Poison Pills in Australia's Carbon Tax

By Henry Ergas

It was Mark Dreyfus QC, Parliamentary Secretary for Climate Change, who let the cat out of the bag.

Once the carbon change legislation is in place, he said, repeal would amount to an acquisition of property by the commonwealth, as holders of emissions permits would be deprived of a valuable asset. As a result, the commonwealth would be liable, under s.51(xxxi) of the Australian Constitution, to pay compensation, potentially in the billions of dollars. A future government would therefore find repeal prohibitively costly.

That consequence is anything but unintended. The clean energy legislation, released this week, specifically provides that "a carbon unit (its generic term for a right to emit) is personal property".

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This, the government says, is needed to give certainty to long-term trades. But that claim makes little sense, for even without such protections there are flourishing markets for fishing quotas and other tradeable entitlements.

 

And internationally, governments have generally ensured pollution permits are not treated as conventional property rights, precisely so as to be able to revise environmental controls as circumstances change. Rather, this provision serves one purpose only: to guarantee any attempt at repeal triggers constitutional requirements to pay compensation, shackling future governments.

Nor is it the only poison pill built into the legislation. Also crucial is what happens if a new government rejects the emissions reductions recommendations made by the carbon regulator, the Climate Change Authority.

In that event, unless the government can secure a majority for an alternative target, permitted emissions are automatically cut by up to 10 per cent in a single year, crippling economic activity.

A Coalition government, or even a Labor government less wedded to the Greens, would therefore find itself trapped.

To describe such poison pills as unusual would be an understatement. Provisions that merely hinder future parliaments have long been viewed as abhorrent, as they undermine the democratic process. But they are especially harmful where uncertainties abound, as is surely the case for climate change. With the Kyoto protocol dead, and complete uncertainty as to any successor, a government focused on the public interest would seek flexibility, not a straitjacket.

That is all the more so as the costs of that straitjacket could be so great. Global warming is a global problem. Unless major emitters engage comprehensive abatement efforts, action by Australia would not only be futile but also extraordinarily expensive.

After all, unless it lowers the risk of global warming, the only benefit of a carbon tax is that it raises government revenues. But like all taxes, it distorts economic behaviour, reducing national income. Its economic cost can therefore be measured by how much income loss it causes per dollar of revenue raised. Going by Treasury's modelling, that ratio is 2: for each $1 of government revenue the carbon tax secures, incomes decline by about $2. By comparison, the Henry review estimated that for each dollar of revenue raised, mining royalties cause an income loss of about 50c.

A unilateral carbon tax is therefore four times more inefficient than the royalties the Henry review excoriated as the most distorting tax on our books.

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