Carbon tax not the solution we need on climate

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A carbon tax, proposed by The Greens as an alternative to Rudd’s CPRS, would increase power prices for ordinary people, and be just as ineffective in encouraging renewables as carbon trading
With Rudd’s CPRS stalled in the Senate, and support for the scheme falling, the debate about solutions to climate change has opened up.
The Greens have proposed an interim two-year carbon tax, as a transition to carbon trading, starting at $23 per tonne this year. Unlike the CRPS it would not involve tradeable permits, or the use of offsets, but as the Greens state “The scheme would operate using the proposed CPRS administrative framework”. The proposal originally comes from the Garnaut review, the report by free market economist Ross Garnaut that led to the CPRS.
The Greens are attempting to deal themselves back into climate negotiations with the government, rather than fight for solutions that would actually work. Given the scale of the problem, their carbon tax proposal is remarkable for its timidity. However timidity is not the only problem. A carbon tax will make getting solutions that work more difficult.A carbon tax would fail because it is based on the same basic approach as carbon trading
The Greens are proposing exemptions for “trade exposed emissions intensive industries”, just as with the CPRS.
This would include exemptions for companies like Alcoa, who have just done a deal to source their power from a coal-fired power station in Victoria, Loy Yang power. It will lock in their enormous use of power for the next 26 years.
Exemptions are designed to support Australian companies against international competitors. But being Australian companies does not make their emissions any less harmful to the climate. Climate change doesn’t recognise nations.

Problems
Carbon taxes are market mechanisms that, like Rudd’s CPRS, work by imposing a price on carbon emissions. This is designed to make polluting forms of energy more expensive, which would supposedly encourage the private sector to invest in renewables.
But a carbon tax set at $23 is far too low to do this. Renewables expert Mark Diesendorf estimates it would have to be set at $100 or more to make solar power competitive.
Energy producers would simply pass the cost of a carbon tax on to consumers. This means ordinary people would pay the cost of a transition to renewable energy—not the polluters.
Some argue increased prices for consumers could be offset by giving them back the revenue from a carbon tax or eliminating other regressive taxes.
But even the threat that prices might rise will alienate ordinary people. It is with good reason most working class people are suspicious of government policies that might raise their cost of living. We have experienced over 20 years of neo-liberal “reforms” designed to cut living standards and boost corporate profits. The climate movement needs to make it clear whose side we are on.
We need a mass movement to force our rulers to act to stop climate change. People will not join our movement if it could mean they can’t afford to drive a car, or if they are cut off electricity.
The right will attack a carbon tax in the same way Abbott has attacked Rudd’s CPRS—labelling it a “great big new tax” that will hurt living standards.

Regulation
If government is serious about stopping something dangerous, it bans it. DDT is banned because of its effects on the environment. So is asbestos. We need to regulate absolute limits on carbon pollution. Why allow companies to pay a tax and continue to destroy the planet?
Carbon taxes are always less effective than regulation. For instance taxing old incandescent light globes would reduce their use, but banning them stops it altogether. Taxing the car industry or petrol might force some poor people to stop driving, but requiring car manufactures to produce electric cars run on renewable energy alongside massively expanded public transport would make a real difference.

Funding renewables?
The Greens say that their proposal “Results in a surplus of $2.97 billion… which could be directed towards climate mitigation and adaptation infrastructure”.
We do need a way of raising money to pay for the building of renewable power generation. But this should come from taxing polluting corporations and the rich—those responsible for climate change.
If government was serious about funding a transition it could raise corporate tax and the highest individual tax rate back to where they were in the 1980s—corporate tax would go from 30 per cent back to 40 per cent and the highest tax rate from 45 per cent back to 60 per cent.
The movement must demand what is necessary, rather that try to come up with “solutions” that are acceptable to those who run our world, but that will not work.
Rudd claims carbon trading can be the key mechanism to fight climate change. The climate movement’s answer must be that a massive program of government spending to install renewable energy and public transport is necessary, not to argue for a carbon tax.

By Chris Breen

Website Comments

  1. chris breen
    Reply

    I have replied to some of the debate over here:

    http://localhost/solidarity.net.au/web/why-the-climate-movement-shouldnt-support-the-greens-carbon-tax-proposal/

    (for some reason those comments aren’t coming up on the Solidarity home page like this one)

    I will make one point in passing about Hansen’s tax proposal, Hansen & others say it would be equitable because the rich have a greater carbon footprint, but this is like claiming the GST is equitable & hits the rich because the rich consume more. Those with less money will find it more difficult to cope with electricty and petrol price rises than the rich, those without access to public transport would also be unfairly worse off.

