climate change basics: The Carbon Tax

Climate Change and the Carbon  Tax                                                    17.7.2011

Why put a price on carbon? (1,2)

The battle to put a price on carbon pollution in Australia started almost 20 years ago, in the early 1990s.  Since then most observed trends, from greenhouse gas emissions to sea level rises, are in the upper range of scientific predictions.  All reputable scientists agree that climate change is man-made, and a huge challenge for human civilization.  Political efforts for an international agreement to limit climate change have more-or-less foundered.  Since the Cancun conference in 2010, there is an agreed goal to try to limit the planet’s average temperature rise to less than 2 degrees.  Although many countries are proceeding with their own measures, the Earth is likely to wander into the fire: 3-4 degrees warming by 2100 and up to 6-8 degrees in centuries to come.  This would disturb the global environment to an extent beyond all human experience, provoking massive effects.  Some might unfold slowly, such as reduced food production and subsequent famine across the globe; but abrupt and irreversible events lurk behind the two degree firewall: the collapse of entire ecosystems, destabilization of monsoon patterns, shutdown of ocean currents and the melting of the big ice sheets, with sea level rises in the multi-metre range.  At Copenhagen we learned that a ‘four degree world’ would reduce the planet’s carrying capacity for humans below one billion people; the world would be transformed into a hostile place beyond the capacity of most people to survive.  Iconic marine systems like the Great Barrier Reef would be destroyed by rising, warming and more acidic oceans.  Certain lethal diseases would become more widespread.  Along with rising temperatures, increasing frequency of floods, droughts and storms would cause Australian farm output to collapse to the point of endangering our food security.  This is the world of climate policy failure that the carbon tax debate has barely mentioned; in the narrow tussle over immediate economic impacts, the ‘greatest moral issue of our time’ has so far been sidelined.

What is the carbon tax and how does it work? (3,4)

There has been confusion about what a carbon tax is and does; perhaps the word ‘tax’ is to blame.  Unlike most taxes it’s not aimed at raising revenue but at changing behaviour, to make it more likely that Australia will meet its targets for reducing greenhouse gas emissions.  Australia has more reason to do this than most other countries.  We are the biggest per capita emitter of carbon dioxide among developed nations, and the world’s 10th biggest emitter overall, despite our small population.  In 2009 we emitted 19.64 tonnes per person, compared with the world average of 4.49 tonnes or China’s 5.83 tonnes.  We have already experienced the effects of more extreme weather – from droughts and bushfires to floods, and as a coastal nation we have much to fear from rising sea levels and ocean acidification.  Advertisements from the resources sector urges Australia to do little, wait for bigger emitters to take action first, not get out in front; but our cities, infrastructure and agriculture are precariously vulnerable to climate change, and with our precious natural assets at risk we have a direct interest in showing leadership.

By linking the need to tackle climate change to economic reform, the government has sent a clear message to the biggest corporate and individual polluters, and made that need an integral part of the way we live.  The 500 biggest corporate polluters will from July next year have to pay $23 for every tonne of their CO2 emissions, giving them an immediate incentive to transition to new technologies.  For families and individuals, those who can most afford it will face increasing costs if they fail to change their habits, while those on low and middle incomes will be compensated.  Families living in larger houses, using more electricity, driving petrol-guzzling 4-wheel drives or running heaters and aircons excessively, can avoid extra costs by adjusting their lifestyles.  Residents of Malvern averaged 24.65 tonnes of greenhouse emissions last year, while citizens of less affluent Maryborough averaged 17.19 tonnes.  So this is a first step towards encouraging the biggest polluters to discard wasteful habits and invest in smarter energy use.

It will set up the economy for deeper cuts down the track, and can be easily boosted if global action increases.  Just as for individuals, the cost for most businesses will be quite light, cushioned by compensation packages aimed at easing the initial pain.  So it’s a gradual start, with a fixed carbon price from July 2012, then from July 2015 there’ll be a market – an emissions trading scheme with a floor and a ceiling price for carbon.  This hybrid approach is a way of achieving long-term stability of the carbon price, encouraging investment in new technologies.  This gradual start (due to industry and political opposition) means that the biggest short term impact should come through ambitious spending programs driven by revenue from the tax.  A $2 billion a year Clean Energy Finance Corporation, run by an independent board of energy and investment experts, should kick-start investment in large scale clean technologies, and in improving our substandard industry energy efficiency and ‘clean’ goods manufacturing.  Some revenue will be spent buying out and shutting down about 2000 megawatts of the dirtiest coal power, including Hazelwood or Yallourn power stations in the Latrobe Valley.  A Climate Change Authority, run by former Reserve Bank chairman Bernie Fraser, will make annual recommendations on Australia’s greenhouse targets, based on assessment of what is happening elsewhere. Treasury modelling suggest that Australia’s emissions will now rise slightly in the years ahead, before starting to fall in a couple of decades.  They will quickly be a lot lower than without a carbon price, and than most analyses of the Coalition’s ‘direct action’ policy, but Australia will only reach its targets by buying international carbon permits for a long time to come.

Will we feel much pain? (3,5)

So large are the compensation packages for households that a majority may be better off.  Two thirds of households (6 million) will be fully compensated, about 4 million will be overcompensated, and most petrol use is initially exempt.  Average bills are expected to rise by $3.30/week for electricity, $1.50 for gas, S1.10 for food.  Consumer prices will jump on average 0.7% in 2012-13, much less than the 2.5% increase after the GST.  Compared with Howard’s GST, the carbon tax is forecast to raise only one sixth as much over its first three years; the GST also included generous compensation packages.  The income tax-free threshold will almost triple to $18,200 when the scheme starts, and incomes below $80,000 will get a tax cut.  Employment will grow by around 1.6 million by 2020 and by a further 4.4 million by 2050 with or without a carbon tax.

