Climate change plans: The best is designed to fade away

The best feature of the Government's climate change plans is the one designed to disappear, taking with it the revenue to compensate households for cost of living pressures.

Despite all the noise of the current debate in parliament, a carbon tax is the most effective way of changing behaviour and contributing to the decarbonisation of the Australian economy.  But the carbon tax is set to be replaced by an emissions trading scheme (ETS) in just a few short years.

Since 2009 CEDA has been touting the many benefits of a well constructed carbon tax over an ETS.

A key benefit of a carbon tax is that it raises a lot of money for the government as businesses pay a fixed rate for the right to emit carbon.

Under the proposed carbon tax, the right to emit carbon at $23 per tonne is worth around $7.7 billion in its first year of operating. This revenue haul will be ratcheted up to almost $9 billion in the final year of a carbon tax before it is transitioned into an ETS and much of this money is effectively gifted back to business. 

While some revenue may be raised from the auctions of carbon emission rights, the proposed price caps, and the fact only a proportion of the carbon emission rights will be auctioned, will ensure the ETS only generates a fraction of revenue of the carbon tax.

The government is promising $15 billion in carbon tax revenue as part of a merry-go-round of compensation for households, allowing it to promise over 5.7 million Australian households that they can play a part in building a clean energy future without making any financial sacrifices along the way.

The real question that is not being asked is what is going to happen to this compensation when the carbon tax transitions into an ETS? The cost of living pressures on Australian households will not magically disappear because the government has adopted a market based approach to pricing carbon emissions.

Will all these voters finally be asked to make a financial sacrifice? Unlikely.

The probability is that compensation will still be paid out but from general revenue, impacting on the budget bottom line.

The ETS is set to do the heavy lifting of Australia's contribution to mitigating global climate change. So the carbon costs of living pressures will only really begin to be meaningful under an ETS.

Likewise, the political pressure on the government will really start as the carbon pollution screws get tightened with the ETS. Meanwhile the revenue stream will have largely dried up.

Currently the carbon tax revenue is being given back to trade exposed businesses and households. An ETS will pit these businesses against households in a political wrangle for compensation.

The mad scramble for the remaining revenue crumbs will prove to be a lobbyist's paradise. Trade exposed industries will have to mount political campaigns like that undertaken by steel businesses and unions who won $300 million in public support to ensure 'not one job' would be lost from the sector.

A superior carbon tax would be based on the consumption of carbon emissions not production, as recommended by senior economist Geoff Carmody. This difference would ensure no industry compensation would be needed and the totality of funds raised could be returned to households.

Despite its poor design, the carbon tax is the best element of the government's program to 'secure a clean energy future.' Unfortunately it is the only part set to disappear.

By Nathan Taylor, Chief Economist, CEDA