Home > Economics, Environment > My take on the carbon tax

My take on the carbon tax

March 1, 2011

Back in 2007 I wrote a policy monograph that was published by the Centre for Independent Studies talking about a carbon tax for Australia. The point of my paper was two-fold… first I argued that a carbon tax is a more efficient and simple option than an emissions trading system (which I think would be a horrible policy), and secondly I argued that if a carbon tax was introduced then it should be linked to matching tax cuts to ensure that there would be minimal efficiency cost to the economy.

I coped quite a bit of flack from the right for even considering the option of a carbon tax, but I think both of my points hold up to fair scrutiny.

Two years later (2009) I wrote several op-eds on the same topic, and gave a speech (along with Richard Denniss and Warwick McKibbon) about why a tax is relatively better than a trading system. In the same year, I also co-wrote a New Zealand version of the monograph, which was held up by Roger Douglass as a better alternative to the ETS that New Zealand is stuck with. My main points were repeated by many free-market economists (such as Sinclair Davidson and Jason Soon) as well as by Tony Abbott.

Fast-forward another two years to today, and I am now involved in a campaign to stop Gillard’s carbon tax. So why the change?

The simple fact is that I haven’t changed my position. While a carbon tax is an improvement over a trading system, I have always been crystal clear from the beginning that a carbon tax would still cause economic damage, and so it would need to be linked to other tax cuts to help mitigate that damage. Since the expected benefit of a carbon tax (or ETS, or any other carbon policy) is close to zero, if there is any substantive economic cost then the policy should be rejected. Unfortunately it is necessary to keep repeating the simple maxim that the government should only introduce a policy if the benefits of that policy exceeds the costs. This seems painfully self-evident, but it is so often forgotten.

While we still don’t have the details of Gillard’s carbon tax, she has been clear that it will include a range of spending commitments. That means this is going to be a “tax and spend” reform, not the “tax and tax cut” reform that I have written about. I have always said that a carbon tax could only make sense with matching tax cuts… and so if there are no matching tax cuts then obviously I will oppose the new tax.

Amazingly, some prominent left-wing writers have been quite confused about this point. Professor John Quiggin suggested that government spending and tax cuts “amounts to much the same thing” while Tim Lambert accuses me of a backflip, of being deceitful and then says that the “difference between revenue neutral [ie tax & spend] and budget neutral [ie tax & tax cut] doesn’t seem to be that large”. This confusion is quite baffling. I think the difference between government spending and tax cuts is pretty obvious and very important.

Categories: Economics, Environment
  1. Lev
    March 1, 2011 at 5:14 am

    Hi,
    I am french and I live in Sydney,
    I really think it will collapse as in was the case in France last year.
    We will see what happen but I am not very confident about it….

    I wrote an article about it: http://www.australia-offshore.com/carbon-tax-australia-july-2012/

    Reagards,

    Lev

  2. TerjeP (say taya)
    March 6, 2011 at 2:27 pm

    “difference between revenue neutral [ie tax & spend] and budget neutral [ie tax & tax cut] doesn’t seem to be that large”

    Nothing original here. This is a standard piece of Keynesian waffle. Both sides of politics routinely fall for it.

    While we still don’t have the details of Gillard’s carbon tax, she has been clear that it will include a range of spending commitments. That means this is going to be a “tax and spend” reform, not the “tax and tax cut” reform that I have written about.

    The other reason to condemn this carbon tax is that it is intended to turn into an ETS after three to five years of operations. So it deserves to be condemned as an ETS.

    I personally don’t think making power from fossil fuels more expensive with a tax is the strategically clever response to concern about global emissions. Better to make nuclear power cheaper through regulatory reform and thus get both lower emissions and cheaper power.

  3. BilB
    March 7, 2011 at 11:36 am

    Hi John,

    I think that most of your assertions, whether for or against a Carbon Price, Carbon Tax, or an ETS are casual guesswork with minmal credibility. The reason I say this is because your “reasoning” suggests to me an assumption of a “steady state” world. Here is an exercise for you. Considering the increase in global population, tight oil production rates with limited surplus capacity, changing national attitudes to remainding oil stocks, global growth for standard of living expectations in China, India, and now North Africa, four fold ratio of oil over consumption to new oil reserves,…..make an assumptive graph of oil price for the next 30 years. With, now, universal (Tony Abbott has reported advised his cabinet to recognise that climate is changing and human activity has influenced this change) acceptance that climate is changing bringing progressively more negative economic impacts for Australia make an assumptive graph of the economic influence of this process (this will require estimating the rate of change of frequency and impact of damaging climate driven destructive weather events such as Fires, Floods, Droughts, Cyclones, Tornadoes, Destructive Hail, Deluges, High Wind events, Desease events, Pestilences,..).

