Korea. In the US, it would be called “environmental racism” to put all the polluting plants in a poor, non-white community, in Australia, it is “green” …

dude, the australian steel industry is already shrinking, and has been for as long as i’ve been alive (i’m 31). it’s death (which is already happening) has nothing to do with the carbon tax.

37

Tony Lynch 10.12.11 at 11:43 pm

OK, domestic emission reduction matters. OK. But Australia’s energy exports produce 120% of our domestic annual emissions annually at present. It is bilateral Australian Government policy to double our coal exports in the next decade…

Also, Australia has 30% of the coal export market – that helps keep the price down and discourages renewables…
Also there is an equally frenetic “Dash for gas” to further enhance our status as an “energy superpower”(to quote John Howard).

It is, of course, nice (say) to blame China. And pointless and deceptive. We make sure they stay hooked on coal (as much as we can), we improve “productivity”by exporting manufacturing to them – so they burn our coal to produce solar panels which we then buy – and proclaim our virtue in reducing our domestic emissions.
Really JQ, can we have a more comprehensive picture.

38

snuh 10.12.11 at 11:43 pm

Is this the same deal as Nick Clegg’s much-trumpeted ‘progressive’ move to ‘take low-earners out of the tax system’? So in effect anyone who earns over $20 000 has been given an extra $14 000 of tax free income, anyone who earns between $6 000 amd $20 000 has been given something less than that, and anyone who earns less than $6 000 has been given nothing at all. And this is something to be pleased with… why, exactly?

it’s something to be pleased with precisely because it is not the same as nick clegg’s proposal. for 2 reasons: 1) there will be changes to the other tax brackets too, meaning that total tax cuts received decline as income increases, such that pre-tax incomes of $80,000 per year (and any number above that) receive only a tax cut of three (3) dollars per year. and 2) it is combined with increases to various pensions.

39

John Quiggin 10.12.11 at 11:58 pm

What snuh said.

40

John Quiggin 10.13.11 at 12:08 am

@QB I don’t have immediate access to your sources. Again, here’s Wikipedia’s list of the highest emission stations in the world, nearly all fuelled by lignite. To be clear, I’m only using Wikipedia because it’s easily accessible at short notice. I’ve never seen any dispute in Australia over the proposition that Hazelwood is (as stated by Wikipedia) the worst in Australia and one of the worst in the world.

At this point, I’m going to turn it back to you. If you can find a source showing that the Australian estimates of emissions from Australian power stations are wrong please present it. Otherwise, I can only assume that the US estimates aren’t applicable, for reasons I’ll leave to you to work out.

http://en.wikipedia.org/wiki/List_of_least_carbon_efficient_power_stations

41

Chaz 10.13.11 at 2:08 am

@Omega Centauri

I don’t know a ton about boycotts. Every contemporary boycott I’ve heard of has gotten nowhere, but I guess Caesar Chavez fared better?

Even a widely supported, successful boycott would not have nearly the same impact as tariffs, though. I also think that if you could get enough consumers worked up enough to mount a successful boycott, you’d be way past the level of voter support needed to get Congress to impose tariffs. A lot of Congressmen are already itching to throw down tariffs just over the offshoring issue. You see that with the current currency manipulation bill and when Hillary Clinton and Obama pretended to care about NAFTA 3 years ago. Bush even imposed tariffs on wood! From Canada!

42

piglet 10.13.11 at 5:34 am

JQ 40: The carbon emissions per unit of electricity of a power plant depend on the conversion efficiency of the plant, as well as on the carbon intensity of the fuel. So it could be that these power plants are simply old and less efficient than more modern ones. I have found a source in German that reports a 30% advantage for black coal over brown coal during operation. Interestingly, this source states that black coal extraction involves methane emissions which need to be accounted for in a life cycle analysis and significantly reduce the advantage of black coal.

http://www.vdi.de/fileadmin/vdi_de/redakteur_dateien/geu_dateien/FB4-Internetseiten/CO2-Emissionen%20der%20Stromerzeugung_01.pdf

43

piglet 10.13.11 at 5:42 am

Regarding the discussion in 23 and 28, does the Australian law have any provisions for imports? Or is it restricted to electricity generation, where international trade wouldn’t be an issue? I agree that a carbon tariff should be part of any comprehensive emissions regulation. See slide 13 at http://www.globalcarbonproject.org/carbonbudget/09/files/GCP2010_CarbonBudget2009.pdf

44

Henri Vieuxtemps 10.13.11 at 6:02 am

Maybe food banks are a placebo getting in the way of real change, and if we all just let people go without food then real change would happen, like a riot.

