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A win all round?

March 15th, 2012

The news that both the Opposition and the Greens are to oppose the reduction in company tax proposed by the government (to be financed by the Minerals Resource Rent Tax) gives the Gillard government a golden political opportunity, if they are competent enough to take it. All they need to do is put the bill up once and, when it is rejected, announce that they will come back again next year. Meanwhile, they can bank the proceeds which will go a long way towards meeting their (ill-advised) commitment to return the budget to surplus in 2012-13. Then, next year they can do a deal with the Greens to make a cut for small business only. That will leave Abbott promising both to reverse the small business cut, and to impose a new levy on big business to pay for his parental leave scheme. This seems to me to work pretty well for both Labor and the Greens, and it gives Abbott the outcome he has chosen, so maybe it’s a win all round.

Meanwhile, and perhaps more significantly, some news on EU cabon prices, which have been the subject of numerous beatups to the effect that a low price will create budget problems for the government. The EU recognises that the low prices means they can make bigger cuts in emissions at low cost. A proposal to do that was vetoed by Poland at a recent ministerial meeting. But a similar proposal is going forward and will be the subject of qualified majority voting in the EU Parliament, probably in June. The most ambitious versions will require emissions cuts of 80-95 per cent by 2050, with milestones along the way.

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  1. Sam
    March 15th, 2012 at 16:01 | #1

    “The EU recognises that the low prices means they can make bigger cuts in emissions at low cost.”

    JQ, can you explain that further?

  2. March 15th, 2012 at 16:08 | #2

    John — perhaps you could contact Gillard’s office and suggest this plan to her.

  3. Hermit
    March 15th, 2012 at 16:14 | #3

    Conflicting factors are at work with EU emissions. Manufacturing may be moving to China who in turn seem to be struggling to maintain coal supplies. Germany is burning more gas and coal therefore driving up the permit price. Under EU ETS Phase III from 2012 all permits are supposed to be auctioned not grandfathered and use of carbon offsets will be tightened. Some new EU members like Poland are resisting increased imports of Russian gas and plan to build nuke plants, for security not low carbon.

    Therefore I’m not sure how much of any EU emissions reductions can be credited to the carbon price as opposed to global factors. Rapid CO2 cuts of the order of 50% may mean either recession or a heavy industry sellout. Whether they succeed or not at least Europe is not avoiding its responsibilities like the US.

  4. TerjeP
    March 15th, 2012 at 17:26 | #4

    The underlying political assumption you are making is that Abbott won’t change position before the next election. He could quite easily turn around and say he will abolish the carbon tax (yippee), abolish the associated green spending (yippee) but keep the other tax cuts (yippee). He can then commit to restoring the budget to balance without much need to prove it because he can bank on his parties superior reputation in this regard. If he wants he can muddy the waters with talk about the off balance sheet NBN costs. Given the dramatic slide in Australia’s proportion of mining investment since the mining tax was floated he can also tell a pro revenue story in relation to axing the mining tax.

    Will he do all this? Will he do some of this? Would it even convince the masses? I really don’t know. But if the government is holding any winning cards in any of this there is ample evidence that it has no clue how or when to play them. If I had to have a bet then I would say Abbott will win the next election and win decisively. Would you wager otherwise?

  5. rog
    March 15th, 2012 at 17:49 | #5

    @TerjeP Abbott is most likely to change his position many times and it is impossible to predict his final declared position per election. He may well go to the election saying that he doesn’t have one and doesnt know what to do because of all the cover ups etc etc. He is always adversarial, like a warrior from Sparta he needs the fight and probably wouldn’t know what to do with his prize should he win it.

  6. Fran Barlow
    March 15th, 2012 at 18:08 | #6

    @TerjeP

    He could quite easily turn around and say he will abolish the carbon tax {price} (yippee), abolish the associated green spending (yippee) but keep the other tax cuts (yippee).

    Your flippant response radically understates (not at all) the practical revenue problems Abbott would have abolishing the carbon price, the political price of abolishing the green programs — which are popular, and keeping the tax cuts. He also has to explain why he didn’t pass the cuts now rather than use The Greens as he did in the Malaysia matter.

  7. rog
    March 15th, 2012 at 18:41 | #7

    It’s a win for Gillard, Abbott forms a coalition with the Greens against tax cuts. He has now established his price to change his mind, 1 cent.

