Tuesday, July 12, 2011

Australia: That’s No Carbon Tax, It’s a Welfare Program

Note from Kerry. I don’t normally post non-Asian articles however, as this appeared in Jakarta’s “The Globe” it is interesting that Indonesians are receiving their dose of information regarding the issue.

Funny thing, Australians thought they were going to get a carbon tax aimed at reducing emissions, but what they ended up with is a welfare scheme being paid for by polluters and households deemed wealthy. Prime Minister Julia Gillard’s centerpiece reform of the Australian economy may well reduce carbon emissions a bit, but it certainly does make some fairly significant changes to the tax and welfare system.

Like all reforms there is good and bad in it, and which side you come down on will depend on how the new tax and spend package benefits or hurts you.

But let’s start with the stated intention of the tax, namely to reduce Australia’s emissions by 5 percent by 2020 from the level in 2000, to be achieved by setting a tax of 23 Australian dollars a ton on carbon. This is a modest target, certainly much less than what Gillard’s partners in the Australian Greens would have wanted. However, it does seem achievable. What’s debatable is whether making the target is worth all the effort it’s going to take.

Put in perspective, the planned saving is 159 million tons of carbon emissions, which represents a paltry 2.1 percent of China’s 7.5 billion tons of emissions in 2009. It becomes even more insignificant when you realize that China’s emissions may rise to as high as 12 billion tons by 2030. Even a stringent pollution-reduction regime would still see China pump out about 9.7 billion tons by 2030.

Still, you could argue that it’s a start and Australia is at least treading where the United States and China are too afraid to go. Perhaps Australians should be leading the way, as they emit more than three times the carbon per head than Chinese do, such is the cost of running more than 80 percent of electricity on coal, having energy-intensive and polluting industries and enjoying a developed-world lifestyle.

Turning to the compensation and adjustment package, and it’s here that Gillard’s Labor Party has shown its left-of-center stripes. Basically low- and middle-income groups are being offered tax cuts and increased welfare payments, while those deemed well-off are slugged with paying for the tax, along with the nation’s top-polluting companies.

The tripling of the 6,000 Australian dollar ($6,425) tax-free threshold is a genuine and worthy reform that benefits low-income workers and encourages more people back into the labor force. The increased welfare payments to families are all too typical of both sides of Australian politics, targeting favored electoral groups with cash in an attempt to buy political support. What very few commentators in Australia ever write about is the cost of churning money through the government. Bureaucracy isn’t cheap and neither is the complexity of working out who gets what according to their income and family situation.

The other odd thing is that Gillard promised that 90 percent of households will be no worse off and some will be better off under the tax. This means only 10 percent of Australians are being sent the message that carbon now has a price and they should change their ways to use less energy. That only the wealthy should change their behavior seems to be a strange message to send the public.

Of course, the other group being asked to change their behavior is the polluting industries. On the positive side for them, the uncertainty of how the tax will work has been removed and they can now work it into their business models. On the negative side, that modeling may show some businesses are going to struggle, even with the handouts they receive as part of the package. Steel making must now be a threatened industry in Australia, and coal mining, especially of seams that contain methane, is now considerably less attractive.

Whether jobs will be lost or investment plans scaled back or scrapped remains to be seen, but expect the big resource companies to attack Gillard at every opportunity for the next few months. Airlines will also see increased costs and brown-coal electricity generators will probably have to be shut down. Shutting down the worst-polluting power plants is overall a positive for making meaningful reductions in emissions, but whether the plan provides enough incentives for new, cleaner gas-fired and renewable energy plants to come on line fast enough remains to be seen.

On the surface, the establishment of a 10 billion Australian dollar clean energy fund sounds great, in practice it is likely to end up as most ambitious government spending programs do – an enormous waste of money with huge expenditure to achieve relatively small increases in power generated from renewable sources.

Taken as a whole, it seems that Australia would have been better off if the original carbon-trading scheme proposed by former Labor Prime Minister Kevin Rudd had been implemented two years ago. Ironically, that scheme was partially killed by the Australian Greens, who have been key to forcing the second-best option.

By Clyde Russell Reuters market analyst.

No comments:

Post a Comment