Death of a Carbon Tax

Last week the Australian parliament lived up to 2013 campaign promises and eliminated the country’s carbon tax. The move leaves the country with little to offer at the crucial 2015 climate negotiations in Paris, and provides grist to the mill of those worldwide who seek delay on climate action.

This turn of events was not sudden: carbon has sat in the front row of Australia’s political debate for eight years and three national elections. The climate-related acrimony during those years helped end the careers of three prime ministers and two opposition leaders. Yet the starting point was one of agreement: in 2007, both major parties were united in their promise to introduce carbon pricing.

So how did it come to this?

When Australians changed government in 2007, action on climate change represented all that was progressive and youthful about the new Labor administration. The Kyoto protocol was signed immediately, and climate change was declared “the greatest moral, social and economic challenge of our generation” by the then Prime Minister (PM) Kevin Rudd. By 2009, an emissions trading scheme (ETS) – a market-based mechanism to reduce carbon emissions – was before parliament.

Yet within months, the first great shift occurred. In December, 2009, the eagerly awaited Copenhagen climate negotiations all but collapsed. Throughout the year Rudd had goaded the opposition on their climate credentials (even though they ostensibly supported his policy) in his determination to ride the climate zeitgeist as far as possible. Pushed into a corner and encouraged by the post-Copenhagen disappointment, the opposition snapped. They replaced their leader with the more conservative Tony Abbott, and dumped support for the ETS.

The opposition’s shift spooked the government, which shelved its plans for a carbon market. The rhetoric of the “greatest moral challenge” was exposed as hollow, and the PM’s poll numbers crashed. Rudd’s own colleagues replaced him within months.

His successor, Julia Gillard, promised to rebuild the general consensus for action on climate change. One thing she pointedly promised not to do, as she headed to an election, was introduce a carbon tax. Yet when the election delivered a hung parliament and only a deal with the Greens Party could save her government, a carbon tax was promptly announced, and eventually passed.

Thus Australians were promised a carbon price by a PM who ditched it when his poll numbers dipped. They were promised no carbon price by another PM who implemented one anyway, for the sake of a political deal. While there were certainly other issues at play, and both leaders likely believed in the merits of climate action, it was this essential contradiction which poisoned carbon pricing for Australians. Carbon was tied to everything which disappointed Australians about their political system.

In such an atmosphere, the facts were easy prey. According to the opposition party, the carbon tax would be a “wrecking ball through the economy”, or at the very least a “python squeeze”. Industrial towns would be “wiped off the map”. Even the humble Sunday roast would cost upward of 100 dollars.

The failure of any of these claims to materialize, once the tax came into force, certainly reduced public anger. But the damage to trust had occurred long before. Abbott rode the antipathy all the way to the polls, and was elected PM in 2013. Only two years after the introduction of the tax, a conservative government was in charge and the tax was dead.

There are three things international readers should know about this fiasco. Firstly, the failure of the tax was political, not economic. Secondly, market-based policies are, by their nature, incredibly vulnerable to opportunist politics. Thirdly, carbon pricing in Australia will return, in one form or another. The question is simply what damage will be done in the meantime.

With regard to the tax’s effectiveness, the evidence is complimentary. Emissions from the electricity sector (the tax’s main target) fell by over 8 percent. Average household energy prices increased by around ten dollars a week, slightly less than the average amount of carbon tax compensation households received from the government. The economy grew strongly by global standards (around 3 percent yearly), the one-off inflation impost was minor (less than one percent) and jobs were added.

Yet the enduring public expectation was that the tax would blow family budgets and cost jobs. Given that market-based policies operate precisely by increasing prices (in order to reduce demand), this perception is a fundamental obstacle. A well-designed policy will compensate consumers for this inconvenience, leaving them, in theory, with the same purchasing power that they had before the policy. But in an adversarial political environment it’s easy for opponents to sow doubt that such compensation will ever arrive.

Despite these difficulties, Australia will eventually return to a carbon price – the alternatives are too unpalatable. International pressure (particularly leading up to the Paris conference in 2015) and associated domestic concern about climate change (even if only modest) will demand some response. Regardless of what one thinks that response should be, achieving it using carbon pricing is easier than through abatement subsidies or regulation. These latter two approaches are the means the Australian government now proposes, in a program called “Direct Action”. Yet with only a few tweaks they could once again become carbon pricing.

Subsidies can be thought of as a reverse tax: firms are paid to reduce emissions, rather than being penalized for not reducing emissions. To make sure that subsidized firms don’t simply increase emissions elsewhere, regulations set limits on each firm. Firms will, quite rightfully, advocate for flexibility in meeting those limits: perhaps they could increase emissions at one plant in exchange for a decrease elsewhere. In doing so, an emissions trading scheme is born.

This is the story of many market-based environmental policies. For instance, water trading in Australia started incrementally in an attempt to reduce the cost of restrictions, and is now one of the largest, most efficient water trading systems in the world. Put simply, the logic of trading underpins thousands of years of human commerce: that logic does not disappear when we simply refuse to recognize it.

The other pressure to move from subsidies back to a carbon pricing will be a sense of fairness. Subsidies will cost taxpayers billions, and such handouts will be unpopular at a time of budget cuts. Already, the proposed “Direct Action” is less popular than the tax – a remarkable achievement.

For the rest of the world, the means by which Australia meets its emissions target only matters if the means dictates what Australia’s target will be. This is likely – the amount budgeted for the subsidy program won’t allow for higher targets. But given that Australia is a small country, a low ambition target primarily matters only if it gives other countries an excuse not to act.

And this is where the real damage could be caused. It is certain that quotes from PM Abbott on the evils of carbon taxes will adorn the speeches of those who would delay action worldwide. To counter this it is crucial that this Australian experiment be recognized for the economic success (albeit sorry political failure) it was. It is also important that advocates recognize the inherent difficulties in selling market-based policies. Finding unconventional allies, including political opponents, will help, and being prepared to compromise will be vital.

For a given target, Australia will now pay billions more to reach it than it otherwise would have. Its eventual transition to a low carbon future will be more painful for the delay. Although sensible climate policy will eventually return, other countries should avoid the same difficult detours.

 

Image Credit: Angelo Tsirekas via Wikimedia Commons

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