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.

35 thoughts on “Access Economics and CEDA on carbon taxes

  1. John, On the choice between ETS and taxes, like you, I have been rather indifferent. It is obviously more important to get one of these operating than none. On balance I have gone for ETS for the standard reasons – you should get a definite carbon outcome.

    But I think concerns about carbon price instability are of concern. You have mentioned in earlier posts that variable carbon prices can act as an automatic stabiliser and that is true. But they are also a signal for investment decisions for firms. Lots of noise in these prices might lead firms to delay investments in carbon friendly technologies for quasi-option reasons. That might be privately optimal but socially disadvantageous.

    I worry too about the huge new created financial markets in carbon. Won’t these be subject to asymmetric information and insider trading issues from energy and power suppliers.

    Finally in practical terms I am becoming pessimistic about the prospects for agreements at Copenhagen or soon thereafter. Maybe a decentralised set of national taxes has greater chance of getting agreement among very different countries. This might be so even if the optimum is a global cap-and-trade with transfers.

  2. It’s a shame the Federal Opposition is inept at pointing out Rudd’s inconsistencies. Recall that Rudd’s two big election promises were Work Choices and Kyoto and that the thorough Garnaut review wanted the ETS to start in July 2009, two months ago. Since then the Rudd government has approved every extension to the coal industry and evidently now wishes to continue a high migration program. It’s extraordinary that he has only received the mildest of criticism. That makes me wonder if he will be emboldened to come back from Copenhagen with some new blather that will never be implemented because he can get away with it.

    There are however risks of political inaction. Confrontations such as Hazelwood could get nastier. Perhaps consumers will be ask to boycott certain carbon intensive products. An extreme weather event will galvanise the public out of complacency for a while. I believe a return to $150 oil will slow emissions, not only transport based but general production and consumption. Whatever transpires I think in the long run there will be diminished respect for politics.

  3. @Hermit

    It’s a shame the Federal Opposition is inept at pointing out Rudd’s inconsistencies. Recall that Rudd’s two big election promises were Work Choices and Kyoto and that the thorough Garnaut review wanted the ETS to start in July 2009, two months ago. Since then the Rudd government has approved every extension to the coal industry […]

    It’s not so much a shame as a consequence of the Opposition’s attachment to the coal industry and the big polluters in general.

  4. @Fran Barlow
    Fran: I said that my figures were based on

    a hypothetical case where clean electricity has to be sold for 10 cents extra per kWh.

    I used this figure to SIMPLIFY THE ARITHMETIC. For this assumption the 2.5 cents/kWh is the increase in the AVERAGE price after 25% of the dirty electricity had been replaced by clean electricity. There was no suggestion that contracting would give a clean power premium as low as 2.5 CENTS/kWh.
    The advantages of using a series of contracts (for the supply of clean electricity) going through the normal tendering process include:
    1. The negotiated prices that prices will be competitive.
    2. The option is there to put boundaries on location, technology etc. if appropriate.
    3. Lower prices may be obtained for later contracts as technology improves without adding tech progress as a risk that early investors need to factor into their pricing.

  5. HC, I am more optimistic and see no sense in maintaining the status quo. Copenhagen is more about setting an appropriate target of betweeen 25-40%. How countries go about reducing their greenhouse gas emissions is their problem.

  6. @Fran Barlow

    The best thing I heard all week was Rudd’s latest outburst “I dont care what you f*****s think” re him cutting the excessive printing expense allocations! I laughed so hard!. Good on him. If the opposition wasnt such a bunch of f*****s in bed with big Coal he might get more legislation through that is useful as well.

  7. @Alice

    You’re overlooking the reality that Kevin Rudd is part of a threesome … a ménage à trois, in which both Rudd and the Opposition love “Big Coal” and compete for its love.

    It’s all very well to get all bothered about stamps, but when it comes to all this lovely filth … they go weak at the knees …

  8. @Fran Barlow
    Maybe your are right Fran…and we are doomed. Coal – its just a big oilemof filthy dust and if thats the best of production they can manage from this economy…they have swallowed the global empire and obstructed the bowels of Australia (call it proectionism if anyone wants but Im over the global economy when all that matters is a filthy black dust that is wrecking the planet). My son found love on a night I will refer to as hell visits Sydney (choking red dust) – -never have I ever seen it before in my entire life (heard about it in places like Coonamble – never seen it before). Its truly scary. If that much red dust was whipped up to travel this far to Sydney, it must be as dry as a bone in the red heart.

    Im actually scared for my kid and the future, and the love affair with big Coal needs to die a million political deaths in this country, before we do. Turnaround needed.

  9. I have heard of another approach to Carbon Trading/Carbon Tazes that is being promoted, I believe, in the US. It is called Cap & Dividend. It is promoted as a simpler and possibly fairer alternative to Cap & Trade

    This is a link to a site promoting it.

    Any opinions?

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