Werner's Blog — Opinion, Analysis, Commentary
Farewell to Australia's carbon tax

Economists agree on a number of things unanimously. One of those tenets is that the most efficient way to deal with environmental problems is to put a price on their cause. It is called a Pigouvian tax. By putting a price on the negative externality, we close the gap between the social cost and the private cost of consuming a good. The culprit behind climate change is fossil fuels—oil, gas, and coal—and thus the appropriate policy is to introduce a carbon price. Yet, carbon pricing has become anathema to politicians, and Australia has become another victim of anti-tax populism.

Australia repealed its carbon tax on 17 July 2014, after only two years. The carbon tax required large emitters—defined as those emitting over 25,000 tonnes per year—to pay a price of AUD 23 per tonne, slightly less than the CAD 30 per tonne paid by British Columbians. The tax was supposed to be converted into an emission trading system that would eventually habe been tied into the European Union's emission trading system.

The new conservative government in Australia killed the tax, fulfilling an election promise. But what makes carbon pricing politically "toxic"? Is it the new-tax-bad versus old-tax-good belief? Is it that any new tax is frowned upon by a tax-averse public? Is the electorate unable to appreciate the severity of climate change? And why do political leaders shy away from making a more compelling case to the public even when they understand the climate science? The answer is simple: to many politicians, climate change only matters when it results in catastrophic outcomes. Until then, it's easier to bury the head in the sand, ignore climate change, and hope for the best. Point the finger at the two big emitters China and United States, and tell the electorate that our own contribution to climate change is too small to matter. Of course, our yet-unborn grandchildren and great-grandchildren can't vote and don't have a say in the politics of today. I have an inkling that they will not look back favourably on our political decisions today.

‘Done right, carbon pricing does not need to become political suicide.’

Can a carbon pricing system be introduced that is not politically toxic? British Columbia has pointed the way. A carbon pricing system needs to be revenue neutral: it must not be seen as a new tax grab, but as a worthwhile tax reform that raises one tax (on a social ill: carbon dioxide) and lowers another (income). It can be introduced gradually and slowly to give economies time to adjust through appropriate new investments. Done right, carbon pricing does not need to become political suicide. British Columbia is not special in that regard. Remember that British Columbia is not immune to tax populism when the HST was abolished in a referendum.

Sayonara, carbon tax in Australia, we'll miss you.

Posted on Thursday, July 24, 2014 at 17:00 — #Environment
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