    If the point is to be equitable, you would tax the rich, if the point is to be effective you would get government to directly build large scale renewable energy, stop new coal and expand publci transport etc – a carbon tax does none of this.

  2. Ben Courtice
    Reply

    John Passant has a relevant article about carbon taxes at his blog here: http://enpassant.com.au/?p=6917 which is worth a read.

    I think your arguments that a carbon tax is a potential distraction for the movement are worth considering. However the argument that it is an unfair tax like another GST is mistaken, at least in the general terms you have put it. All taxes, and any costs of environmental regulation, will be passed on to the consumer by corporations, as much as they can get away with. Restoring corporate tax to 1983 levels would no doubt have this effect too. But we wouldn’t argue against all regulations would we? What about, for example, a regulation that coal power stations capture and store safely all of the mercury from their smoke stacks? Instead of disposing of it at sea. That would cost more and might be passed on in higher power bills, but I can’t see how we would oppose it.

    Socialist Alliance is currently debating the ins and outs of carbon taxes, without having a position yet, although individual members of course have their own views. There’s not much in print yet but I’ve written an opening article at my blog http://bccwords.blogspot.com/2010/01/carbon-tax-climate-emergency-and.html

  3. chris breen
    Reply

    Hi Ben you say my argument that a carbon tax is like a GST is mistaken, but dont say why. A carbon tax is like a GST, though not exactly the same.
    It is a tax on carbon, rather than on the exact amount of electricity you buy. But using coal-fired power there is a direct relationship between the amount of carbon and the amount of electricity which is what makes it like a GST, rather than a tax on profit.

    A tax on profit (or a progressive income tax) is a very different thing, tax on profits cant be passed on, because the more successful a company is, for instance at raising prices and making profit, the more it gets taxed. So raising corporate tax would not hurt workers, it would indeed be very popular.

    With environmental regulations, business would try to pass on the costs to the extent it could, but at the very least you would have the effect you are after. So for instance everyone I know who supports a tax tells me it will stop new coal-fired power stations (I think the level the Greens are talking about wont do this), but why not legislate to ban new coal-fired power stations and be absolutely sure of the effect you are after? At the very least the carbon price needed to stop new coal-fired power stations is uncertain, it is certainly a political impossibility to get the emissions reductions that we need of around 80% or more using price signals of any kind (because this would lead to price rises that would see people being cut off electricity or unable to drive their cars).

    More particularly when we talk about what is needed with climate change, it isn’t just minor enviornmental regulation and changes to existing products, but major economic transformation. So for instance we need massive direct government investment in renewable energy and public transport, this is not something that would need to reduce living standards. Schools and hospitals, become part of the social wage, renewable energy can be the same. Building new schools and hospitals does not in itself raises prices for students or patients.

    But actually I think they key point is that a carbon tax is not a movement building demand. I think it comes out of demoralisation of some activists after Copenhagen, pessimistic about the possibility of building a movement and wanting to grab onto something, anything…

    By the way John Passant’s article is very abstract and confused and supports carbon trading on my reading of it. The Greens also support carbon trading in principle, though they want a better version that Rudd has on offer (it is a good thing that the Greens have kept up their opposition to the current CPRS). Both carbon trading and carbon tax work on the same basic mechanism – a price signal. The Green’s carbon tax proposal is taken straight from Ross Garnaut, and is intended as a way into carbon trading, rather than as an alternative.

    For anyone in Melbourne interested in discussing these points further I will be debating the carbon tax with Greens’ MP Greg Barber, 6.30pm Tuesday April 20
    RMIT, Building 37, on Swanston Street, City
    (directly opposite the Commonwealth Bank and the Kaleide)

  4. James S
    Reply

    Re business being able to pass any kind of tax on, as the article in our latest issue points out “A tax on company profits cannot be passed on to consumers so easily as a carbon tax, since companies make different levels of profit relative to the prices of their products. Company shareholders will pay the higher tax in the first instance. Other progressive taxes such as more tax on high-income earners cannot be passed on at all.
    Taxing the rich to fund renewable energy would be popular—and would improve living standards rather than attack them.”

    http://localhost/solidarity.net.au/23/carbon-tax-a-distraction-from-real-solutions/

  5. John Passant
    Reply

    Chris, I agree with your gernal analysis. However I wasn’t arguing for a carbon tax in my article Tax and the Exploitative process on my blog as you incorrectly argue. I was using it as an example. I suggest if you read Harman’s Zombie capitalism (pages 111 to 113) you’ll find the same ‘abstract and confused’ analysis, something I rather happily discovered after making my fairly rushed arguments. The point I was making (and one that some of my students understand, if not you) is that who bears the burden of taxes ( direct versus indirect, price increases, increased exploitation etc) depends on the level of class struggle and the commitment and ability and preparedness of workers to fight for their interests.