    Having quantified and integrated the range of possible outcomes, at what point do you imagine the Australian economy in its current form succumbs to the impacts of climate change, and what is the global temperature at this point? As an economist can you lay down an national infrastructure restructuring list and timetable for this replacement of essential facilities against the changing climate and global energy supply situation. By what method do you imagine this restructuring will be caused to be undertaken and what is the probability that an optimal timetable of change can be followed?

    If you cannot make a believeable proveable projection of future economic outcomes for the next 30 and 50 years, then it is my guess is as good as yours as to how the future will unfold, and what policies should be undertaken to protect Australia as Climate Change unfolds.

  4. March 7, 2011 at 12:27 pm

    @BilB — I agree that modeling and projections can be difficult, but I don’t think that means that all models and all projections are equal. While projections are never perfect, I think a good projection is better than a bad projection.

    There have been a few peer-reviewed papers looking at the likely consequences of global warming, including destructive weather events, rising sea-waters, impact on ecosystems, changed farming practices, and cold/heat-related activities, illness/deaths, infrastructure costs, and other consequences. The average estimated impact on welfare from these studies is a total cost of about 1% of GDP by 2100. Using some more negative assumptions, Stern estimated the cost would be equivalent of nearly 3% of GDP by 2100. Of course, these aren’t perfect, and if you can improve on the methodology or quality of input data, then I’m sure that would be appreciated.

    Of course, the costs won’t impact all countries equally. Indeed, Russia is likely to be a beneficiary of global warming of 2-3 degrees. Richer countries are generally going to do better, because we have better infrastructure and are more easily able to adapt to new situations. If you’re curious about the peer-reviewed studies, I suggest starting with Prof Richard Tol.

    None of the above studies, or any of my own studies, have an assumption of a “steady state” world.

    But none of this is particularly relevant to the old discussion of “carbon tax v ETS” or the current discussion of whether Gillard’s carbon tax is good public policy. The simple fact is that Gillard’s “tax & spend” approach will have costs but no benefits, and so is therefore bad public policy.

  5. BilB
    March 7, 2011 at 5:24 pm

    Hi John,

    Thanks for your reply. I’ve just lost my very long reply to yours in a keystroke accident which deleted the full text so I will have to retype it, but have run out of time for now. Until I get to that, here is a little reading for you

    http://www.scoop.co.nz/stories/HL0601/S00001.htm

    You should also read up on Peak Oil, and its projected impacts on the global economies (plenty of information at The Oil Drum). Some back ground. Over the last 150 years we have extracted half of the worlds oil starting from a global population of under 1 billion to the present under 7 billion. In 1960 with the population at 3 billion global oil consumption was 21 million barrels of oil per day. For 2011 oil consumption is projected to be 87 million barrels per day and the stable oil price is $90 per barrel (106 at present). So with the global population project to overrun to 10 billion by 2050, there is a little graphing exercise for you to do to estimate the life of oil availability.

    http://www.eia.doe.gov/aer/txt/ptb1105.html

    you should also readup on PID control systems, read the “scoop” article and its conclusions, quantify and integrate those conclusions with worlds oil availability/price, then compare those results with you 1% GDP fantasy and the suggestion that global temperature rise of 2 to 3 degrees is advantageous. Then apply your new PID knowledge to determine the rate at which the global economies have to act to avert Climate Catastrophy.

    My evaluation is that we have at best 20 more years of business as usual stable global economy. Beyond that we face a spiaralling decent into economic collapse if we have not replaced all of our energy infrastructures with solar renewable.

  6. March 8, 2011 at 2:15 am

    What I like about peak oil is that every decade we use more oil, and then at the end of the decade our projection of remaining oil has *increased*. Since the start of the industrial revolution there have been predictions of “running out” of natural resources, and no matter how many times these predictions of doom are proved wrong, they always come back with the next generation. It seems Malthus just won’t die.

    The problem with the doomsayer logic is that they seem to assume a steady state, whereas economic incentives create a constantly changing situation, with a continuing evolution of preferences and technology.

