Exploring a Carbon Tax

How a carbon tax could reduce income tax and petrol prices

The Australian government, with bipartisan support, has stated its clear intention to speed the transition away from carbon-intensive energy. It plans to do this by increasing the relative appeal of alternative energies such as nuclear, solar, wind and ‘clean’ coal.  But which policy option will achieve a reduction of carbon emissions at the lowest cost – carbon trading or a carbon tax?

In a paper being released by the Centre for Independent Studies on Thursday, Exploring a Carbon Tax, researcher John Humphreys takes an unusual position for a free-market advocate, by recommending the government apply a new tax.  Humphreys argues that ‘our government is currently using a regulation and subsidy approach while considering the possibility of carbon trading. Instead of government subsidy ‘picking winners’ from available low emissions technologies with carbon trading, we would be better served if the government replaced this option with a revenue-neutral carbon tax.’

‘Despite including the word “trading” in the name, a carbon-trading system is not the best market solution for creating a carbon price.’

‘With a carbon tax, money flows from polluters to the government. In a carbon-trading system, money flows from polluters to organisations who receive carbon credits.  This amounts to a subsidy for some producers.  While this will be popular with the recipients of the subsidy, it is likely to promote further inefficiencies by creating perverse incentives and rent-seeking behaviour.’

Humphreys says that ‘carbon trading is a costly, bureaucratic and inflexible approach. In contrast, a carbon tax is a relatively efficient and flexible alternative that allows market participants the maximum freedom to do business.’

‘A carbon tax has the added benefit of providing revenue which can be used to cut other taxes.  For example, a $15/tonne CO₂e carbon tax would provide enough revenue to increase the income tax-free threshold to $10,000, or to drop the top marginal tax rate to 30 per cent.’

‘Another way to consider a carbon tax is as an extension of our existing environment tax on fuel and diesel which generates just over $14 billion in tax revenue each year. Replacing the current fuel taxes with a $30 carbon tax would lead to a reduction in petrol prices by about 30 cents.  While there will be some winners (heavy transport users) and losers (heavy energy users), for many people the higher electricity bill will be offset by the lower transport bill.’

John Humphreys is an Adjunct Scholar with the Centre for Independent Studies.

He is available for comment.

Embargoed copies of the report are available online at ……..
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