The impact on industry is cushioned by compensation of $9.2 billion over the first three years.  Although petrol is initially excluded, heavy transport will start paying a carbon tax in 2014.  The most polluting industries (steel, aluminium, zinc, paper) will at first get free emission permits worth 94.5% of their average carbon cost. Coal mines will get $1.3billion, and surviving coal-fired power stations will get $5.5billion compensation, with other big packages for the steel industry, manufacturers and threatened communities.  Agriculture is excluded, and there’s $1billion to help store carbon in the landscape (saving forests) and a similar amount to preserve biodiversity by restoring vegetation and ecosystems.  More biodiverse ecosystems store more carbon more securely, and are more resilient to the impacts of climate change.

What other countries are doing: (1,3)

Australia has long been perceived internationally as a top polluter and a laggard on climate protection.  In 2007 the Intergovernmental Panel on Climate Change indicated that industrialized countries must reduce their emissions by 25-40% below 1990 levels by 2020 for the world to have a chance of staying below 2 degrees of global warming, rightly calling this the critical decade for action. In the 1990s carbon and energy taxes were introduced in The Netherlands, Norway, Sweden and Denmark – none came to ruin.  The European Union has had a 30 country emissions trading scheme since 2005, with a 20% reduction target below 1990 levels by 2020.  Before this Germany had passed a comparable eco-tax and protected it by using it to lower industry superannuation contributions; it has cut emissions by 22%.  The UK has already cut its carbon emissions by 23% and aims to halve them by 2025.  South Korea has an ETS and a 30% reduction target by 2020.  Many other countries and provinces have varying schemes in place.

Despite our prime polluter status, we are pursuing a 5% reduction below 2000 levels by 2020, and have a long-term target of minus 80% by 2050.  Our mitigation effort and short-term target are among the weakest of all industrialized and major industrializing nations.  We are setting an example that says ‘It’s OK to go slow’, but the science says otherwise, and it is widely believed that success in avoiding environmental disaster depends on the rate at which we can cut emissions.  By analogy, if you are trying to lose 30kg by Xmas, start now and you’ve got a chance; start on Dec 23rd and you’ll need surgery which will be very unpleasant and quite possibly lethal.  Australia’s rate of emissions reduction needs to be a lot faster than 5% by 2020 to avoid crashing our economy in the following decades.  More optimistic predictions claim that if all nations did something like Australia, there’d be a 60% chance of limiting global temperature rise to 2 degrees, but this assumes no tipping point accelerates global warning in an unforeseen way.  To argue that curbing Australian emissions will make no difference to global emissions is as silly as saying that paying personal income tax makes no difference to the nation’s budget.


Opposition to a carbon tax: (1)

In this the defining political and moral issue of our times it is unfortunate that, rather than having the bipartisan support it deserves, it is embroiled in one man’s mission to become Prime Minister.  Australian resource industry lobby groups and conservative politicians have beaten up the carbon tax as a radical, painful measure; as Australia ‘going it alone…… ahead of the pack’, and our media bears some responsibility for perpetrating this deception.  Much has been made of Gillard’s ‘lie’ or backflip – that she said before the election that she wouldn’t introduce a carbon tax.  I guess she didn’t reckon on being in a minority government with the Greens, to whom I for one am grateful.  In any case, I have no problem with a leader who can change her mind in response to changing circumstances that demand action.  Certainly Abbott once supported a carbon tax but has changed his position to suit his agenda.  The Productivity Commission recently concluded that market pricing mechanisms are the best way to cut emissions at least cost – in contrast to a costly ‘picking winners’ approach, which the Coalition’s ‘direct action’ policy would perpetuate.  Market pricing mechanisms have the flexibility to take account of changing conditions and needs, domestically and globally.  Even if the Coalition wins office and is prepared to roll back the tax cuts, it is unlikely to have the numbers in the Senate to dump carbon pricing.

The Future: (2,6)

Turning around emissions growth this decade, then cutting greenhouse pollution by 80% by 2020 would put Australia on the trajectory the world needs to avoid the catastrophic consequences of 4 degrees warming.  The next few years are critical, as the planet’s systems are poised on the brink of a man-made climate shock equivalent to the most devastating shifts nature has ever delivered on human civilization.  The fate of the biosphere looks likely to depend on pioneer countries that are willing to lead by example, and form sub-global alliances.  For instance, Germany has embarked on a steep road towards complete decarbonisation of its economy by 2050.  A recent Stockholm symposium attended by 20 Nobel laureates recommended that this serve as a role model for the world – so Australia, with its special vulnerability, could be part of such a venture.  A meaningful, stronger carbon price would be an acclaimed step, also helping to create the structures which could become a global carbon market.  There must be parallel developments promoting energy efficiency and renewable energy – Australia bathes in free sunshine.  We would need to take a diplomatic stance that shows we are serious; in closed ministerial meetings away from the public spotlight, and in the new progressive Cartagena Dialogue Group, Australia has so far been less progressive than the world needs it to be.  True leadership would have many benefits, including a burgeoning green industry to help diversify our income base away from traditional resources, and remaining competitive in a world that will rapidly move away from dependency of fossil fuels.

Rod Anderson,   July 2011


  1. Christoff P and Eckersley R,  A Soft Start on Carbon, The Age 11.7. 2011
  2. Schellenhuber, HJ   A Pioneer Role for Australia, The Age 11.7.11
  3. The Age Editorials, 11.7.11 and 12.7.11
  4. Morton A   Gillard makes tentative steps towards a cleaner greener future, The Age 11.7.11
  5. Martin P   Economy will pay a small price: Treasury,  The Age 11.7.11
  6. Chandler J  Good start, but only the beginning of decarbonizing the economy, The Age 11.7.11

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