That’s the title of my piece in yesterday’s Fin, over the Fold
Budget clears decks for carbon tax
The 2011 Budget is unlikely to produce much of a change, for better or worse, in the Gillard government’s political standing. The government managed expectations well in the leadup to the Budget, warning of deep cuts, but in the end not taking too many risks. However, this caution only emphasises the extent to which the government has bet its survival on the successful introduction of a carbon tax.
The details of the carbon tax have yet to be finalised and the Budget took no account of its likely introduction. As regards the macroeconomic impacts of fiscal policy, this is not an important issue. The carbon tax policy will almost certainly be revenue neutral or so close as to make no real difference to the budget balance.
Despite its absence from the list of budget measures, the proposed carbon tax stood, like Banquo’s ghost at the banqueting table, behind a number of the measures announced on Tuesday night. The abolition of the Green Car scheme along with earlier announcements ending the subsidy for rooftop solar photovoltaic systems make some sense on the basis of the government’s argument that these are inefficient substitutes for a carbon price.
But if the government now backs away, or fails to get the legislation through Parliament, it will be left, in effect with nothing.
The critical importance of the carbon tax was doubtless one of the factors behind the heavy emphasis on regional Australia, also present in more coded form in giveaways targeted at small business ‘ute owners’. The government needs the support of the regional independents, not only on votes of confidence but for the passage of this complex and controversial legislation.
If they can manage this (and Gillard has been remarkably successful in steering legislation through Parliament so far), the prospects for re-election will improve dramatically. The tax will have none of the disastrous effects claimed by its opponents. Its effects will be hard to detect against the background noise of a volatile economy.
Of the measures that have been abolished in the Budget or the leadup, few have attracted more condemnation than the subsidies for solar photovoltaics. These subsidies were massively oversubscribed, and drastically scaled back or scrapped altogether. There have been similar episodes in Germany, Spain, Italy and many other countries.
Looked at on a country-by-country basis the criticisms of these schemes seem entirely justified. They achieved relatively modest reductions in emissions at far higher cost than would have been incurred under a fixed carbon price, or with an emissions trading scheme.
Globally, however, the results have been striking. The price of solar modules has fallen from 4.75 to 2.70 euros/watt in just five years.Even as subsidies have been reduced, volumes have continued to grow, and cost reductions have continued.
Solar power is already outpacing nuclear, with installations of 18 gigawatts in 2010, and annual growth rates of 20 per cent or more. Assuming a gradually increasing carbon price, solar power is likely to be cost-competitive within the next decade.
For economists, this is a striking result. Every student of trade theory is exposed to the well-known argument for protecting ‘infant industries’, along with the observation that most such infants never grow up to walk unaided. This is one infant that is, at least, toddling, and may soon be walking or even running.
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He is the author of Zombie Economics: How Dead Ideas Still Walk among Us.