Unless you’ve been living under a rock it has been impossible not to hear of the “Carbon Tax” debate in Australian politics. Given my knowledge of market-based instruments for environmental purposes, I feel compelled to explain many of the issues that confound the Australian public. If you require further detail, you can consult my thesis on the topic.
This post is the first in a series of posts explaining why the “carbon tax” is actually good policy and a different mechanism to what most pundits and voters think it is.
What is a Tax?
A tax is an enforced and unavoidable contribution to an authority.
Income tax for example (unless illegally manipulated) is a fixed contribution, or equivalent to, as a rate of money earned. $100,000 will be taxed the same (accounting for adjustments) as any other $100,000 earned from any other work. The tax is collected regardless of the outcomes of your work or the manner in which your work is done.
Tax revenue is consolidated into a revenue pool and is not set aside for specific purposes or programmes, such as 3rd party insurance.
For environmental purposes, a tax is usually applied to inputs. For example, fertiliser taxes apply a charge as a rate of a specific active ingredient. The resultant outputs and impacts of the fertiliser use are irrelevant to the way the tax is charged and collected.
Environmental taxes apply to what would be considered as the front end rather than to the emissions – or the back end. For this reason, an environmental tax is a blunt instrument and isn’t regarded as an effective policy choice for improved environmental outcomes due to the lack of consideration of outputs, limited influence on changing behaviour and or negative environmental impacts – known as externalities.
However, the “Carbon Tax” does not work in this manner and it has been shown to influence behaviour.
The “Carbon Tax”
Under the Clean Energy Plan the “Carbon Price” or the “Carbon Tax” was set.
This is where the confusion is allowed to reign supreme. The carbon price is a direct pricing instrument (more about this later, or see my thesis). Under which, by definition it is what is known as an Emissions Charge, or an effluent charge.
An emissions charge is a direct pricing mechanism for the outputs – the emissions. Not on the inputs. Not on the coal going to power stations, but on the estimated or measured emissions.
If we refer to the previous example regarding income and income tax, we can use the example of electricity generation to show the difference in how the Carbon Price works. The energy output is equivalent to income earned. And the CO2 emissions are equivalent to the work performed. The price is levied against the work performed – not on energy output.
The charge will vary depending upon the work performed, regardless of energy output. In this way it is avoidable.
And that’s how polluter behaviour is changed. Input choices are left to the polluter; however, it is the outputs and the emissions that are the important component and that which is assessed. So polluters can either reduce their emissions by changing the inputs, or end of pipe emissions reductions. That decision can be based on what achieves the most cost effective outcome, and at the same time, achieving an improved environmental outcome.
The revenue generated from the carbon price, or emissions charge, is recycled to compound emissions reductions. In Australia this is going to various grant schemes, offsets and renewable energy initiatives. It is designed to be an encapsulated system that will continually reduce carbon emissions.
Income tax reduction (tax differentiation) with the estimated revenue generated is directed to those who have a relatively inelastic demand for electricity consumption. I will write about this at another point. But there are multiple elements to the carbon price as a policy and as a mechanism.
What does it mean?
When broken down, and the topic is discussed with correct terminology, the rationale behind the carbon price becomes a lot clearer and the mechanism behind changing behaviour makes much more sense. What people think of as a Carbon Tax is actually at this time a hybrid Emissions Charge and Tax Differentiation Scheme.
I’m not sure why the debate was allowed to be manipulated without an actual understanding of the underlying mechanisms at work. Granted, they appear to be quite complicated policy instruments. But they are not at a fundamental level.
It is similar to the way car registration operates, but not how income tax is collected. It is another failure of our political leaders to get to grips with policy explanation and education of the public in the process, because these mechanisms are not foreign to us.
But now that you are with me, and over the first hurdle, we can progress further into other areas of the policy.