If this thing you do really does get in the way of real change (which seems plausible, in the case of charity), then it’s nothing like a placebo. It’s counterproductive and harmful.

45

engels 10.13.11 at 9:29 am

“total tax cuts received decline as income decreases”

Could you run this by me for the case of those earning up to $20 000, say?

46

John Quiggin 10.13.11 at 10:43 am

@Engels Those earning up to $20K will now pay no income tax, gaining around $800 per year. The marginal tax rates over the range $20-80k will be raised, gradually clawing back the effects of eliminating the bottom bracket. Over $80K, total tax paid remains unchanged. (Current exchange rate close to parity with US, estimated PPP $1A=$US0.80)

47

Steve Williams 10.13.11 at 11:28 am

Henri@44

‘If this thing you do really does get in the way of real change (which seems plausible, in the case of charity), then it’s nothing like a placebo. It’s counterproductive and harmful.’

The example Salient gave was handing out food at a food bank. Used by, one presumes, homeless people and the like. Not exactly the vanguard of the next revolution. So, it’s not getting in the way of change. It’s helping cope with a problem, in a small way. In the same way, Australia cannot simply dictate to the world how to run their environmental policy. Incremental change is disappointing, but it’s worth doing if the alternative is doing nothing at all.

48

engels 10.13.11 at 11:32 am

It’s a small point but what I meant was if Engels and Snuh are earning E and S, where 0 < E < S < 20 000, then Engels is going to get less back than Snuh, so it doesn't seem to me to be true to say that 'total tax cuts received decline as income decreases'.

Overall, it sounds a lot better than Clegg but it still disadvantages the very lowest earners, in relative terms, it seems to me. (But perhaps I'm still missing more details.)

49

engels 10.13.11 at 11:43 am

so it doesn’t seem to me to be true to say that ‘total tax cuts received decline as income _increases_’

50

mds 10.13.11 at 12:56 pm

How about, “total tax cuts received decline as income increases above the new cut-off, phasing out entirely above $80,000″? Since its immediate purpose is to make the carbon tax more palatable to the public, I think it’s impressive that it manages to retain as much progressivity as it does. As I implied way back in 13, I wouldn’t have been surprised if it had been a Cleggian or US-style tax giveaway, especially since in the US mental incompetence and mendacity are rife when it comes to marginal tax brackets. So although it would not be the optimum egalitarian approach if the bill were primarily concerned with income tax reform (which, by the way, it is not), as a bribe an indirect carbon tax rebate to members of the electorate making $80,000 or less it actually comes off looking pretty good.

51

Occasional Reader 10.13.11 at 6:27 pm

Could someone please explain to this underinformed non-Australian what the rationale is for switching to a cap-and-trade system after five years? If a tax on polluters/income tax relief for lower income brackets is a good solution, why not just keep it? If cap and trade is better, why not just do that from the beginning? Are the tax changes, subsidies etc kept after the switchover?

52

John Quiggin 10.13.11 at 6:29 pm

It’s important to note that minimum full-time full-year wage incomes in Australia are significantly above $20K. So, incomes below that are a mixture of
(a) would be full-time workers who are unemployed or underemployed for part of the year
(b) people who choose to work part-time, commonly not the primary income earner for a household

The single unemployment benefit is about $12K, so anyone with a lower income is almost certainly not a primary income earner.

It follows that worry about the precise pattern of benefits within the <20K group is misplaced. What matters is that the benefit is greatest for those at or near minimum wages, and declines thereafter.

53

John Quiggin 10.13.11 at 6:34 pm

The tax changes are permanent. Technically, it’s a cap-and-trade system from the start, with the government intervening to fix the price until 2015, and with some free permits. After the switchover, permits will be auctioned, and the number of free permits will decline, so the revenue will still be there to fund the tax changes.

The argument for the switch is that, in the absence of action elsewhere, and in the early days of the scheme, a fixed price gives certainty to business. The hope is that by 2015, business will have got used to the idea and there will be better opportunities for international trade in permits.

54

Occasional Reader 10.13.11 at 7:46 pm

Thanks very much.

55

mpowell 10.13.11 at 8:10 pm

If you are going to complain about the distributional effects of an increase in, effectively, the standard deduction despite corresponding offsetting increases in higher marginal brackets, you are pretty hopeless in my opinion. I mean are we seriously going to complain that if for two wage earners making less than median income, a tax break benefits the wealthier one by more than the other it is necessarily a bad thing without even being familiar with the situation? This is how you end up with marginal tax rates in excess of 100% on certain low middle class earners, which is possible factoring in total benefits in the US, at least. And that is certainly not fair or wise.

