Federal budget establishes a new carbon tax, with problems

It remains surprisingly unremarked, but it is worthy of headlines.  The latest federal budget provides for the establishment of Australia’s second carbon tax. That is right. The Coalition government is proposing a carbon tax of its own in the form of an indexed excise tax on carbon-based fuels. It appears that instead of “axe the [carbon] tax”, the more apropos campaign slogan for the Coalition would have been “axe carbon emissions trading and tax carbon energy inputs directly”.

In imposing a fuels excise tax, including one payed directly at the bowser, the Abbott government has accomplished a political feat that many other countries have found impossible. Of course, it could be because it received no mention during any campaign. In any event, it appears that only the politically progressive Canadian province of British Columbia has had similar success.

An indexed excise tax on carbon-based fuels is just a less-efficient carbon tax.
An indexed excise tax on carbon-based fuels is just a less-efficient carbon tax. Photo: Graham Barclay

Consider the specific example that will impact almost all Australians; the situation of the millions of people who buy petrol to operate vehicles. By significantly raising the price of petrol, the Abbott government – wittingly or unwittingly – is correspondingly increasing the cost of a major greenhouse gas emitting activity (transportation accounted for 17% of Australia’s total greenhouse gas or GHG emissions at December 2013). In turn, the economic effect will be to limit and discourage carbon emissions among those who can no longer afford to drive as much as they did pre-tax and are seeking to reduce their costs. It is more complex than this, but generally, everything else being equal, the practical effect of the tax should be a reduction of GHG emissions in Australia.

Of course, this sort of approach, without more, is a regressive tax that will hurt those who cannot afford to bear a continually increasing indexed fuel excise. However, it is likely that the new tax will be heartening to many of those that Mr Abbott recently claimed are possessed of a “green ideology, which has done so much damage to our country over the last couple of decades”.  Why?  Because the Abbott carbon tax, despite its regressive nature, is concrete action that can help mitigate Australia’s contribution to global greenhouse emissions. From an environmental perspective, this is a good outcome.  And, more generally, a carbon tax could help blunt the ongoing breach by our generation of its duty to future generations to hand on a planetary environmental legacy as unspoiled and rich as that which we received. From an ethical perspective, this helps cushion our continuing moral, if not legal, failing.

With these environmental pluses, despite the greenie bashing, could it be that Mr Abbott is the “fair dinkum environmentalist” he professed to be in 2009? Probably not yet. Even if the Abbott carbon tax were genuine (and assuming measures might be taken to ensure that the carbon fuel tax is not regressive), here are just four, among a number of problems. 

First, there is the problem of the tax proceeds. At present, the plan is to use the $17.6 billion in generated revenue to build roads. The intendment, of course, is to make it easier and faster for yet more carbon-emitting vehicles to take individuals from place to place.  Clearly this is counterproductive and defeats the purpose of raising petrol prices as a mean to reduce emissions. A much more sensible thing to do would be to devote the revenue to improving public transport in order to allow more vehicles to be taken off the road as an efficient alternative to paying ever-increasing prices for petrol.

Second, ordinarily a carbon tax would be used to reduce other sorts of individual taxes in order to help combat its regressive nature. For instance, economic literature demonstrates a “double dividend” can be gained from a petrol tax if the revenue collected is used to lower other distorting taxes, such as those on labour. Nothing of the sort is planned for the Abbott carbon tax. Indeed, it is quite the opposite.

Third, there is not a stark “either-or” election that must be made between the Abbott petrol tax and the last government’s emissions trading regime. Indeed, both should be part of an optimal mix of carbon-pricing measures designed to ensure that both individuals and large emitters contribute to mitigating Australia’s large per capita GHG emissions.  As it is now, the great financial burden is placed on ordinary Australians and large emitters are allowed to mostly escape the economic pain.

Finally, it makes little sense to impose a carbon tax on petrol, if the government is going to continue to provide fossil fuel subsidies for other activities. For instance, under the planned arrangements, aviation fuels will not be subject to the indexed fuel excise. In other cases, like the fossil fuel industry itself, taxpayer subsidies of $10 billion a year are planned. Again, these arrangements are counterproductive and undermine any impact a carbon tax on petrol will have. They also offend Australia’s obligation under Article 2 of the Kyoto Protocol to the Climate Change Convention to “phase out … subsidies in all greenhouse emitting sectors”.

In summary, Tony Abbott has taken what appear to be unintended baby steps on the road to contributing to Australia’s part in mitigating GHG emissions.  He still, however, has a long way to go. Perhaps Tony Abbott will again recall his days as a somewhat junior member of the Howard government when that government laid the groundwork for what would have been the first emissions trading regime in Australia. One can always hope.

Don Anton is a Professor of Law at the ANU College of Law.  He thanks Dr James Prest and Dr Rakhyun Kim for helpful insights and comments.  The errors remain his own.