Reserve Bank of Australia – Greenhouse Skeptics?

Alex Wadsley

The biggest impact of a carbon tax will be on how we generate electricity. A carbon cost of $15 to $25 per tonne will make natural gas a more cost effective way of generating electricity than brown coal. The lying lobbyists from the Carbon Mafia will tell with a straight face that this means the lights of Melbourne go out. More scare tactics.

In fact what happens is that the price of electricity increases immediately, and then declines as natural gas generation replaces coal plants and the coal plants are shut-down. I expect this would take about 10 years. Wind, geothermal, solar and nuclear opportunities also become more profitable and may be commercial on a case by case basis.
THE RESERVE BANK OF AUSTRALIA Chief, Glenn Stevens is reported to have said that he sees “emissions trading is designed to make them pay more and lower their standard of living”

While this may be the outcome if the government simply hand carbon emissions permits to major polluters, a rational approach, such as that proposed by Malcolm Turnbull should raise standards of living.

Malcolm’s proposal is that revenue from auctioning emission permits should be used to fund tax reform. While this should be obvious to any half decent economist, the fact that it has been picked up by a politician once again sets Malcolm as the federal liberal with the sharpest eye on the future. And this at a time when Federal Labor is being swallowed by carbon mafia lobbyists and Peter Garrett’s sore throat has turned into a serious case of laryngitis.

Malcolm’s proposal isn’t perfect. He attacks a carbon tax and prefers an emission trading scheme because he thinks it will find the lowest cost abatement and interact with other schemes around the world. Malcolm is an ex-financier, he should know that one of the biggest barriers to investment is price uncertainty, something that can be crippling in early phase trading schemes and is eliminated by a fixed rate tax. A potential combination would be a floor price so that investment in abatement would have a guaranteed minimum return.

International trading would be nice, but if it is dependent on a complete international agreement then it should be recognized as an excuse to do nothing.

Excuses for doing nothing is what Howard’s Liberal party specialised in, from the clean coal perpetual motion machine to the 25 nuclear power stations, one for every city. I suspect that these proposals, along with the attacks on airline travel, are part of the subconscious arguments to increase the ‘cost’ of action and encourage people to ignore the problem for as long as possible. Unfortunately it has been highly successful.

Glenn Stevens’ reported comment fits into the same basket, encouraging people to put off doing something because they believe they will be worse off.

It is untrue.

It ignores the macroeconomics of taxation, something that Glenn Stevens should be very aware of.

There are two economic aspects of any tax, the first is its distributional impact and the second is its distortion of inputs that reduces economic output. Traditionally the former is of greatest concern to the left, while the latter is of greatest concern to the right. Economists will often sidestep these arguments by assuming a lump-sum tax, which has no distortion but has huge equity (read distribution) issues which are ignored by assuming everybody is the same.

A distortional impact is something where because there is a tax, people change their behaviour. An example would be Amsterdam, which had a tax on the length of street frontage of houses. In response people built their houses tall and narrow, shaping Amsterdam’s classic architecture. In other places people have put in window taxes, so people bricked their windows in. Payroll tax is often seen as a silly tax because it discourages employers from employing people. The loss associated with taxes on activity is called the ‘dead-weight loss’.

There is a good side to the distortion caused by taxation when you induce behaviour that you want and discourage behaviour that you don’t want. We can put into this category cigarette taxes, alcohol taxes and petrol excise. Some distortions that are a deliberate component of taxation policy will have debatable benefits. MIS schemes fall into this category.

What about Carbon? Whether it is a tax or an auctioned permit trading scheme it will still have a distortionary and distributional impact.

Whether you believe that people will be worse off depends on whether you think carbon is good or bad and what the government does with the money. By Glenn Stevens saying that he thinks that emissions trading will lower people’s standard of living implies that carbon emissions are good. We know this is definitely not the case in the long-run and given that impacts of global warming are already being felt, not good now.

