What does a public-spirited citizen do when a government makes a solemn commitment to do something important, but simply can’t come up with a policy measure to keep that commitment? Why, they come up with their own suggestion to fill the vacuum.
If you haven’t guessed, the government in question is Scott Morrison’s. The solemn commitment is our Paris agreement to cut our greenhouse gas emissions by 26 or 28 per cent from 2005 levels by 2030.
As part of his overthrow, the government backbench refused to accept former prime minister Malcolm Turnbull’s NEG – national energy guarantee – policy. But Morrison hasn’t been able to come up with a policy measure to take its place.
The public-spirited citizen – or citizens – are Richard Holden, an economics professor at the University of NSW, and Rosalind Dixon, a professor of law at the same uni (who just happen to be married).
This week the pair launched a proposal for an “Australian climate dividend plan” as part of the uni’s “grand challenge on inequality”.
The plan is for a carbon tax, levied at the rate of $50 per tonne of carbon dioxide emissions, not just from electricity generation, but also from transport fuels, direct combustion, fugitive emissions and industrial production processes.
The pair estimate the tax would raise net revenue of about $21 billion a year – and would, of course, raise the retail prices of electricity, gas, petrol, diesel, cement and various other products subject to the tax.
Not likely to be politically popular? Here’s the trick: the $21 billion would be returned to every Australian citizen of voting age, in the form of a tax-free “dividend” payment of about $1300 per person per year.
Because the amount of tax a person paid would vary with the amount of their consumption of taxable items (which, in turn, would vary roughly in line with the size of their incomes), but everyone’s dividend would be a flat $1300 a year, this would produce net winners and net losers.
Holden and Dixon estimate the average household would be a net $585 a year better off. The poorest 25 per cent of households would be better off by more than double that. The net losers would be people whose high spending on taxed items put them on incomes way above average.
Get it? The tax would be highly “progressive”, taking from the rich and giving to the poor. There need be no concern that low-income families would be adversely affected by the new tax. (This, BTW, is how the plan fits the “grand challenge on inequality”.)
And don’t forget this. Pollution taxes such as a tax on carbon are intended to encourage people to avoid paying them. How? By using or doing less of the undesirable thing that’s being taxed.
There are many ways a family could reduce the carbon tax it pays. Avoid wasting electricity and gas. When replacing household appliances, make the next one more energy efficient. Make your next car more fuel efficient.
And here’s an idea: why not generate your own power by putting solar panels on the roof? The higher cost of electricity from the grid would mean the investment paid for itself all the quicker.
In other words, an individual family could increase its net saving by paying less tax but still getting its $1300 annual dividend.
Of course, if too many people did that, the total amount of tax collected would be a lot lower and so the amount of the dividend would need to be reduced.
And, indeed, since the object of the exercise is to significantly reduce our carbon emissions, the tax’s ideal is that next to no one ends up paying it. The more successful the tax, the less it collects. If so, the dividend would start high, but gradually fall to zero.
Since the higher prices of the taxed products they produced would discourage their customers from buying as much, the carbon tax would also create an incentive for the affected businesses to find ways of reducing the emissions caused by those products.
Innovations that made this possible would be very valuable. One obvious way for electricity retailers to reduce the tax on their product (and hence, its price) would be to buy more renewable energy (whose generation involves few emissions) and less coal-fired energy (whose generation involves heavy emissions).
Underlying the economists’ preoccupation with “putting a price on carbon (dioxide)” is their concern that the greenhouse gases emitted by use of fossil fuels impose a cost on society - global warming – that isn’t reflected in the prices charged by producers of emission-intensive products and paid by their customers.
This means that, left to their own devices, the price mechanism and market forces will do nothing to discourage private sellers and buyers of these products from imposing the “social” cost of global warming on all of us.
In other words, emissions and other forms of pollution are outside the economy’s system of private prices. That’s why economists call them “externalities”. Because they’re a cost to society, they’re a “negative” externality. (An example of a “positive externality” is the small benefit to the rest of us when little Janey takes herself off to uni to get an education, which she does purely for her own (private) benefit.)
In econospeak, the point of “putting a price on carbon” is to “internalise the externality”. To get it into the prices charged and paid by private sellers and buyers. Why? To give them a monetary incentive to find ways to reduce the social cost their polluting activity is imposing on us.
In the absence of a carbon price, polluting coal-fired electricity has an undesirable price advantage over non-polluting renewables electricity. This is the economic justification for government subsidy schemes for renewables electricity and household solar power systems.
But Holden and Dixon remind us that, if we introduced their Robin Hood carbon tax, those subsidies would no longer be needed, saving governments (and often, other power users) about $2.5 billion a year.