  8. charles
    March 15th, 2012 at 18:42 | #8

    Fran there is one thing I don’t understand with the carbon trading system. The government can collect funds by creating the permits and selling them, but once they are being traded how does it effect the budget going forward.

    I thought the whole aim was to pull permits out of the system going forward. Is there a yearly fee or something.

    I know I should have been listening better but most of what you read is the sort of nonsense TerjeP has written, there seems to be littler that explains what is actually happening.

  9. March 15th, 2012 at 19:48 | #9

    Pr Q said:

    The EU recognises that the low prices means they can make bigger cuts in emissions at low cost.

    Huh?

    Implying that they can make even bigger cuts in emissions at, say, zero cost?

    I’m guessing that this is a brave-face way of saying that the EU economic slump is cutting carbon emission levels without the need for an extra slug of carbon tax, which would be unavoidable, crippling and contractionary.

    But then emission levels would be falling without a “low carbon price” at all.

    So the answer to AGW is just a permanent GFC.

    Not sure that this is the message GREENs should be sending the Rest of Us.

  10. Sam
    March 15th, 2012 at 20:19 | #10

    @TerjeP
    Unless you’ve changed your mind, you’re being disingenuous here TerjeP. You’ve previously said you support the pigovian carbon tax, you just think that 100% of the revenue should be spent on tax cuts.

  11. March 15th, 2012 at 20:23 | #11

    The carbon price trading scheme is a waste of time and money. Given the rorts and loopholes it does not appear to be an effective cost deterrent. But it generates the illusion that “Something important is being done by far-sighted and responsible men in high places”.

    Lets try an apples to apples comparison to see the effect of carbon price on emission levels under conditions of economic recession ie two large economic regions both experiencing an industrial slump, one with a carbon price trading scheme (EU) and one without any carbon costing scheme (US).

    The Guardian (Friday 7 October 2011 18.07) reports that over the course of the recession (2008-11) the EU’s carbon emission levels have fallen by nearly 11%:

    There was a 2.4% increase in emissions in 2010, which followed a 7% drop in 2009 caused largely by the recession and the growth of renewable energy in Europe, the agency said. Across the 15 countries in the EU which have a collective target under the international Kyoto protocol on climate change, emissions were down 10.7% on 1990 levels, well ahead of the 8% reduction required by 2008 to 2012.

    Over the same time period the US’s carbon emission levels have fallen at a similar, slightly slower, rate: Earth Policy Institute reports:

    Between 2007 and 2011, carbon emissions from coal use in the United States dropped 10 percent. During the same period, emissions from oil use dropped 11 percent. In contrast, carbon emissions from natural gas use increased by 6 percent. The net effect of these trends was that U.S. carbon emissions dropped 7 percent in four years.

    The slightly slower fall in US carbon emissions can be put down to the Obama administration’s somewhat more successful expansionary macro-economic response, relative to the contractionary “austerians” at the EU.

    So instead of bagging the “expansionary austerity” economic policies by neo-orthodox EU econocrats Pr Q should be praising them to the hilt for their greener than green ecological policies.

    How very ironic.

  12. Robert (not from UK)
    March 15th, 2012 at 20:31 | #12

    Mr Strocchi, I think that the link to your website must have died somehow. I tried clicking on it today, and was told that the site was unavailable. Have others had the same problem with it, I wonder?

  13. Freelander
    March 15th, 2012 at 22:59 | #13

    If economic theory is anything to go by, a not entirely meaningless qualification, then as a first approximation, a cut in company tax simply provides an unrequited gift of increased wealth to existing shareholders. In that simple analysis their wealth holding, the value of their company stock, simply goes up to reflect anticipation of the increased revenue stream. Of course, there are several factors that would modify the magnitude of this simple analysis but I’m not so sure about modify the sign, except in extreme constructed cases.

    That said, secondary impacts could conceivably make this gift a net benefit to others. However, I don’t know where the justification for this particular gift lies? So why make it? And if there is a justification for making the gift for the benefit of others, why not try to claw back some of that gift by increasing some other tax or taxes progressivity.