    The estimate of a total cost of 1% of GDP by 2100 isn’t my assessment. I haven’t done a robust or peer-reviewed study of the evidence. That is the average that comes from the peer-reviewed literature. As I said, some studies (with doomsday assumptions) have a higher cost, while some have a lower cost.

    Those projections may be wrong, but they seem to be the best we have at the moment. It would be dangerously wrong to simply assume that AGW costs are near-infinite and therefore justify introducing panicked policy that has a net cost. That sort of “policy analysis” would allow us to justify any policy at any time based on any fear… which is a recipe for the “economic collapse” that you are concerned about.

  7. TerjeP
    March 8, 2011 at 4:52 am

    Not quite on topic but you can watch Richard Tol talking about the economics of climate change strategies here:-

  8. BilB
    March 8, 2011 at 4:58 am

    Wow, John.

    For starters you really do need to get acquainted with

    http://www.theoildrum.com/

    and read what people in the industry say about oil and reserves. Much of what are now called reserves are bodies of oil in the most extreme of places. In other words the “easy oil” is all but used up, and delivery from many of the reliable sites is now declining. Furthermore as “reserves” are accessed it is anticipated that most will underperform due to the extreme nature of their location, meaning that “reserves” are most likely to be massively overstated. Don’t take my word for it, read what the players and industry technologists are saying. Studies by most serious governments are reporting that peak oil has now passed. Of course as oil becomes harder to extract, more expensive to process, the oil to market price steadily rises just as it is now. People find replacement products just as Canada is exploiting its tar sands (oil’s equivalent to Brown Coal), the US is now howing into coal seam gas, and China is gearing up to convert coal into petrol and plastics. There is a cost to this process which steadily rises with time. But as oil is now sitting at 90 to 110 dollars per barrel much of the flexibility has been used. $110 per barrel is usually seen as a trigger point for inflation. That point may now be a little higher but to ignore the trend is a dangerous poition to take. India recently announced its intention to build 50,000 klms of new surfaced road ways to open up the country for trade. At the same time Indian car manufacturer Tata is producing the worlds cheapest new car at $2500. In the so doing they have devised a car that is cheap enough for a whole new section of their society to buy a vehilce, and they are affordable to run at present as the latest offering, the Profile does 100 klm on just 3.4 litres of diesel. That might sound good, but the competition for fuel from 100 or 200 million more new vehicle users will still drive demand higher even if each vehicle uses less fuel per klm.

    Your approach to this further confirms that economics is not a complete enough science to properly evaluate total risk, and certainly is completely incapable of properly integrating the full spectrum of influences that arise in a complex environment. As the GFC clearly demonstrated economics cannot even detect or predict dynamic processes occuring in the hub of the economies of the world.

    And that was pretty much my point. Economic evaluation at this stage of how governments should react to global warming can only be treated as opinion as there are so many specific aspects of influence with which Economists have no understanding or solutions. Economists have a contributory role in evaluating the various influences as they come into play, but as to deciding on the guiding strategy for Global Warming Action, economic understanding of the dynamics of a complex system such as Atmospheric Carbon Accumulation driven Climate Change is hopelessly inadequate.

    That is why your opinion on Carbon Management Devices carries little more weight that anyone elses, particularly when, as an Economist, you make as many sweeping assumptions as you have in your above response.

  9. BilB
    March 8, 2011 at 5:25 am

    Is that a joke, Terje? Hairy guy in front of book case talks about spending money? On what? Why? Based on what understanding of CO2 and Methane feedback scenarios…and as of what knowledge base date? Based on who’s guidence? with what final atmospheric CO2 level and what global temperature?

    Clearly you are thinking that everything will remain for the rest of the century pretty much as it is today, only perhaps a little warmer and wetter, or something. Only “they” will be spending your money in ways that you do not approve of. Is that how it is for you? This Global Warming thing?

  10. March 8, 2011 at 7:29 am

    Regarding the GFC, the “efficient markets hypothesis” predicts that nobody should be able to predict a crisis. So you could say that the GFC proved that theory right.:)

    My assumption is that technology will continue to improve. That has been true for every year for the last 200 years. Your assumption seems to be that technology will suddenly and inexplicably stop. That is a very strange assumption. I feel very confident that your assumption is crazy & wrong.