Is Glenn Stevens a Greenhouse skeptic?

Studies previously presented on Tasmanian Times indicated that there is a huge potential for reducing energy usage and carbon emissions at zero net cost. These are opportunities for free reductions that have not been implemented because people are waiting to see what the scheme is. If the government gives away emissions credits, those people with free reduction schemes will get a windfall gain by waiting.

Talking about schemes without introducing them actually discourages investment in clean technology and increases carbon emissions!

After auctioning or taxing carbon, these schemes will be implemented. Many involve reducing energy consumption, which will take pressure off electricity grids and improve profitability. It doesn’t sound like a welfare loss to me.

The biggest impact of a carbon tax will be on how we generate electricity. A carbon cost of $15 to $25 per tonne will make natural gas a more cost effective way of generating electricity than brown coal. The lying lobbyists from the Carbon Mafia will tell with a straight face that this means the lights of Melbourne go out. More scare tactics.

In fact what happens is that the price of electricity increases immediately, and then declines as natural gas generation replaces coal plants and the coal plants are shut-down. I expect this would take about 10 years. Wind, geothermal, solar and nuclear opportunities also become more profitable and may be commercial on a case by case basis.

Australia has huge gas reserves on both the east and west coasts. Because of government inaction, Santos and Oil Search are planning to build LNG plants in Queensland and PNG to export natural gas to Asia and the United States. Wasting energy to liquefy natural gas (cooling it to minus 170 degrees!) while you burn coal in your own back yard can only be described as needless atmospheric vandalism.

The electricity price rise is what causes the distributional problem. Poor people are likely to spend a higher proportion of their income on electricity than rich people (many of which may already be buying green electricity) so that the carbon tax reduces their spending power. At a time of rising interest rates and other prices, this is a problem, but this is where Malcolm Turnbull’s tax reform comes in.

There are three tests of a progressive tax – do the rich pay more than the poor in absolute terms, do the rich pay more than the poor as a proportion of their income and finally, do the rich pay more than the poor at the margin, as a proportion of each additional dollar earned. While Australia’s tax and benefit system meets the first two criteria, it fails on the third, with people who lie between lower and middle incomes paying over 50% of their additional income back to the government as family tax benefits, parenting payments, health care cards, rent assistance and low income tax offsets are withdrawn whilst HECS, income tax and the Medicare levies become payable. This marginal tax rate is sometimes as high as 100%, you earn more but are poorer. It is the poverty trap where the working poor pay more in tax that the rich.

Removing the poverty trap is expensive, so left wing political parties focus money on increasing the low income tax offset (which helps the poor but not the ‘poor to middle’ income earners) rather than the tax free threshold or benefit reform. However, addressing the poverty trap is critical to enabling people out of poverty, particularly when there are additional childcare or transport costs associated with taking on a better paying job. In tax terms, our current tax structure has a high dead-weight loss, as well as distributional issues.

According to Malcolm, “Reducing tax, including high effective marginal tax rates, on low-income households should be a key priority.” If this is done well, and marginal tax reductions allow the working poor more flexibility, they will have the money to pay higher electricity bills, reduce energy consumption and be better off.

If Glenn Stevens is worried about wage inflation, better taxation reform will help.

Addressing global warming is simple. Carbon is bad, taxing it raises revenue and reduces the harmful effects of global warming. Using the money to address negative effects of our tax and benefit system, particularly the poverty trap, will make us all better off.

And what is interesting is that this works even if you’re a greenhouse skeptic.

There are no excuses.

Alex Wadsley
http://www.smh.com.au/news/environment/get-used-to-being-greener-poorer/2008/04/04/1207249460420.html
http://www.malcolmturnbull.com.au/Pages/article.aspx?ID=97515
http://oldtt.pixelkey.biz/images/uploads/McKinsey_(2020_cost_curve).pdf
http://www.theaustralian.news.com.au/story/0,25197,23216638-11949,00.html