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Opinion: Hands Up For A New Economic Paradigm

The carbon tax is the single most significant economic reform since the labour market reforms of the late eighties. It signals the internalisation of of environmental consequences into corporate accountability, reflecting the public’s acknowledgement that environmental assets must be valued economically in order to ensure that they are both protected and maintained. In the end, this will enable positive, pragmatic, and above all, collectively beneficial environmental and economic outcomes.

While environmental romantics tend to palpitate at the concept of the monetary valuation of the environment, it is necessary, and ultimately pragmatic, that we guide our transition from a high-carbon emitting society into one that is low-carbon intensive. By employing economics we can re-allocate capital in the marketplace in order to achieve better environmental outcomes, monitor resource throughput and lower emissions output, for just as the valuation of such vitally important domesticated species such as corn, wheat, sorghum, and taro has facilitated their continued preservation, and sustained capital valuation, factoring carbon dioxide and other externalities into the economic cycle is necessary to provide the bedrock for the foundations of sustainable economies.

The carbon tax allows the financial benefits of reduced emissions to flow back into the public purse and provides monetary incentive for research and development in the under-funded renewable energy sector. On the other hand, the laissez-faire approach preferred by others simply doesn’t work when faced with the complexity of contemporary environmental issues. Thus there is a clear need for Gillard’s carbon tax, which has provided industry with the incentive to change. Notably, such changes have occurred before; just as the forestry industry gave way to fossil fuels, it is now the turn of fossil fuels to move over and make way for the green technologies of the future.

Beyond its ecological impact, it is also necessary to discuss how Labor’s tax package will financially impact on Australian households, and indeed, whether the tax mechanism is itself the best way to price carbon dioxide. Obviously, there will be winners and losers, that’s just the reality of important economic reforms. However in this case, the losers have been buffered significantly by government hand-outs. The compensation handouts promised to the coal and steel industries as part of the carbon tax package are massive. The government will contribute $1 for each $3 the steel industry spends on energy-efficient capital equipment. The coal industry will also receive support, with $5.5bn being allocated to the coal sector to assist them in the economic transition, with most of the compensation (97% by some estimates) being allocated to the brown coal utilities in Victoria and South Australia. Such slow transition away from carbon intensive industries has proven historically necessary. Rapid and uncompromising economic and political shifts, which the swift dismantlement of the coal industry would represent, are unstable, costly, and position singular ideological conviction over rational pragmatism.

Tony Abbott’s ‘Direct Action’ plan is economically problematic. This plan involves the subsidisation of the big polluters to the extent of $18 billion by 2050, despite the fact that government subsidies often result in inefficiencies and market distortions. In reality, the carbon tax package will primarily impact state-run power generators such as Macquarie Generation rather than private industry and hence such a subsidisation would be misplaced. Moreover, due to their government support, the asset values of these utilities will descend annually at a considerably greater pace than most private sector generators, which is important because as more base-load capable renewable energy technologies gradually come online, the value of coal generators will diminish. In short, the carbon tax represents one of the most responsible ways to re-shape the economy for the inevitability of a low-carbon future.

The Carbon Tax is also effective in terms of how it allows other Emissions Intensive Trade Exposed industries such as steel, cement, and privately operated energy generation to receive 94.5% of their permits for free. This allows for a gradual reduction in their emissions output, whilst also enabling them to maintain competitiveness and sustain capital investment.

Given the slow development of renewable technologies in Australia, a continued output is important as we do not currently have to capacity to replace the enormous base-load power capacity coal power stations provide to the energy sector. Additionally, through its incentives for industry-wide diversification and decentralisation of energy generation, the carbon tax will eventually lower electricity prices due to greater competition. Increasing efficiency within the renewable energy sector, from investment and subsequent mass production, will in the long-term result in both cheaper energy, and more consumer choice regarding energy sources.

Undoubtedly this will also involve extensive grid upgrades, where an eventual transition to a smart-grid system allowing consumers to manage their own electricity usage more efficiently, and investment in new distribution technologies such as thyristors (the electronic upgrade of transistors) becomes financially feasible. This encourages a long term shift towards renewable and indeed decentralized energy technologies. So far, the winners of pricing carbon include companies such as BioPower Systems (ocean power that employs bio-mimicry to create energy), CO2 Group (commercial reforestation and carbon credits), Carnegie Wave Energy (wave energy technology) and Geodynamics (geothermal energy), all which have seen their share prices rise considerably since the announcement of the tax. This is significant in that it suggests that the carbon tax has finally provided industry certainty in a marketplace characterised by considerable uncertainty ever since the emergence of the debate around action on climate change. Such certainty will allow Australians to invest in clean, green technologies, thus providing the financial muscle required for extensive, long-term economic reform.

Despite populist rhetoric and the deceptive economic nature of Tony Abbott’s ‘Direct Action’ plan, the impact of the carbon tax on working people will also be minimal. Economic projections suggest that pricing carbon will result in less job losses than the tariff reduction reforms of the 1980s and the electricity privatisation of the nineties as well as a smaller rise in commodity prices than what occurred under the GST. The government is also allocating $15.4bn in household assistance over four years and only one-ninth of households will be worse off under the tax while four million will actually be overcompensated by up to 20%. Small rises in the costs of important dietary staples such as milk, bread and rump steak will in many cases be cancelled out by the increase in the tax-free threshold for low-paid workers from six thousand to eighteen thousand two hundred dollars, and an increase in the pensioner tax-free offset. Both these measures allow for revenue neutrality and thus prevent inflation. In short, it will open up more economic opportunities than it will close; it will encourage – through market pricing – competitive advantage to low-carbon intensive businesses in all sectors through passing on lower costs (through these businesses reducing their emissions and thus not having to pay the tax), in the form of lower prices to the consumer. Such measures suggest the raft of positive market implications the carbon tax carries with it far outweigh the disdain for the word ‘tax’ to which I attribute much of the carbon tax’s current opposition.

Internationally, the carbon tax also acts as an insurance mechanism that will guarantee that Australia is well-placed in the ever growing global low-carbon economy. This tax, morphing into an emissions trading scheme in three years time, encourages the private sector to innovate in order to achieve energy efficiencies, drive down carbon emissions, and ultimately save money. Also, with the money generated from the tax being re-deployed to provide $10bn for renewable energy and resource and development projects, progress in facilitating new technologies to replace the old technologies will be boosted significantly.

Given its beneficial economic and environmental consequences, it is clear that the carbon tax is undoubtedly a visionary economic policy on the part of the government. So where to from here, given it has been rejected by nearly seventy percent of the voting public? We need to reject the Australian psychology that the desire for prosperity serves our collective interests, given as we grow wealthier, things only become more expensive for all of us. In real terms, such a psychology means nobody actually gets ahead. Instead, we need to face the realities of our current economic and environmental situation, and view economic and environmental responsibility as mutually reinforcing rather than oppositional forces. We should collectively bare the responsibility of a price on carbon, and through this finally push towards the emergence of a clean, green way of life.

Dominic Bowd