carbon price is supposed to hurt a little

Lollies for everyone! If only it were that easy...

SMH April 16, 2011: FREE lollies for everyone! Any student politician worth his or her salt knows the way to a university student’s heart is through the stomach. When grown-ups play politics, they simply aim a smidgen lower, at the hip pocket.

Such was the strategy of the Prime Minister, Julia Gillard, and her Climate Change Minister, Greg Combet, this week, when they announced millions of households would be better off financially under their proposed carbon tax.

This will be the tax that tickles, rather than cripples, the government argued, seeking to counter scare-mongering about how a great big new tax will push up the cost of everything from mangoes to mandolins.

And the remarkable thing is, it’s true that some households can be left better off without defeating the whole point of a carbon price. Households can be compensated for the blow of higher prices out of revenue generated by imposing the carbon price on big polluting companies. But because the relative price of carbon-intensive goods and services – like electricity – still rises, the incentive remains for consumers to consume less of these items, where possible.

But of course, more compensation for households means less money to compensate polluters. Households have their lolly now, but big polluters will want theirs, too.
Determining an acceptable level of compensation for the thousand-odd companies directly affected by a carbon price remains by far the biggest challenge for Gillard. In doing so, she remains caught between the rock of industry and the hard place of the Greens, who wouldn’t give polluters a penny if they had their way.

Combet fired the latest salvo in this battle this week by trying to quantify the cost of a carbon price of $20 per tonne of pollution relative to the market value of steel and aluminium. Such a carbon price would impose a cost of $2.60 a tonne compared to the market price of steel of about $800 a tonne, or “one-third of 1 per cent of the value of a tonne of steel”, Combet said.

Australia’s biggest steel producer, BlueScope Steel, hit back, saying it would be more like $8 (1 per cent), or perhaps as high as $14 (1.75 per cent), more than five times the government’s estimate. Is that so much worse?

The government is in dangerous territory here, trying to sell its carbon pricing scheme on the basis that it won’t hurt. Putting a price on carbon means, at least in the short term, shifting to a way of doing things that is by definition more expensive than the way we do them now.

But the cost of action must always be referenced against the cost of inaction. If you accept the findings of the vast majority of climate scientists, climate change will impose increasing direct costs from rising sea levels and more droughts and catastrophic weather events.

While it is in all our interests to act to stop this, unfortunately it is in no one country’s immediate interest to act first – the free-rider problem. Action is also less in the interests of the current generation than it is in the interests of future generations who will have to live with the costs of climate change.

Pricing carbon involves sacrifice now to avoid even greater sacrifice in the future. It’s not about the lolly.

THE IRVINE INDEX

$7.80
Estimate of what the average household will pay extra each week on goods and services, including electricity, gas and food, in the first year of a carbon price* (and with a rebate for petrol).

0.7%
Estimated rise in consumer prices in the first year of a carbon price*, as shown by Treasury modelling of Kevin Rudd’s trading scheme.

0.325%
Carbon cost as a percentage of steel’s market value.

6%
Jump in consumer prices after the GST was introduced.

$2500
Price of aluminium a tonne.

$800
Price of steel a tonne.

$18.70
Carbon price* a tonne that would be imposed on aluminium production, according to government estimates.

$2.60
Carbon price* a tonne that would be imposed on steel production, according to government estimates.

0.748%
Carbon cost as a percentage of aluminium’s market value.

* Assuming the carbon price is set at $20 a tonne of pollution.

Sources: Treasury executive minute Preliminary Carbon Price Household Price Impacts, February 11, released under freedom of information laws on April 1, and available at treasury.gov.au; abs.gov.au; Minister for Climate Change, Greg Combet, address to National Press Club, April 13.

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