Wednesday, March 23, 2011

The Tax That Saves You Money

Being too busy to write lately, I figured I’d sort of missed the boat on this issue. But seeing the huge opposition to the Government’s proposed Carbon Tax at the Parliament House rally today, I realised just how effective the Liberal scare campaign has been. So, as always, it’s time to cut through the hysteria and rhetoric and get to the facts.

The first thing you need to know is that if you have seen a figure on how much more you will pay for something - be it electricity, food, fuel or anything else - it is a complete fabrication. The Liberal Party does not share all of the blame for this, as the media has done a very good job perpetuating these claims, but it serves no purpose but to attract votes and ratings.

Prices on many products are indeed projected to rise, but as yet the government has not given any indication as to what rate carbon will be taxed at, so it is currently impossible to calculate this rise. Furthermore, it has not even been decided precisely which items will be taxed - electricity will be, agriculture won’t, but petrol is still very much undecided. So don’t go counting the moths in your wallet before they’ve hatched.

The second thing you need to know is that climate change is going to cost us all, whatever happens. Even setting aside the direct environmental impact on the economy (loss of farming income, etc) the rest of the world is moving. The European Union has had an ETS in place since 2005, and New Zealand started one last year, to name a few countries comparable to Australia. Although the US does not have such a scheme in place at a federal level, several states do.

People often claim that our efforts are negligible in the face of continued pollution by China and India, but India began the process of moving to cleaner fuels by placing a tax on coal last year, and China are investing better in nuclear than we are. We are fast being left behind - even I was surprised to see that the EU’s system has been in place for six years already - so if we want our economy to remain competitive in a low-emission market, we need to act now.

It has often been argued that less-developed nations - China and India, particularly - would not self-regulate, and that the efforts of Australia and similar countries would therefore be in vain. As stated above, this is not necessarily true (especially since they use coal for no other reason than price - if we make renewables cheap enough, they will use them) but is pervasive nonetheless - and could apply to nations other than those two - so some strategies have been formulated to deal with it.

The most likely one is this - in the event that other nations refuse to regulate their emissions, the EU (and likely other nations with low-emission economies) could put a tariff on certain products coming from high-carbon countries. So if we wanted to export our steel to Europe but had no emissions system in place, we would have to pay more than a low-carbon nation, and would therefore be outcompeted. And I don’t need to tell you how bad that would be for the economy.

Furthermore, we are already seeing rises in electricity prices for the simple reason that the companies are expecting a carbon reduction scheme of some type but have been uncertain as to the specifics. This uncertainty has caused a massive drop in investment in their industry, and the prices have risen in an attempt to regain costs. It is predicted that introduction of firm, reasonable legislation will increase confidence in the industry, which will effectively lower prices. Although the economic modelling of this is reasonably sound, in my opinion, whether we’ll actually see price drops is another thing entirely.

When you have an industry where just a few key players hold all the cards, the difference between that and a monopoly is negligible. They don’t even need to collude on prices, which is illegal - they just slowly rise, and as long as nobody jumps too far ahead of the others, consumers are unlikely to riot (the most obvious example is petrol companies).

Furthermore, in situations like this, where the cost of entry is so high (I could say “Fuck you and your prices!” to my local florist and start my own, but I can’t exactly build my own power plant) what sets the price of goods is not actual supply and demand but perceived supply and demand.

Translation - if the media keeps telling everyone that electricity prices will rise by 30%, the prices will rise by 30%, because the companies know they can get away with it - they know the public expects it. It’s a self-fulfilling prophecy. So while the prices should drop with the introduction of a fair carbon tax, there’s no guarantee that they will; my guess is it’ll split the difference and have a small but manageable rise.

The third thing you need to know is that whichever party you support, they support action on climate change that is likely to cost you money, at least initially. The Carbon Tax may be the product of the Greens-influenced Labor government, but the Liberals have a policy too. Who the hell knows what Tony Abbott thinks any more - one minute he calls climate change crap, the next he says the CPRS is ineffective and that if climate change were real a simple tax would be better, and now he says that anthropogenic climate change is real but that a tax is the wrong way to go (and, funnily enough, that Gillard isn’t allowed to change her mind).

At the end of the day, however, despite their red-faced spittle-whipping towards “Juliar”, the current Liberal policy is also that anthropogenic climate change is real, and must be acted on. They just believe that the best way to deal with it is “direct action” - basically a mix of direct regulation (saying that you can only have a certain amount of CO2, in the same way that the cleanliness of drinking water is regulated), subsidisation of clean energy projects, or buying out heavy polluters (which, funnily enough, is a larger version of Labor’s horrendous proposal of a “cash for clunkers” scheme).

This system could work to effect change in industry, though it is generally believed to be less effective than a carbon tax or an ETS would be - Emission Trading Schemes for other chemicals have a good track record (for example, the Acid Rain Program), whereas direct action does not. But let’s say, for the sake of argument, that the two systems would be equally effective and that the only point of difference would be how much it would cost citizens.

A direct action system such as the Coalition is proposing would cost money - money that would come straight out of the budget. Direct regulation of carbon emissions will have the same type of effect on cost of living as a carbon tax; under direct regulation, companies must buy new equipment in order to comply, or face fines - the cost of which would be passed onto the consumer. A carbon tax would initially not force companies to cut emissions, as such (that will come later, when the ETS comes in) just make it very much in their best financial interests to do so - so either they are taxed and pass the cost onto consumers, or they buy new equipment and pass the cost onto consumers.

This might seem lose-lose, since both would effectively result in cost-of-living rises, but from the citizen’s perspective the two are very different. With direct action, the government spends budget money on technology investment, buying out companies, etc - all of which must be accounted for either by increasing debt (something the Coalition has previously ranted about), cutting spending (something the Coalition periodically complains about, on select issues) or increasing taxes (something every opposition is always shouting about).

With a carbon tax, the government actually makes money from it - money that is then used to offset the cost-of-living rises. Under the Rudd CPRS, pensioners and low-income households actually stood to gain more by this mechanism than they would lose, although we don’t yet know what the case will be with the current formulation.

Though it’s probably less settled in the minds of voters, in current policy all major facets of Australian politics now agree that climate change is real and must be stopped - in this context, the scientific and ethical arguments are effectively moot. The only question remaining is how to act.

So to those who are worried about whether or not they can afford Julia Gillard’s new carbon tax, ask yourself this - are you better off with cost-of-living rises that will be offset by the government, or unchecked cost-of-living rises on top of a probable tax hike?

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