Saturday, 26 February 2011

Gillard Announces Carbon Tax in Australia

Australian Prime Minister Julia Gillard has announced that a carbon tax will be implemented by July 2012 in Australia. This carbon tax will be an interim measure that will eventually transition into a cap-and-trade system.

Assuming that humans burning fuels is what is causing climate change, then a carbon tax makes sense. I personally would prefer a carbon tax over a cap-and-trade system simply because of the simplicity, although a cap-and-trade system may be better in theory.

Gillard has not released any details of her carbon tax. The details will matter a lot. For example, will the tax be applied on companies that burn fuels with carbon in it or will it apply to the extraction of oil, coal, or natural gas from the ground (like a mining tax)? If it is the former then I worry that if companies will have to pay a tax on burning fossil fuels then they will simply export it to another country, burn it there, and possibly wire the electricity back to Australia. A mining tax based on the carbon content of what is dug from the ground is a much better idea.

Since a carbon tax will increase the cost for miners who dig up or sell energy, the costs will likely be passed on until it reaches the consume. The bottom line is that a carbon tax will increase the price of everything since just about everything involves the burning of fossil fuels. The carbon tax will effectively be similar to an increase in GST, and one of the potential problem is the impact this has on poor people who will face price rises when buying essentials like food and petrol. Gillard has claimed that most of the revenue from this carbon tax will be used to ease cost-of-living pressure. I sure hope that it does otherwise there will be massive public backlash, even from Labor voters. In my opinion the proceeds of the carbon tax should be used to increase the tax-free threshold. Currently anyone earning less than $6000 per year do not have to pay income taxes in Australia. With the revenue from the carbon tax, this can be increased, and this will help poor people buy necessities like groceries and petrol.

Some people believe that given that Australia's economy makes up only 2 per cent of world GDP, this carbon tax will have no impact on global warming. This is true, but it ignores the fact that Australia doing this will give other countries an incentive to start their own carbon tax. If the tax is applied to mining or the export of energy then it will have a much greater impact because Australia is a major energy and resource exporter. If the price of Australian resources is higher then this will increase the world prices of resources, which will have a massive impact on global energy consumption. If we are cynical and assume that governments only want to make as much money as possible, then we should expect to see governments around the world use the carbon tax as an opportunity to increase their own tax revenue. If we are very cynical and assume that the governments of the world are controlled by oil and mining companies, then oil and mining companies will be happy that Australia will apply a tax on its energy exports as this will push up the global price of energy and lead to greater profits for them. This will effectively be price fixing for energy. In the name of saving the environment, an OPEC-style multinational cartel of energy-rich countries can be established to artificially inflate the price of energy to both save the environment and to increase profits for oil and mining companies and to increase taxation revenue for government. Governments colluding among themselves and international oil, coal, and gas companies to artifically inflate the price of energy is not going to win public support. However, if it is done for the sake of the environment and if the poor are massively subsidized for the cost of necessities--e.g. by increasing the progressivity of income taxes--then I am sure that this plan will be popular and it will work.

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