AUSTRALIAN Treasurer Joe Hockey will release the Intergenerational Report today and has invited Australians to join in a conversation about the economy and the challenges facing the budget.
I'd like to argue the case for bringing back the carbon tax.
Tony Abbott, when leader of the Opposition, promised to repeal the carbon tax brought in by Prime Minister Julia Gillard. And he has fulfilled his promise.
Now circumstances have changed: the budget deficit and public debt have turned out to be important problems in the eyes of the government because of the somewhat unexpected decline in export prices. So Abbott, or his successor as prime minister, would be justified in re-imposing this tax.
The revenue from a carbon tax could make a significant contribution to dealing with the deficit problem. Of course, it would not be enough, and, as is well known, other measures or reforms to generate revenue for the government are available and certainly needed.
The carbon tax as a burden
Prime Minister Abbott certainly convinced his fellow Australians that this "great big new tax" would be a burden. But all taxes impose burdens or costs somewhere, whether on companies or individuals. One might reflect that, in current budgetary circumstances a "big new tax," and perhaps more than one, is just what doctor Hockey ordered.
The carbon tax was paid by numerous businesses, but this did not mean they carried the final "burden". Mostly they would have passed it on to their customers, both households and businesses. Essentially it might be regarded as a fossil energy tax.
When the tax was repealed Abbott argued households would benefit on average by A$550 a year, with gas prices to fall by 7% and electricity prices by 9%. His much-repeated and persuasive message was that the carbon tax raised the cost of living and this was "toxic" and "has been hurting ordinary people". He also argued a tax that raised energy prices would have led to job losses.
All this seemed very persuasive. The persuasion was reinforced by the fact that earlier - essentially from 2007 to 2010 - electricity prices had risen sharply for other reasons, essentially to pay for the high costs of excessive investment in networks (poles and wires). In many minds those price rises were mixed up with the expected effect of the carbon tax.
Where did the revenue go?
But Abbott never refers to the government revenue that was raised because of the carbon tax. Did the tax not have any beneficial effects for households or businesses to compensate for the directly adverse effects of the higher prices of energy? Where did this revenue go?
In fact, some of it was used to compensate firms that competed in international markets, while a substantial part compensated low income households through reductions in their income tax. The latter was an important element of the Gillard program. What was taken out of the income stream by the carbon tax at one point was put back by the compensation at another point. If there were job losses at one end, there would be job gains at the other. Furthermore, reducing income tax, at least in the low income ranges, would increase the incentives to seek work, a highly desirable economic effect.
Possibly some of the revenue led to greater government spending which benefited households. By ignoring all these offsetting revenue effects Abbott was able to conclude that the carbon tax had a severely adverse effect on incomes and employment. Did he really believe this?
At this point one might ask: what was the point of the whole exercise when funds were taken out of the economy at one end and put back at the other. The answer seems obvious. The carbon tax would produce market inducements that reduced harmful emissions of greenhouse gases. Of course, if one does not believe that climate change is a problem, or that Australia could make any difference, the whole business seems pointless. And if one assumes that nothing happens to the revenue, the tax would seem not just pointless but harmful.
Use the revenue to reduce the deficit?
In the event of the carbon tax being reinstated, the whole of the gross revenue might be used to reduce the budget deficit. It would not finance increased government spending. How much money would be available? According to official estimates, in the first two years of operation the carbon tax raised A$15.4 billion in gross revenue.
If the carbon tax revenue actually reduces the budget deficit without compensating tax or spending changes elsewhere, the benefit would then be in the future (when debt is lower than otherwise), while the return of the "big new tax" would indeed impose a present cost. Hockey would then get his deeply desired budget improvement but this would still be at odds with Abbott's desire to avoid new taxes.
The economic impact of climate change
Australia has a group of "realists" who do not deny climate change, but argue Australia generates such a small proportion of the world's harmful carbon emissions that we cannot make any difference anyway. So, why bother with a carbon tax?
We can make a difference, and, above all, it is in our interest that we do. We may not be able to directly affect world climate alone, but it certainly will affect us, so we must try and influence collective global action.
First there is the direct effect of climate change on Australia, and especially its coastline, as set out by the CSIRO. Likely effects include reduced rainfall in southern Australia, more extreme fire weather, adverse effects on the Great Barrier Reef, on coastal populations, and so on. Particularly important for Australia are increasing heatwaves. Heatwaves have killed more Australians than all other natural hazards combined.
Second, the rise of the sea level in association with severe weather events is likely to have a serious impact on Australia's neighbouring islands and island countries, including Indonesia, with many of its population of 250 million people highly vulnerable.
For selfish reasons we need to use our maximum diplomatic influence to encourage other countries to take the necessary measures to drastically moderate or avoid climate change. And we can only do this if we set an example ourselves. A restoration of the carbon tax would be the first step.
Of course, eventually this might evolve into an Emissions Trading Scheme. In both cases carbon emissions will be discouraged and the government will receive revenue.
Max Corden is a Professorial Fellow in the Department of Economics at University of Melbourne
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