Access Economics and CEDA on carbon taxes
I’ve seen a number of reports of statements by CEDA supporting a carbon tax as an alternative to emissions trading. This seemed surprising, since the two are basically equivalent. Given that the ETS is almost in place, suggesting such a variation seemed rather pointless.
But I’ve now received an email from CEDA which appears to explain everything. The real distinction is not between a tax and a trading scheme but between a tax levied at the point where carbon is used and one where final products are consumed. Since Australia exports a lot of embodied carbon, the tax on final consumption would raise a lot less revenue, and cause a much smaller economic shock.
In fact, modelling by Access Economics (PDF) suggests that the loss of income under a consumption-based carbon tax would be about half that from a production-based tax or ETS
So what’s the catch ?
Actually, there are two. The first is obvious. The consumption tax costs about half as much, but also achieves about half as much in terms of emissions. You could get the same outcome by proposing a tax levied at half the rate implied by an ETS.
The other problem is more technical, but more fundamental. In general, it makes no difference whether a tax is imposed on consumers or producers. If the tax is imposed on producers, they raise their prices as much as market demand permits, and consumers are affected just the same as if they paid directly. The same point is applicable here, but it’s missed in the analysis because there is (it appears) no modelling of the determination of world prices. But pretty clearly, if consumers of Australian exports had to pay tax on the embodied carbon, they would be willing to pay less than if the tax had already been paid in Australia.