Wednesday, March 16, 2011

Great Big Carbon Tax Cuts for Everyone

The Australian Prime Minister has a two-stage plan for carbon pricing, starting with a fixed price for up to five years, before an emissions trading scheme (announced 24 February 2011). The federal opposition response was to call this a "... great big new tax to create a great big new slush fund ...". I propose the government implement the opposition's suggestion.

The government has not yet proposed a figure for the carbon price. The temptation would be to make this as low as possible. But as the opposition has pointed out, any price will be seen as a tax on everything. A low carbon price will still have a political penalty, while not sending an effective price signal to reduce carbon emissions.

Therefore I suggest the government set a high carbon price, around $50 per kg of CO2e. This will provide significant funds to compensate the community through the tax and welfare systems. In political terms it could be promoted as a "great big carbon tax cut for everyone".

A carbon price of $50 per kg of CO2e, would increase the price of petrol by about 12 cents per litre (Petrol produces about 2.3035 kg of CO2 per litre) and electricity by about 4 cents per kWh (0.89 kg CO2e/kWh). Assuming fuel use was at the 2007 level of 18.1 billion litres, this would provide $2B extra revenue. Australia consumes approximately 3 pWhr of electricity. If these price increases resulted in a 25% reduction in carbon emissions, this would still produce about $90B in revenue. Assuming income tax review was $600B, this would allow for an average 10% tax cut, as well as increases in pensions and other benefits.Link

1 comment:

Tom Worthington said...

After writing "Great Big Carbon Tax Cuts for Everyone", I found that Dr Frank Jotzo, Director of the Centre for Climate Economics and Policy at ANU Crawford School, had released a paper proposing something similar, but in more scholarly language. See: "Carbon pricing that builds consensus and reduces Australia’s emissions: Managing uncertainties using a rising fixed price evolving to emissions trading", CCEP working paper 1104, The Australian National University, 15 March 2011