    Once again I need to point out that the studies I have mentioned aren’t mine. I am flattered that you want to give me credit for them, but alas I don’t get the glory. They were done by some of the best economists around the world, using mainstream science predictions as the inputs. If you don’t want to read them, that’s fine. But if I have the options of (1) following the peer-reviewed literature on the topic; or (2) shreiking and throwing my hands in the air, and panicking to introduce policy that we know doesn’t work… then I pick (1).

    As it happens, none of this is even relevant for the discussion of Gillard’s carbon tax. For that policy analysis all you need to know is that the benefit is zero, and the costs are greater than zero. Peak oil, steady-state assumptions of technology, Indians cars, and your dislike for peer-reviewed literature are not relevant. All that matters is whether the policy has a net benefit. Obviously, it does not. So obviously, it’s bad policy. The end.

  11. TerjeP
    March 8, 2011 at 7:53 am

    Clearly you are thinking that everything will remain for the rest of the century pretty much as it is today, only perhaps a little warmer and wetter, or something. Only “they” will be spending your money in ways that you do not approve of. Is that how it is for you? This Global Warming thing?

    That is a pretty good summary of my outlook.

  12. BilB
    March 8, 2011 at 12:04 pm

    You would have to have efficient markets for that to be true. The nature of the would of the traded commodities that triggered the crissis would require there to have been a strong efficient market for your claim to be true. The fact is that there was massive fraud at play to conceal the questionable value of the derivatives whaich should have been detectable in an efficient market. So the claim is false.

    I give you default respect for your credentials, which means that you should comprehensively understand the substance of the models that you hang your arguments from, you should be able to quantitatively evaluate them and be fluent with their foundation material, assumptions and their limitations. If you are actively following advances you will be aware that mainstream science predictions are highly volatile and are being updated almost weekly. Conclusions of the IPCC have long ago lost their validity as the basis for economic evaluation. One hopes that the modelling that you are quoting is significantly more recent.

    As an industrial designer and manufacturer I am intimately connected to the flow of technology and closely follow the energy technology explosion that has been triggered by the Global Warming threat. Furthermore, I have a comprehensive knowledge of the spread of technologies likely to provide cost effective solutions to the stationary energy component of CO2 emissions. But I also understand the limitations of the technologies and foresee the circumstances under which many of these technologies can be rendered useless in a very short period of time.

    Relevency? You can’t see relevency? Gillards…policy…is nothing more than an announcement technically. It is however entirely likely to contain much of the developed policy work of economists such as Professor Ross Garnaut. What has been announced so far is the intention to establish a Price for Carbon, not a tax. A Carbon Pricing mechanism is potentially a comprehensive two way tool for incentivising the reduction of CO2 emissions, not from the stationary energy sector and transport energy sector, but for the other 50% of Emissions throughout the economy. There are many devices available, more suitable devices to tackle the very specific nature of CO2 emissions from power generation , but that does not mean that the kickoff policy of the Carbon Pricing mechanism is not a good and useful tool for legislators to have to begin the process of decarbonising our economy.

    But you now feel, having publicly and enthusiastically previously endorsed a Carbon Tax (as did I in 1992 when I ran for office in New Zealand), that there is a better alternative. Well I think that you should spell out comprehensively exactly what you feel is better and how it will work quantitatively, and why it is better in quantitative comparison.

  13. BilB
    March 8, 2011 at 12:08 pm

    Terje. As I thought of you and your understandings.

  14. TerjeP
    March 8, 2011 at 8:24 pm

    BilB – what do you think will happen over the next century if Australia fails to implement a price on carbon?

  15. TerjeP
    March 9, 2011 at 5:05 am
  16. BilB
    March 9, 2011 at 6:38 am

    Well, Terje, for Australia to not put a price on Carbon would mean that we carry on using coal for our energy needs as we would be saying that we are choosing to ignore AGW. The very small economic edge that this would provide would be quickly eroded for the same reason that America is in difficulty now. The US has made no real attempt to curb their oil consumption, so while their own oil production has grown slowly their consumption has grown far faster. At the same time they have embraced cheap imported products from Asia. While this is not quite as bad as it seams on the surface as the cost component for Asian products ranges from 5% to 20% meaning that the bulk of the revenue generated by these products stays in the destination country. At least that is how it started out. As time has moved on the second generation of Chinese manufacturers are marketing more directly yielding higher returns for the Chinese businesses. Furthermore China is widening its productive capacity to compete with many of the US strength industries. So the US has allowed itself to be cornered with an inefficient vehicle fleet that consumes double the fuel of other western nations while at the same time their oil import bill has grown to be a huge drain on the on the countries balance sheet now compounded by the high oil price at $90 per barrel, effectively trippling their fuel import bill from 5 years ago. The combined drag on the US economy of these and other similar influences has placed the US economy in a position from which it will be difficult to solidly recover from in any reasonable time frame. This will also be Australia’s fate. The only thing that prevents this from happening is the ratio of Australia’s mineral exports to its population.

