Abbott introduces Carbon Tax

Shock, horror and awe. The Abbott Government announcement that it will index the petrol excise levy: Petrol tax via the backdoor will hit both motorists and servos has been greeted by predictable outrage. But more on that later.

First some history: Fuel excise stopped being indexed for inflation in 2001 in a gutless political decision on the part of John Howard before the general election. This meant that the effective rate of the excise has been reducing and is now about 28% lower in 2014 dollars.

 John Howard: capping fuel excise seemed like a good idea at the time

John Howard: capping fuel excise seemed like a good idea at the time

The problem that Abbott is facing in reintroducing the indexation of the levy is that it is a part of this legacy from the Howard era and, in particular, from Peter (tax cuts) Costello.

Costello regarded himself as a great Australian Treasurer. Despite Howard's obvious adulation, he wasn't

Costello regarded himself as a great Australian Treasurer. Despite Howard’s obvious adulation, he wasn’t

Had Costello not taken the easy option and passed all of the benefits of the booming economy back to taxpayers  as tax cuts during his time as Treasurer, the budget would not be facing the structural  problems it faces today. Abbott is now facing the consequences of this political profligacy and economic shortsightedness.

Some definitional issues. 

(i) Abbott is already arguing that this is not a new tax but merely an indexation of an existing one. He is yet to run, but will certainly soon run, the argument that it’s not a tax at all, it’s a levy.

There are a number of other things that also aren’t taxes: co-payments, imposts, co-contributions, tariffs, duties, tolls,  contributions,  tributes, tithes, charges and fees. So Abbott has a lot of wriggle room before he imposes a new tax.

Nonetheless, if it walks like a duck, quacks like a duck and fucks like a duck, it’s likely to be a duck. In this case, the impact on the motorist is exactly the same, regardless of the weasel words that are used to describe it.  So this boils down to breaking the promise of no new taxes.

(ii) This is a tax on carbon consumption and is likely to have effect similar, but lesser, effect to that of the now-abolished Carbon Tax. It will  put up the price of  petrol and to some extent limit demand and usage. Some people will not be able to avoid the  increasing cost of petrol, particularly if they live in areas not well serviced by public transport. But we can expect to see some decline in petrol consumption, particularly as the price increases get steeper.

The financial impact

This will be the real killer. The levy is currently $.38c per litre and will be increased by the inflation rate every six months. This means that the rate of the levy, not just the levy itself, will be increasing.

Modelling suggests that this increase will initially be $.06c per litre bit rising to $.13c a litre in the next decade. On top of this there is the 10% GST. The modelling suggests that, all things being equal, the price of petrol (which is around $1.40 per litre now) will rise to just under $2.60 in the next decade. This will translate into approximately $80 a week in increased petrol costs. That’s $4000 a year. And in keeping with Abbott government policy, this cost will impact most on lower socio-economic groups.

This dramatic increase is due to the compounding nature of the tax at the Abbott government is imposing.

What petrol prices will do in the next decade

What petrol prices will do in the next decade

The financial impact of this particular tax increase will be greatest for the transport companies, people who rely on vehicles for their business and motorists. Hardest hit will be motorists in the socio-economically depressed outer-urban areas which are often badly served by public transport. Early reports indicate that the farming and mining sectors will be exempt this tax, another example of the Abbott government’s socially regressive policies and mate-protection.

There will also be an inflationary effects from these increases as they flow through into  broader economy.  Expect food prices to rise as transportation costs go up

 Is this a good policy?

It depends on which side of the petrol browser you’re standing.

Given the way the Abbott government has introduced this tax, by regulation rather than legislation, it must be passed into law by the federal parliament within 12 months. Otherwise, the money must be repaid. But not to the motorists: to the petrol  companies. This tax is levied on the petrol companies, not the motorists. The fact that the cost is passed directly on to the motorist by the petrol companies is a irrelevant. So if you’re a petrol company, this tax could be a real windfall.

If you’re a motorist and you’re thinking of the hip pocket, this is a very bad policy.

if you are a motorist living in the burbs, this tax will hit you hard

if you are a motorist living in the burbs, this tax will hit you hard

If you’re the Federal Treasurer, you will be seeing far more revenue flowing into the already overstretched budget, so this is a very good policy.

If you’re an environmentalist  (and we assume that the Greens are full of environmentalists) and concerned about the consumption of fossil fuels, you will see any tax that limits consumption as a good thing.   If you’re environmentalist, you may be scratching your head in bewilderment at the climate change-denying Abbott government introducing a tax like this but don’t take it as a change of heart.

If you concerned about the state of our democracy, and were alarmed at the decision to send troops to Iraq not being debated in Parliament, you will be equally dismayed by the Abbott government sidestepping the democratic processes when it can’t get its own way.

 Should this policy be supported by the Greens and Labor?

