Our regular guest writer James Glover (@zebra) returns to the Stubborn Mule today to look at the real cost of carbon tax…and who pays the cost.
It is no surprise that the latest Newspoll shows the Labor Government sinking under a concerted attack by the Opposition, and its supporters in the media, over the Carbon Tax. The incessant cry of “a great big new tax” was bound to have an effect on the marginal voters who derive their political views in atavistic ways. In fact most of the political arguments lately recently seem to revolve around the distinction between levies and taxes. The trick seems to be if your opponents propose it then it is a tax and if you propose it is a levy—the latter being used by both sides to describe variously the flood levy (Labor) and the parental leave levy (Coalition). Taxes, as opposed to levies, apparently lead to profligate spending and are downright un-Australian. It makes you wonder what they use to fund hospitals, schools and roads.
So how does the Carbon Tax work? And what does it mean to say it is “revenue neutral”? Is it really a tax or “not really a tax” as the Treasurer, Wayne Swan, claims? Suppose the government wants to set up a Carbon Tax for the purposes of reducing carbon emmissions. It does this by imposing a tax (or levy or fee) on the price of goods and services that are deemed to ultimately cause high but avoidable (hence no agriculture) emissions of carbon. This of course raises the price of these goods e.g. electricity. If we impose a Carbon Tax on coal-generated electricity (the sine qua non of carbon emitters) then expect the power companies to pass on all or most of the increase to consumers. Now here’s the thing, the money the tax raises will have gone to subsidise the increased power bills of these very same power consumers. By exactly the same amount as the price should rise. So in effect nothing happens. In other words, at a base level the Carbon Tax does nothing. It has no benefits and no costs. Isn’t it really “a great big snooze tax” and not “a great big new tax”?
The Carbon Tax has one (fully intended) important consequence. If power emitters want to increase their profits they can do so by switching to lower carbon emitting alternatives. These might already be available or they can pay to research and develop them. And because of the tax what was previously uneconomic will now be made viable. Since these alternatives are really more expensive than coal-based power, without the tax, you might ask what is really happening at the cost end. It seems like a tax which costs nobody nothing, magically makes alternatives to carbon emitting industries economic. Voila!
Well that’s what the government would have you believe. On closer examination though it is precisely when the Carbon Tax has its intended effect that the cost gets passed onto consumers. But not when the Carbon tax is first introduced. To see why let’s have a look at an example.
Suppose the cost per unit of producing electricity from coal is $100. The power company charges $110 to consumers and so makes a $10 profit. The Govt introduces a 20% Carbon Tax on the cost of producing electricity using coal. This raises the price to $130 in order for the company to maintain its $10 profit margin. That’s $100 for the coal, $20 for the tax and a profit of $10. The extra $20 gets passed onto the consumer whose bill is now $130 per unit. However after the $20 subsidy (paid for by the $20 proceeds of the tax) they still only pay $110.
In other words: the producers, the consumers, and the government are no better or worse off immediately after a Carbon Tax is introduced. But what happens if the Carbon Tax is successful in reducing emissions? That is when consumers end up paying more. The cost to the company, including the tax, of producing one unit of electricity is $120. Suppose an alternative non carbon-emitting energy source is found which costs $115 per unit. This is more than the coal-based cost before the tax, but less than the cost with the Carbon Tax as this carbon-free energy source, let’s call it “sunshine”, attracts no Carbon Tax. So the company, in order to maintain their profit of $10, charges $125 per unit, less than coal based power with a Carbon Tax. But now the consumer receives no subsidy either so even though their total bill has dropped from $130 (with carbon tax and a subsidy) to $125 without a subsidy. It now actually costs them $125, an increase of $15 over the cost before the carbon tax was introduced and even immediately afterwards. This of course is the extra $15 per unit that it costs to produced electricity from sunshine rather than coal.
That is how the Carbon Tax really works and ends up costing the consumer. You start out with a Carbon Tax which costs nobody anything and end up without a Carbon Tax that everybody ends up paying more for. When it has its intended effect, and there is no coal based power, but also no more money for subsidies. And, in principle, no more carbon pollution.That of course though is really the point. There is a (currently) hidden cost of producing carbon as carbon dioxide and methane in global warming and that is, if the system works, the $15 extra you pay to solve the problem by removing carbon from the economy.
Possibly Related Posts (automatically generated):
- Resource Super Profit Tax Everything Correctly Explained (R.S.P.T.E.C.E.) (25 May 2010)
- The Price of Carbon for Petrol (2 July 2008)
- No hiding the cost of emissions reduction (10 February 2010)
- Rudd, Carbon and the Price of Petrol (19 December 2008)