Potential carbon poison to tax reform and to emissions reduction

Comments on Henry Ergas “Carbon is poison to tax reform”, 25/03/2011, http://www.theaustralian.com.au/national-affairs/commentary/carbon-is-poison-to-tax-reform/story-e6frgd0x-1226027671416


It is extraordinary that Professor Garnaut, the government's key climate change adviser, has taken such a step to link the carbon tax with tax cuts.

While it has some merits to link the two, it violates some sound economic principles, makes the carbon tax case even more complex to the public and clouds the emissions reduction issue unnecessarily.

Some commentators have been quick to applaud such an idea as politically ingenious, whether to link the two is politically clever or not is yet to be seen. Once the revenue from the carbon tax is used to address other issues which are unrelated to the objective emissions reduction, many normal political issues arise.

For example, the issue of fairness associated with any equity, efficiency and incentives of any income redistribution emerge and it is likely that the majority will perceive they will be disadvantaged one way or another out of uncertainty of the outcome.

It will be much easier if the proceeds from the carbon tax are allocated to the public on an equal basis to recognise both the rights to the environment belong to them and the fact that they will have to bear the higher energy costs associated with such a carbon tax. Politically it will be an easy job to sell such a carbon tax package as a pure price mechanism.

That will have another advantage in that it will not cause structural damage to the underlying budget in the future when the tax proceeds may decline when emissions are reduced.

Of course, such a simple solution will also address the various issues Henry Ergas has identified in this article.