Why is Australia afraid of leading the world?

Australia's carbon tax may be more comprehensive and higher than others, but global competitiveness is a function of an awful lot more than the carbon tax.

When did Australia decide that we didn’t want to lead the world on doing something good for the rest of the world? That instead we’d prefer to be an extremely timid follower or, maybe better, a free loader? This fight to not lead the world in having an effective and comprehensive price on carbon pollution is starting to become a bit ridiculous. Does it really matter if our carbon tax is higher than someone else’s if our taxes on some other production input are lower?

The Department of Climate Change and Energy Efficiency (DCCEE) has recently prepared an exhaustive list of how Australia is not a leader on addressing climate change and putting a price on carbon pollution. This document outlines that from 2015, emissions trading schemes are expected to be operating in 35 countries and 11 sub-national jurisdictions (assuming China’s seven provincial and city pilot schemes will be part of the national scheme).

According to DCCEE, these countries and jurisdictions represent:

-- A population of around 2 billion people in 2012;

-- Around 45 per cent of global gross domestic product on a purchasing power parity basis in 2012; and

-- Around 35 per cent of global emissions in 2005 (the latest available year for comprehensive data).

Also the paper points out that in addition to emissions trading schemes, there are a range of carbon pricing instruments, in place or planned, in Japan, South Africa, Costa Rica, Canada (Alberta) and Brazil (Rio de Janeiro).

This may all be true, but why does it matter so much that other countries also choose to collect a proportion of taxation revenue from levies on carbon pollution rather than say incomes, or the purchase price of a house, or bank interest, or payroll expenses? 

Global competitiveness is the answer commonly used.

But the reality is that taxes of all kinds impose some kind of cost on industry, and the carbon tax will allow us to lower other taxes. For example, if people pay higher income taxes, then a substantial number of people may then require a higher wage to induce them into the labour force. Taxes on the purchase price of homes may make people less willing to move to new locations. This could increase the cost of labour for companies in remote locations, such as the miners in the Pilbara and inland Queensland.

It is true that some things you might tax are less able to shift countries than other things, for example taxing land or mineral resources. But even these can have competitiveness implications, as the Minerals Council will gladly tell you.

Also competitiveness is not solely or even mainly a function of tax. Production of everything in the world hasn’t all shifted to the Bahamas or the Channel Islands in spite of their incredibly low rates of business taxation. Silicon Valley hasn’t remained a hot bed of innovation and new wealth over the past three decades because it offers lower tax rates than other regions or even lower costs of labour. Interestingly, many bedrock Silicon Valley firms, such as Google, seem to be in favour of the Californian emissions trading scheme that is being introduced. 

Some argue that a carbon tax is different because it will place a tax on energy, and energy underpins a modern economy. Yes, without energy a modern economy would grind to a halt, but a carbon tax doesn’t restrict the availability of energy. Instead, it increases its price. And energy is a small cost for the vast proportion of the Australian economy - below 4 per cent. The proposed carbon tax won’t change that.

Many people fail to consider that there are other ways countries alter the price of energy that might have equal impact on competitiveness, but aren’t labelled a carbon tax. For example, the removal of subsidies on fossil fuels and electricity more generally, which many developing countries have now realised should be wound back, will have almost precisely the same impact as a carbon tax. Taxes on transport fuel across Europe dwarf the impact of Australia’s carbon price.

Yet in Australia we seem to have this blinkered obsession about whether or not our carbon tax might be higher or apply to more things than in other countries, while ignoring other factors that are important to competitiveness.

Australia just might lead the world in having the least distortive and most comprehensive carbon price – so what? Sweden might lead the world in taxing fuel. Germany leads the world in taxing electricity via feed-in tariffs. The US might lead the world in indirectly taxing coal fired power stations via direct power plant pollutant controls. China leads the world by applying a tariff on the export of aluminium. A narrow comparison of one cost factor without taking into account others is almost meaningless. 

After the carbon tax is implemented the amount of tax the federal government collects as a proportion of the economy or GDP will be about 24 per cent versus 25.1 per cent in the last Howard government budget. And it should be noted that this also includes the addition of the Minerals Resource Rent Tax, not just carbon pricing.