  14. TerjeP
    March 15th, 2012 at 23:09 | #14

    Unless you’ve changed your mind, you’re being disingenuous here TerjeP. You’ve previously said you support the pigovian carbon tax, you just think that 100% of the revenue should be spent on tax cuts.

    I prefer a low carbon tax over income tax. But I prefer lower tax more than either of those taxes.

    None the less if the government had proposed a low carbon tax (eg under $10 per tonne) with all revenues simply allocated to income tax cuts then I think they would have faced little hostility.

    p.s. Don’t keep calling the carbon tax a carbon tax or Frans head will explode.

  15. Sam
    March 15th, 2012 at 23:46 | #15

    R.E. your PS. Nice try, but I’m not getting trapped in that semantic debate again.

  16. Robert Merkel
    March 16th, 2012 at 06:48 | #16

    Terje, maybe the Gillard government is so on the nose that the Coalition will be able to get away with such a nonsensical plan. But I doubt it.

  17. Ikonoclast
    March 16th, 2012 at 07:52 | #17

    At the risk of annoying… whoever he was… I will bang on the same old drum. All current carbon taxes and carbon prices are inadequate to stop rises in CO2 emissions. All the figures show CO2 emissions continue to rise.

    Although people talk about stopping emissions they won’t. The only things that will reduce emissions (temporarily) will be economic slumps and the successive exhaustions of various fossil fuels. However, the damage will have been done. Global temperatures will rise by 6 to 10 degrees C over the next few hundred years and sea levels will rise by 20 m to 200 m over the same span. As the sun is now hotter than it was in earlier epochs the earth may not this time be able to avoid runaway global warming to above 100 degrees C.

    At best the human species has a few hundred years left. More likely, extinction will occur by 2100.

  18. TerjeP
    March 16th, 2012 at 08:39 | #18

    More likely, extinction will occur by 2100.

    Yeah and even the rain that falls isn’t actually going to fill our dams and river systems.

  19. Dan
    March 16th, 2012 at 09:20 | #19

    @Ikonoclast

    “…runaway global warming to above 100 degrees C.

    At best the human species has a few hundred years left. More likely, extinction will occur by 2100.”

    While I am more worried about climate change than most, I believe this to be a bizarre and unfounded set of claims. Sources please.

  20. billie
    March 16th, 2012 at 09:39 | #20

    It has been argued that our tax rates should be increased to around a third of our incomes so I welcome the company tax cuts being restricted to small businesses, who often struggle not to go bankrupt.

  21. James Haughton
    March 16th, 2012 at 09:45 | #21

    I don’t see why they don’t deal with the greens to extend to gold and uranium in exchange for the cut. Would make the tax less distortionary.

  22. Ikonoclast
    March 16th, 2012 at 09:48 | #22
  23. JB Cairns
    March 16th, 2012 at 10:20 | #23

    Terje,

    Mining investment as a % of total world investment in the world is a complete red herring.

    When supply prices rise you would expect more investment world wide.

    Investment in Mining here as a % of total investment is at levels never seen before and is getting higher!

  24. Tim Macknay
    March 16th, 2012 at 11:32 | #24

    I don’t see why they don’t deal with the greens to extend to gold and uranium in exchange for the cut.

    It would make more sense to extend it to gold, nickel, copper and bauxite. Uranium makes up a very small portion of Australia’s mining exports by value. Nickel, copper and bauxite (and even lead) are much more significant.

    At the risk of annoying… whoever he was… I will bang on the same old drum.

    A gratuitous insult now, Iconoclast? I may have complained about you repeating yourself, but at least I was minimally respectful. It’s a shame you can’t even maintain that undemanding standard.

  25. TerjeP
    March 16th, 2012 at 11:48 | #25

    Mining investment as a % of total world investment in the world is a complete red herring.

    It might be. I have not looked closely enough to say. However are you somehow suggesting that red herrings can’t be effectively deployed as part of a political campaign? My observation is that they get used all the time. The climate debate in the 2007 campaign was full of red herrings. The carbon tax debate of 2010 was full of red herrings. The fact is they get used because they often work.

  26. Troy Prideaux
    March 16th, 2012 at 12:34 | #26

    @Freelander
    The company tax cuts are there to lower the cost of running a business. In terms of manufacturing or trade exposed businesses, many need all the assistance they can get. I personally believe that lowing company taxes is generally a good thing whether for large or small businesses. I have nothing against tax increases if they’re actually constructive in either an economic or social or environmental sense.

