Wednesday, May 25, 2011

Let consumers carry the can on carbon

Labor is losing the carbon tax debate. It is pressing on, hoping that once the tax is in place, the fearmongering will die away, and Australians will accept it reluctantly, as they accepted the GST.

They might. But it is equally likely that the Coalition will keep riding the issue, win the 2013 election, dismantle the tax, and we will end up much worse off than we started.

Is there a better solution? Yes. What matters most - for anyone who wants to see Australia and the world take effective action to stop climate change - is not to press on regardless, but to stop right now and ask if there is a politically more acceptable way to achieve that goal.

And there is an alternative: not perfect, but politically more acceptable, in Australia and in other countries - such as the United States and China - that have been cowed by the same problems and refused to put a price on their carbon.

Labor plans to tax carbon emissions produced in Australia, following the model set by Europe. But its task would be easier if it were to tax carbon emissions on products consumed in Australia, wherever they were produced.

This would make its carbon tax easier to sell here. But more: it would make it easier for any country to put a price on carbon - because this gives them a model that does not disadvantage local producers.

It is global action, not Australian action, that will decide if carbon emissions stop heating the world. Globally, taxing production of carbon emissions has proved too hard for key countries. But if we tax consumption of them instead, it could unlock the door to global action.

Why? Look at what is happening in the debate here.

Labor is losing the debate for many reasons. But a key one is that it has to fight on too many fronts. Most Australians want action on climate change, but don't want it to make them worse off. Their wishes could be met, but only if the money raised by a carbon tax is returned to households by cutting taxes and raising welfare payments - as happened with the GST.

But companies exposed to global competition are also fighting a plan that would tax them but spare their overseas rivals. A carbon tax would threaten key industries that Australia will need once global supply of minerals expands, and prices go back to normal.

The government plans to compensate industries it sees as ''internationally exposed''. But it can't compensate industry and fully compensate households. And last time, its list of industries was arbitrary, leaving out many that would lose from a tax on domestic producers only.

Bluescope Steel, rated in the top third of global steel makers for carbon efficiency, estimates that in year one it faces a tax of up to $39 million, while its Asian competitors go tax-free. A study by PricewaterhouseCoopers for the Federal Chamber of Automotive Industries concludes that the Australian car industry could pay between $30 million and $84 million a year, up to $412 per vehicle.

That shouldn't worry us if all car makers faced the same tax - but they won't. In Labor's model, only Australian car makers would pay the tax. Tell me, what is the benefit of that?

Geoff Carmody sees no sense in it. A respected economist who left Treasury in 1990 to co-found Access Economics, he argues that, rather than follow Europe in taxing producers of carbon emissions, we should set the world an alternative model by taxing consumption of them.

How does that make a difference? Carmody put it very simply in a recent interview on ABC radio's Late Night Live: ''A production tax hits all our exports, and none of our imports. A consumption tax hits all our imports, and none of our exports.''

In practical terms, that means there is no need for any compensation of industry: none at all. All of them would be facing the same taxes as their overseas competitors. The whole issue of unfair burdens on business would disappear, and all the revenue from carbon tax could be divided between compensating households and investing in renewable energy.

There are two problems with the Carmody model. First, any estimate of the carbon content of an imported product will inevitably be arbitrary, approximate and bureaucratic.

How much carbon is there in a frying pan from China, a ream of paper from Indonesia, a car from Korea, or a machine tool from Germany? Australia would be the first mover on this form of carbon tax, so we would have to work it all out, for every product. That would take time and money, to deliver rough justice.

Second, it gives no advantage to more carbon-efficient producers. There's no incentive for producers to reduce carbon use, because for simplicity, all frying pans and paper reams would be taxed the same. In the long term, when the whole world uses carbon pricing, the Carmody model should give way to emissions trading or a global carbon tax.

But it makes a global carbon deal more likely. The governments of the US, China, Russia, Japan and the rest have put off carbon pricing because they fear it would disadvantage local producers. If Australia, one of the largest emitters of greenhouse gases, adopts a model that is politically acceptable, it would open an easier path for them.

Three years ago, I thought the flaws in the Carmody model outweighed its strengths. Now, with key countries hanging back from carbon action, no global deal likely, and the high dollar forcing Australian industries to the wall, it seems to me the best option.

It could give us a carbon tax that works - and the world, a way to break the impasse.