Two million businesses were hit with the often stressful task of completing regular Business Activity Statements when the GST was introduced in 2000. Only about 1000 will be saddled with having to buy a greenhouse gas emissions permit if Rudd Government’s scheme to help tackle global warming begins on schedule in 2010. Almost no small businesses will be directly effected, other than by a minor increase in the price of energy.
In contrast, the GST required every business in Australia with a turnover of more than $50,000 to issue special invoices, introduce new accounting systems, learn which items attracted the new tax and so on. Unless they ran a small business from home, households did not have to do anything except pay an average price increase of less than four percent — and the Howard Government gave them offsetting income tax cuts.
The plan to cut the release of greenhouse gases into the atmosphere by relying an emissions trading scheme (ETS) will have no impact on households, nor on the vast majority of businesses, other than an expected increase in prices of less than one percent in the initial years. The Reserve Bank ignored the impact of the GST when setting interest rates. It is expected to do the same with the lesser impact of the ETS. However, vested interest groups and many journalists keep talking about the “huge” price rises which will supposedly occur when the ETS starts operating. As explained below, the increases will be so small that most people will barely notice them, even before they receive government compensation.
Oddly, Kevin Rudd is going out of his way to say how painful it will be to cut emissions. Perhaps he wants to be seen as a strong leader if he makes the cuts. He would be better off explaining that there won’t be “huge” price rises and that suggestions to give power stations free emissions permits would undermine the “polluter pays” principle.
An ETS relies on old fashioned government regulation to set a reducing cap on the amount on greenhouses gases, such as carbon dioxide (CO2), which can be emitted by the nation. Most emitters (excluding those in agriculture) will have to buy emissions permits which they can trade in an artificial market created for this purpose. If all goes well, the trade in permits will help find the least cost solution.
The price of permit to emit CO2 will depend on how tightly Rudd’s Cabinet sets the cap. A loose cap is expected in the early years, with the price of permits probably ranging from $10-20 a tonne of CO2. A price of $10 will add about $1.30 a week to the average household’s electricity bill; $20 will add about $2.60 and so on. Energy saving measures could easily eliminate these minor imposts which compare with last week’s minimum wage increase of over $21 a week.
As well, the Government will fully compensate low to middle income earners for price rises under the ETS. Energy costs are usually around one percent, or less, of corporate budgets. Exceptions occur in sectors such as aluminium smelting and the liquefaction of natural gas. But the Government will compensate these industries so they can retain their international competitiveness.
A $10 a tonne permit will lift the price of petrol by 2.5 cents a litre, a $20 a tonne permit by 5 cents and so on. This is dwarfed by rises in the international price of oil over the past 18 months. By the time an ETS starts, falls in oil prices might even have cut the price of petrol by more than 5 cents.
One problem is that the relatively small increases in electricity and petrol prices due to an ETS will do little to encourage power stations and car makers to invest heavily in low emissions technologies. But expectations of a long term rise in oil prices, regardless of shot term drops, are a significant factor in the rapid development of electric cars which is now underway.
A leading economist, Ross Garnaut, points out in his recent report on cutting emissions that there is a good case in modern economic theory for increased government support for the development of low emissions technologies when corporations don’t have enough incentive to do the job on their own. Garnaut has recommended $3 billion be allocated each year to public investment in researching and commercialising low and zero emissions technology. He also wants additional measures to improve the efficiency of energy useage.
But the Government seems so intent on over-compensating middle income families that it will go nowhere near meeting Garnaut’s $ 3 billion target. This will put all the weight on higher permit prices to drive a switch to cleaner technology as well as improved efficiency. If the Government wants to achieve the least cost path to making the switch, it should invest heavily in speeding up the deployment of low, or zero, emissions technologies. As operating experience is gained, the cost these technologies will fall and make it even easier politically to live with a big reduction in emissions down the track.
Instead of exaggerating the pain involved, Rudd should follow the example of California’s Republican Governor, Arnold Schwarzenegger, who highlights the boost to innovation and national prosperity which will be generated by encouraging clean technology.