  27. Jim Birch
    March 16th, 2012 at 13:24 | #27

    Politician will obviously offer their own red herrings in preference substantive issues but we might aim a little higher here.

  28. Hermit
    March 16th, 2012 at 13:42 | #28

    Ikonoclast is in good company because James Hansen believes a Venus scenario is possible for Earth http://en.wikipedia.org/wiki/Runaway_climate_change though many disagree. Long ago Venus and Earth the second and third rocks from the Sun were both inviting blue marbles I believe with surface water and vapour cloud. Then there was one.

    The fact that the EU carbon price often dips below $10 could either be a sign they’re broke or because there are too many freebies in their ETS. The ‘real’ carbon price would require neither recession nor giveaways. If China is going to become the world’s factory with unapologetic coal burning I think we should carbon tax their finished goods. Oh no protectionism the neoclassicals will say. I think it will happen after a few years of hand wringing.

  29. Troy Prideaux
    March 16th, 2012 at 15:02 | #29

    Hermit :
    Ikonoclast is in good company because James Hansen believes a Venus scenario is possible for Earth http://en.wikipedia.org/wiki/Runaway_climate_change though many disagree. Long ago Venus and Earth the second and third rocks from the Sun were both inviting blue marbles I believe with surface water and vapour cloud. Then there was one.

    I have trouble with this too. Haven’t we (as a planet) been through runaway global warming cycles before – isn’t that how the carbon arrived at the bottom of our oceans? I can’t see what’s going to be different this time to past times in terms of ending up as another Venus?

  30. Freelander
    March 16th, 2012 at 15:37 | #30

    Company tax cuts don’t lower the cost of business.

    Many small businesses ought to go bankrupt.

  31. AndrewD
    March 16th, 2012 at 15:56 | #31

    Hermit, I don’t think China will ‘become the world’s factory with unapologetic coal burning’ though it may appear that way for a while. I’m on a processing plant near Shanghai now and the owners are acutely aware of their environmental and GHG pollution. I note that the Government is closing down some of the most polluting Nickel Pig Iron plants, most rooves have solar water heaters, and I’ve nearly been run over several times by these silent E-bikes with rechargeble battery motors that are everywhere. I know the benefits of electrical power over petrol/diesel are not overwhelming, but my optimistic view is that China will never reach the GHG per capita levels we in Australia enjoy. The future may, indeed, be green.

  32. Troy Prideaux
    March 16th, 2012 at 16:48 | #32

    Freelander :
    Company tax cuts don’t lower the cost of business.

    Is that just ideological hand-waving or is there some evidence to support that statement?

  33. Freelander
    March 16th, 2012 at 16:51 | #33

    This “Blame it on the Chinese ” stuff is silly. The total contribution of the Chinese to the current stock of GHGs is minuscule, probably smaller than Australia’s and on a per capital basis much much smaller. Next we will hear about the ‘yellow peril ‘?!!

  34. Freelander
    March 16th, 2012 at 16:58 | #34

    @Troy Prideaux
    Company tax is on profit. Profit is revenue minus costs .. The tax doesn’t raise or lower costs. It’s not a tax on costs!

  35. Tim Macknay
    March 16th, 2012 at 17:00 | #35

    If China is going to become the world’s factory with unapologetic coal burning I think we should carbon tax their finished goods.

    China is planning a cap on coal consumption within three years. Obviously they’ll have to do much more than that in the long run, but it’s a start.

  36. Hermit
    March 16th, 2012 at 17:39 | #36

    That’s generous of China to make a savage cutback from 3.5 bn tonnes annual coal use to 4.1 bn several years from now. Look what happened when the EU proposed to carbon tax airline fuel… China cancelled several Airbus orders.

    I think we have to look the tiger in the eye and say they are burning too much coal for the health of the planet. Sure their per capita emissions are a fraction of ours but they also have 60 times as many people. I suggest only 300m or so are middle class, similar to the US who burn a mere 1 bn tonnes of coal a year.