Certainly the Greens  should support it.  It’s a very green policy, albeit introduced by the very un-green Abbott government. The Labour Party should also support it for the same reason but won’t because the political advantages of attacking a “great big new tax” are far too great for Bill Shorten to resist.

The Emissions Reduction Fund: a budgetary disaster

If things go very badly in the Senate, the government will abolish the Carbon tax and replace it with Direct Action. The fundamental difference between the two schemes is that the first taxes polluters and the second pays them not pollute.

In the last financial year the Carbon Tax raised $4.2 billion.

The Emissions Reduction Fund will cost $2.5 billion.

The simple arithmetic is that this switch to what may possibly be less effective system is going to cost the government $6.7 billion per year. This is in a budget that will cut a range of social service spending: pensions healthcare and education.

The projected 5% reduction of in emissions by 2020 is so hopelessly inadequate, we might just as well do nothing. If the Abbot government wishes to abolish the Carbon Tax, it can claim a mandate to do so. But it should say this the pain of an expensive and even less effective approach through Direct Action.

On the 10-point scale of stupid political and economic decisions this one is a 9.5

The need for renewable energy targets

On ABC’s 7.30 last night, a spokesman for the Australian Chamber of Commerce argued that the renewable energy targets for 2020 should be abandoned because they were distorting the market and imposed costs on the consumers.

What is it that this guy does not understand? Of course that’s what it does! That’s what it’s designed to do. It’s not about economic efficiency it’s about moving our economy to less dependence on fossil fuels and more dependence on renewable energy.

The policy is designed to distort the market to move the economy to renewable energy sources. The fact that might be working is not a reason for abandoning it. Not in the minds of consumers concerned about climate change. It might be a reason for abandoning it from the point of view of the fossil fuel power generators. But they would say that, wouldn’t they?

The Federal government attacks the Labour opposition because electricity prices have risen and they link the rise to the carbon tax and make their reason for abandoning the carbon tax. The carbon tax is designed to make electricity prices rise for those people who use electricity generated by burning brown coal in the Latrobe valley. That’s the whole point. is hard to understand why some people are surprised about this.

Will Steffen’s article in The Age is a timely reminder of the dangers of not acting on climate change. The spokesman for the Australian Chamber of Commerce should have a look at it.

Farmer Abbots barnyard animals (6): Clarence, the Carbon Tax goose

Clarence, the Carbon Tax goose was not like the goose of mythology, he did not lay golden eggs which was okay because he hadn’t been designed as golden egg laying goose. Rather he was the kind of goose that was meant to keep the pond clean by eating the weeds. However, the eggs he did lay turned out to be a nice little earner for the farm. But Farmer Abbott was unimpressed.

Trouble was that Farmer Abbott had a different view of geese in general. “The only good goose is cooked goose,” he used to say. So Clarence was for the chop once Farmer Abbott had taken over Fair Dinkum farm. The problem for Farmer Abbott was that he didn’t have a big enough axe to chop off Clarence’s head.

He was hoping for a bigger axe for his birthday in the middle of the next year but until then he had put up with Clarence. The problem for Farmer Abbott was that the longer Clarence kept the pond clean and kept laying his eggs, the more everybody thought it might be a good idea to keep him on rather than turning him into a late Christmas dinner.

Getting the climate change debate wrong

In an article in The Age (25/11/13): Parliament’s mid-winter sitting hints at carbon tax repeal wait, there was the opportunity for readers to participate in an  Age Poll

What it showed was that 57% of the  14,319 respondents preferring emission trading scheme, that 28% prefer to keep the carbon tax and 4% support direct action. Hardly surprising.

This type of polling disguises the real issues.  Very few people seriously believe that direct action is going to be an effective policy mechanism for halting and reversing climate change. The real question is not which policy is the best for doing it.

The real question is how we can lift the current Australian target of 5%  to a more effective 25%.   Australia’s carbon emissions will rise 24% by the year 2020.  To break even, that is to make no change in the carbon emissions in the atmosphere, Australia will need to cut its emissions by 24%.

To make inroads in the total carbon in the atmosphere, Australia will need to reduce emissions by more than 24% by 2020.

Conducting polls that demonstrate that the current government’s policies are not popular is pointless and  draws attention away from the fact that all current policies are hopelessly inadequate.

The issue that needs to be addressed is the level of carbon emission reduction that will decrease the total amount of carbon in the atmosphere. Debates about the relative effectiveness of the carbon tax/emissions trading/direct action are merely rearranging the deck chairs.

Given that the amount of carbon that can be absorbed from the sphere by natural processes is likely to be relatively stable, and possibly decline given the rate that deforestation is occurring, it is important to understand that we need to get the rate of carbon emission significantly below the rate at which it is absorbed by the oceans and by the forests. It is only at this point that progress will be made in reducing the total amount of carbon in the atmosphere.

Click here to see a simple example of this principle in action

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