56

Occasional Reader 10.13.11 at 8:13 pm

One more question, once it transitions to a full blown ETS, will the tax base still be limited to the 500 or so big polluters, or will it expand?

57

David S. 10.13.11 at 8:27 pm

“Australia is not yet European enough…” Ouch, you’re probably going to live to regret that one.

Translated into Murdochese – “We Marx-loving socialists won’t rest until the femi-Nazi run government controls every aspect of our lives and all Australian men kiss each other over their morning lattes and go clothes shopping together. By train!”.

58

John Quiggin 10.13.11 at 10:51 pm

@56 That’s in the too-hard basket for now, I think. The big challenges are farmers and private motorists, both of whom were excluded this time around.

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John Quiggin 10.13.11 at 10:52 pm

@David I know where I stand on the latte question, at any rate

http://johnquiggin.com/2003/04/08/cold-duck/

60

QB 10.14.11 at 5:18 am

“I don’t have immediate access to your sources.”

Here you go:

Quick and Glick (2000): http://www.sciencedirect.com/science/article/pii/S0016236199001970

Quick and Brill (2002): http://www.sciencedirect.com/science/article/pii/S0166516201000684

But really there are lots of studies of these kinds looking at various kinds of U.S., Australian (Quick and Brill look at data from 52 Australian samples), and European coals. In terms of carbon emissions per unit energy, there’s not much difference among them.

“Again, here’s Wikipedia’s list of the highest emission stations in the world, nearly all fuelled by lignite… I’ve never seen any dispute in Australia over the proposition that Hazelwood is (as stated by Wikipedia) the worst in Australia and one of the worst in the world.”

In Wiki’s tables, the two worst plants are Hazelwood (1.58 Mt/TWh) and Edwardsport, Indiana (1.56 Mt/TWh). Hazelwood is lignite, but Edwardsport is a bituminous coal plant. I’d guess that if you converted Hazelwood to bituminous its carbon output per watt-hour might improve by about 10% and… it would become the second worst plant in the Wiki tables.

“At this point, I’m going to turn it back to you. If you can find a source showing that the Australian estimates of emissions from Australian power stations are wrong please present it.”

I don’t doubt that Australian plants are terrible, and I’m glad you’re getting around to internalizing their carbon cost. However, I do doubt you can improve them as much as you seem to think you can just by running them on black instead of brown coal.

61

ajay 10.14.11 at 9:27 am

Australia is not yet European enough for men to exchange kisses

Ahem.
http://en.wikipedia.org/wiki/The_Adventures_of_Priscilla,_Queen_of_the_Desert

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John Quiggin 10.14.11 at 1:30 pm

@QB thanks, that was useful. Sorry if I was a bit short in response, but I found your claims surprising, and your initial references seemed to me to contradict well-known facts. Now I think I can see where our misunderstandings have arisen.

First up, my reference to anthracite was an error, just a recollection of what I was taught in school. The black coal used in Australian power is bituminous, which appears as optimal in Quick and Brill (despite the US example you mention). In addition, the moisture content of Australian lignite (30-70) appears to be higher than that used by Quick and Brill. Finally, as you say, these are old and inefficient power stations.

I don’t think any of this changes the conclusion of the post. The package will lead to the rapid shutdown of the most polluting power stations and will discourage the construction of new coal-fired power stations in favor of gas and renewables.

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Doug Evans 10.16.11 at 12:48 am

Interesting post
This package is widely accepted as a small step in the right direction – at last. Although as you say it may well promote a shift out of brown coal I understand that the price signals from $23/tonne are barely adequate to promote the shift from coal to gas and that would be no win at all. Not unconnected with the pending carbon tax – ETS legislation; in Victoria (with the tacit encouragement of the government) we have a proliferation of de-watering technologies to allow brown coal to more or less match it with black coal as a source fuel in the carbon emissions stakes. Currently this seems to be aimed at export but there is perhaps potential to use the processed lignite in the Victorian power stations also. Don’t know whether there are technical problems associated with this or not. While this may seem a small win in terms of emissions mitigation the environmental downside of these techniques in terms of water use and toxic waste products is apparently very large and community opposition promises to rival ‘Lock the Gates’ in QLD.

To me the most important aspects of the Clean Energy legislation is the ancilliary bills directly aimed at growing the renewable energy industry. $10 billion for Clean Energy Finance Corporation and $3 billion for Australian Renewable Energy Agency. The Greens believed they are the saving grace of the package I agree. These have not seen the light of day and Giles Parkinson at ‘Climate Spectator’ for one, seems pessimistic about their prospects. Given the current chaos in Canberra it is hard to believe that they will ever become law. This is pretty depressing.

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