    Clive Palmer’s new coal mine will be called ‘China First’ from where coal will thread its way to China through the Great Barrier Reef hopefully without incident. Much of that coal will meet up with West Australian iron ore to become steel . Had locals OneSteel or Blusecope made the steel from the same Australian inputs we would pay carbon tax on that steel and we wouldn’t have burned a lot of oil shipping it back and forth. Chances are no steel will be made in Australia after the sit down money runs out.

    I suggest this is a conscious move by the big end of town with the tacit support of politicians like Swan and Emerson. They are not too concerned about steel, aluminum and other heavy industries moving offshore because in their minds we will become a nation of carbon farmers and solar panel installers. It appears to get us off the hook with emissions. Coal export revenue will boom but we won’t be debited with the carbon. I think this will backfire as we will stagnate while using as much or more carbon as ever by proxy. In light of our own carbon tax it’s also kind of sleazy.

  37. Tim Macknay
    March 16th, 2012 at 18:14 | #37

    I think we have to look the tiger in the eye and say they are burning too much coal for the health of the planet.

    There’s no doubt that China, as well as the US and India (the three biggest coal consumers) are burning too much coal for the health of the planet. The main thing is to adopt an approach that is the most likely to be effective. I’m unconvinced that a carbon tax on imports from China to Australia would be particularly effective at swaying China’s policy settings, but I suppose all options should be looked at. Australia has more leverage as a large exporter of coal to China than as a relatively small importer of finished goods. But I’m doubtful that Australia on its own has enough leverage to influence China, or that China can be convinced to adopt serious emissions reduction strategies unless the US and India also act.

  38. Ikonoclast
    March 16th, 2012 at 21:52 | #38

    It’s all talk. Runaway climate change is already built in.

    Game over.

  39. Hermit
    March 17th, 2012 at 12:36 | #39

    Thought I’d check if China (who are in a snit over EU carbon charges) will buy Boeings instead of Airbus planes. The answer seems to be maybe. Noting that the US Pacific northwest is also cashing on coal exports to China perhaps the US and China will become a new axis of non carbon restraint. Ironically California and British Columbia are carbon restrainers.

    An alternative interpretation is that China wants to save money on any new planes. When China say they will make a negative reduction from 3.5 bn tonnes to 4.1 bn tonnes of coal perhaps by 2015 they will be burning a mere 3 bn tonnes due to shortages or economic downturn. Australia’s paltry but world leading coal exports of 0.3 bn tonnes to all countries won’t help China much.

    Ironically if China’s coal has peaked the initial signal will be good export coal prices. Great day for Australia everybody Swan or his successor will say. However the backswing will be reduced non-fuel exports such as iron ore. This may be a stretch but the cancelled Chinese plane orders could be an early sign that Australia’s mineral boom is about to peak then wane.

  40. TerjeP
    March 17th, 2012 at 23:29 | #40

    Company tax is on profit. Profit is revenue minus costs .. The tax doesn’t raise or lower costs. It’s not a tax on costs!

    You are right that profit is revenue minus costs? But whilst tax applies to “taxable profit” that is not the same as “profit”. From an investor perspective the tax burden is a cost much the same as any other.

  41. Freelander
    March 18th, 2012 at 00:04 | #41

    @TerjeP
    piffel.

    Might as well say the company tax cut is to help the bald regrow their hair, and to make tulips grow out of butt holes.

  42. Tim Macknay
    March 19th, 2012 at 18:43 | #42

    When China say they will make a negative reduction from 3.5 bn tonnes to 4.1 bn tonnes of coal perhaps by 2015 they will be burning a mere 3 bn tonnes due to shortages or economic downturn.

    Well if that happens, it will be ‘a bad thing’ for the Chinese (in the short term at least) and Australian coal exporters, but ‘a good thing’ for the climate.

    @Ikonoclast

    something something doom

    whatevs.

  43. Hermit
    March 19th, 2012 at 20:23 | #43

    @Tim Macknay
    If China’s domestic coal production is peaking I would expect mixed signals for Australia. The initial effect would be higher coal prices but the delayed effect would be reduced sales of other commodities like iron ore. Clive Palmer can send China all the Queensland coal he wants but it won’t be enough to arrest the slide.

    See http://peakoil.com/consumption/heinberg-china-coal-update/
    I think this issue could be a sleeper few saw coming, namely Chinese growth going into reverse.

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