    Alright so what happens. For starters not much in the next 12 years during which time oil price, I expect, will oscillate between $70 and $120 per barrel. During this time energy systems such as BalBun Technology’s GenIIPV system will become available and start to release people from their family energy cost elevating their standard of living in the process. Plug in Electric Vehicles will slowly become available over the next 5 years but the initial uptake will be modest. Over the next decade uptake will steadily improve but the number of vehicles will still be fairly low. Australia will be punished with a recurring pattern of flooding followed by extreme fires possibly on as little as a 5 or 6 year cycle with short but severe droughts in the central west. The dry years of this new recurrent cycle will see extreme temperatures with very high night time temperatures and extending over many weeks. It is unclear at this stage what the pace of damage will be in this new weather pattern.

    Beyond the 12 year point I expect Australia’s fortunes to start to change quite dramatically. Oil scarcity will start to be a concern placing real stress on Australia’s trading partners. Output from Australian farming will be in a slow decline but there will be a shift in the crops produced and the localities most successful. The real problem will be unpredictability of weather conditions. The real backbone of the economy will be minerals. Tourism will be in decline as air travel will be more expensive making the longhaul to Australia a less appealing alternative, taking Australian tourism back forty years. Nuclear container ships and bulkhaul carriers will begin to appear in the largest sizes. By 2030 it will be plainly clear that the houses built in the noughties and tens are not suitable for the climate conditions of this century, and severe losses of property value will conspire with the increased burden of climate damage rebuilding and oil scarcity to put Australia in recession. It is unlikely that comprehensive property Insurance will be affordably available to the average home owner. Climate depression will become a new syndrome affecting many. By 2035 the Arctic permafrost will be in full retreat and methane will be pouring into the northern atmosphere further heating that part of the world. Unbearable heat waves will start to kill many thousands in the European summers. Tropical and other diseases may trigger pandemics.

    I expect that by 2050 those alive at that time will look longingly back to the twentieth century, as the mid 21st century will be a hell hole and at 2060 our civilisation is starting to take severe damage. At this point the electronic age may come to a grinding halt for anything other than essential users. This is because this highly complex sequential industry will be struggling to maintain continuity of its supply chain.

    If Australia does not take up a Carbon Price the main impact will be that Australia’s preparedness for the future climate will be minimal. However if the US does not take up a Carbon Price and other measures then the above scenario is all but certain to that time frame. The principle decider of how well Australia copes with the future climate and resource depletion will be the rate of uptake of comprehensive energy systems such as GenIIPV, electric vehicles, future proofed building designs, future proofed regional and new city planning (which includes a complete rethink of public transport), quality of NBN, restructuring of commercial systems managing the food supply, water supply management, ,,,, (I’m sure there a broad clutch of future proofing initiatives beyond what I can think of right now.). So it is not essential that Australia takes up a Carbon Price, but at the same time the future will I believe wil be nothing of what you are imagining judging by your attitude, Terje.

  17. TerjeP
    March 10, 2011 at 4:48 am

    The uptake of plugin hybrid vehicles will be hampered by expensive electricity. Best to keep it cheap for now.

  18. BilB
    March 10, 2011 at 5:02 am

    Not so, Terje. If you use the recently released spec for the VW Bulli which is 300klm range top speed 140kph 40 kwhr charge seating for up to 6, the full charge for this vehicle at 22 cents per unit is $8.80. The same range for an Internal Combustion Engined vehicle will $30 plus. So cost of “fuel” for plug in EV’s is not an issue. You could double the electricity price and it would still be a good deal as far as $per klm are concerned.

    It is easy to flick out little claims like yours, but they do not hold up to scrutiny.

  19. TerjeP
    March 10, 2011 at 5:14 am

    It has to be a good deal given the higher cost of the vehicle.

  20. BilB
    March 10, 2011 at 9:41 am

    All noise, no signal, Terje.

  21. TerjeP
    March 10, 2011 at 10:20 pm

    Is that an argument?

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