Ross Garnaut has made it clear that an Emissions Trading Scheme is going to raise costs for households and businesses, whatever its final shape, because its central aim will be to raise the cost of using fossil fuels to make them less attractive.
As the blunt harbinger of carbon-withdrawal pain, he is doing the Government a service by softening up the national psyche for its upcoming penance. But the Government still faces a nasty political challenge in imposing this new cost in 2010, which is also due to be an election year. The fact that few countries will be doing the same by then will make it even harder to convince voters and trade-exposed industry that they should cop this extra carbon charge for the good of an otherwise complacent planet.
Debate has begun to swirl around the issue of how to ease the pain by redistributing ETS revenue. Garnaut and all other protagonists agree that some will have to go to compensate low income earners for higher energy costs. There is also general agreement that some should fund research into low-emission energy sources. After that, we hear a growing chorus of special pleading, whether it be power generators wanting emission permits for free or industry calling for cuts in company taxes.
The Government will be looking for a political strategy to minimise the shock of an ETS. The vehemence with which it has demolished edifices set up by its predecessor like WorkChoices and the Opel Networks broadband project show it also has a keen appetite to destroy the Howard legacy.
So here's a magic pudding recipe for simultaneously introducing an ETS without imposing new costs on the economy, winning votes, and eroding the foundations of a pillar of Howardism: cut the GST rate when you introduce an ETS.
The GST is seen to be an efficient tax because it is imposed on almost all transactions so does not distort economic activity. An ETS is also seen to be a good tax, but for the converse reason that it will be imposed only on carbon transactions and will distort economic activity to lower dependence on carbon. The GST currently pulls in around $40 billion a year, while our 2008-12 CO2 emissions are forecast to average 600 million tonnes a year.
It works out that to raise the whole $40 billion harvested in a year by the GST, an ETS would have to chime in with a price of around $66/tonne/year. But nobody is expecting the ETS to start with such a high price; even the Greens argue for a range topping out at $40.
So you could cut back the 10 per cent GST rate by maybe a couple of percentage points in the first year to compensate the economy for the impact of paying for its carbon. We would feel the same pocket pain not extra from the introduction of ETS, just in different places, and Australia could claim the moral high ground in global climate change negotiations.
The share of GDP going to Government revenue would not change and, like the GST, all ETS revenue would be distributed to the states. Take that, Michael Costa. If the ETS is effective in lowering carbon emissions, the cap on emissions could be progressively lowered, thus raising the price of carbon to keep revenue tracking along with economic growth as emissions fell. If the ETS is not effective in lowering emissions, the cap would also be lowered to keep revenue tracking along with economic growth and exert more downward pressure on emissions. In either case, the rate of the GST could be adjusted in synch with the ETS to keep total revenue on track, with the ultimate goal of abolishing the GST as it is fully replaced by the ETS. I can hear Kevin 10 on the pulpit.
"After the last election we moved swiftly to abolish WorkChoices, the core example of the Howard government's core attack on working families over 12 long years of core neglect.
"If re-elected, we will again move swiftly. By 2020 we aim to have abolished Howard's core GST burden on working families, replacing it with a sustainable ETS that working families can choose to avoid by reducing their dependence on fossil fuels."
What would an economist think? I put it to two at the top of the profession.
"Someone might take you seriously, that's what worries me," said Warwick McKibbin, Reserve Bank board member, ANU professor, and a global leader in the ETS field.
He argues that ETS revenue should be redistributed in ways wholly directed to reducing carbon emissions. He says most should be shared between households and businesses to enable them to reduce emissions in ways they choose, and the rest applied to market smoothing intervention such as compensation for the poor and to fund research.
For households it would be "as if we privatised Telstra and rather than selling it to the people we gave it to them to compensate for higher energy costs", while companies can use their compensation to "get out there and innovate or close down and sell off their assets".
Unlike Garnaut, he doesn't think the states should get a share.
"The state governments have demonstrably shown that they cannot manage economic decisions well." The Commonwealth which shares that poor opinion of fiscal practice in the provinces could tell the states they will only share the reduced GST take because the ETS revenue will be better used to compensate the poor and fund energy research. Take that, Michael Costa.
McKibben is an economic purist compared to Chris Richardson of Access Economics, who is more readily reconciled to the political compromises forced on the pointyheads of the dismal profession.
Richardson recalled that the politics of the GST introduction was eased by compensating punters for the one-off jump in prices and by calling it a states tax. A calibrated GST/ETS mix with revenue going to the states and compensation for low income earners would match that strategy, and by taxing spending rather than income it would pass his fairness test.
Over to you, Kevin, Wayne and Penny.
Simon Grose is Canberra Correspondent for Science Media (www.sciencemedia.com.au).