freediver
Gold Member
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www.ozpolitic.com
Posts: 48833
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Synopsis: a ‘revenue neutral’ carbon tax is better than a cap and trade scheme because the carbon tax allows the reduction of other taxes, thereby offsetting the majority of the economic impact, whereas a cap and trade scheme will impose an added cost when the government buys back emissions permits. The strict annual limitations on emissions imposed by a cap and trade scheme are unnecessary from an environmental perspective. The price fluctuations they create are bad for the economy and create a barrier to investment in reducing our emissions.
The Labor government has rejected Rudd’s Carbon Pollution Reduction Scheme and is currently reviewing its strategy for reducing Australia’s greenhouse emissions. This review is not about science, nor is it about targets for emissions reduction. It is about the mechanism for reducing emissions. I hope this is because they have realised that cap and trade is a mistake and we should opt for a tax on greenhouse emissions. It is a good sign that both the media and politicians are at least using the word tax on a regular basis, although this is partly because the media has begun to equate a tax with a trading scheme.
A carbon tax raises a steady stream of revenue. This allows the reduction in other taxes on environmentally and socially benign items (eg income tax, GST). A carbon tax will raise revenue for at least half a century. As it is phased out it will most likely be replaced with other ‘green’ taxes as new threats to the environment arise.
A tax differs from a trading scheme in that the government sets the price and allows market forces to determine the quantity being consumed or traded. In contrast, under a trading scheme the government dictates the quantity being traded and allows market forces to determine the price. It is wrong to say that one scheme makes more use of market forces. Both schemes make the most use of market forces that is possible while still allowing the government to intervene to correct the ‘market failure’ that created the problem (the market failed in that it did not already internalise the environmental cost into the price). They differ however in the outcome these market forces achieve.
Under a cap and trade scheme, the outcome is a fixed annual quantity of emissions, with a wildly fluctuating price. Under a carbon tax, the outcome is a steady price on emissions and a gradual reduction in annual emissions. The fixed emissions under a cap and trade scheme have been promoted as an advantage over a tax, however this is not the outcome we want for the environment – we want a gradual reduction. Furthermore, the annual variation in emissions is totally irrelevant from an environmental perspective. What matters is the cumulative emissions over several decades. This depends to a large extent on the economic impact of whatever mechanism we choose for reducing emissions – the better the mechanism, the more long term emissions reductions we achieve and the less the impact on the economy.
The cost of the fixed annual emissions is a wildly fluctuating price. At first, and each time the government reduces emissions, the price will skyrocket. It takes time to build infrastructure and change habits. However, eventually it will happen and the targets will be easily achieved. When this happens, the price plummets. This happened in Europe. Anyone interested in investing in emissions reduction will be forced to go for the quick fix. Any option that takes a long time to develop (eg new technology), implement (new infrastructure) or pay off will be discounted because of the uncertainty created by the unpredictable price on emissions.
A carbon tax on the other hand provides what the economy needs to respond appropriately – certainty about the return on investment from emissions reduction technology and infrastructure. If the price is set right, it also achieves our environmental goal – a steady reduction in emissions over many years.
Both schemes require changes over time. Under a cap and trade scheme, the government will need to buy back emissions rights from large polluters. This will impose a cost on taxpayers. We will not only pay more for electricity (which goes into the pockets of polluters), we will have to pay higher taxes to buy back emissions rights – money which again goes into the pockets of big polluters. No matter what plans the government makes now, the politics of the day will always dictate what happens in the future. Under cap and trade, the government will have no choice but to take the price into account when imposing further reductions in emissions. Likewise under a tax the government will be forced to take the economic situation into account when deciding if the tax needs to be increased in order to meet long term targets.
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