  6. Kieran Latty
    Reply

    James S is correct in stating that corporate taxes are harder to pass on than rises in input costs. However, a rise in corporate tax is not without potential negative effects, including price rises.

    A rise in the rate of corporate tax would discourage private sector investment, and therefore would lead to a reduction in capacity expansion. Eventually this would lead to price rises as demand outstripped supply. If price controls existed, there would be an continued shortage and rationing would be required.

    This is one reason why any price controls or rises in corporate taxation must be backed by an increase in state investment to match any reduction in private sector investment.

    Of course, we want a big fall in investment in coal power, and a rise in the corporate tax rate on this industry would be good thing. But shutting down existing plants requires profit to fall to zero, and in this situation the rate of corporate tax is meaningless. A carbon tax or levy on coal use would be a better mechanism to make the running of coal plants a financial liability.

    The other advantage here is that a carbon tax would not hit ‘green’ or at least not carbon intensive investments like a blanket rise in the corporate tax rate- which would hit windmill owners, sustainable farmers, manufacturing, clinical research etc just as much as it would hit coal power producers.

    Furthermore, electricity and other price rises will be likely in the medium term even under a state investment scheme. Even with corporate taxes funding state investment in renewable or low emission technology, the investments must still at least break even (or be subsidised at a big cost). This means that the cost of electricity will need to rise to at least the cost of producing the green energy that the state sector produces.

    This is actually not such a problem, because price rises on energy intensive products will help encourage reduction in waste and substitution along the production chain.

    More expensive aluminium, electricity, fuel and steel will mean that the manufacturing industry will be encouraged to substitute other materials or conserve the use of these products which have a high true cost of production. By not charging industry the true social cost of these products, the current economic system is simply encouraging their over-use.

    The problem we face is how to shift production and consumption patterns, increase sustainable output and also effect a more egalitarian distribution of purchasing power and welfare.

    The best way to effect this would be a big rise in the taxes on luxury consumption and high income earners- plus cuts to taxes and increase in services to low income earners- plus an increased taxation of externalities and subsidies to environmentally positive options.

    You could package these together like this-

    A 20% or higher sales tax on luxury consumption items
    A surcharge on excessive use of electricity, water etc.
    A 60% top income tax bracket
    An increase in the tax free threshold to $15,000 dollars.
    A $2500 or more increase in the pension, unemployment benefits, minimum wage.
    A carbon tax of $100 per tonne or higher, with equalisation tarrifs on imports from countries with a lower rate.
    Free and expanded public transport, increase in preventative health expenditure etc.
    Sales tax exemptions on low emission vehicles, bicycles etc, and deductibility of such commuting expenses from declared income.

    Of course, there would still be a massive role for state investment in R+D and production as even under these sort of incentives the state would be more effective at making big investment over long time scales- such as that required to set up a electric vehicle infrastructure or windmill construction industry- and in running campaigns to educate or shift public opinion/practices.

  7. Kieran Latty
    Reply

    There is one more important issue regarding corporate taxes and this is regards to the business cycle of boom and recession.

    One advantage of corporate taxes over taxes on labor is that corporate taxes have a passive counter-cyclical effect. During good times, profits rise and therefore so does the tax take- if government spending does not rise then a budget surplus exists and there is a dampening of aggregate demand. On the other hand, in bad times profits tend to fall and therefore so will the tax take- if spending stays the same then there will be a budget deficit and therefore an effective stimulus. Of course, for this effect to work spending must be effectively de-linked from short term government income and instead linked to longer term income projections- which several governments have consciously or unconsciously done already or in the past.

    A corporate tax rate hike would be most effective if it was combined with a reduction in labor input costs, especially at the bottom end of the labor market. This would be one possible effect of a reduction in income taxes on low income earners- whilst some of this would accrue as a welcome increase in take home pay for such workers, this very rise would also reduce pressure for increases in the pre-tax wage.

    Even better would be negative income tax at the bottom end of the labor market or even a partially government funded increase in the minimum wage.

    The advantages of such a tax shift would be this-

    1.Take home pay at the bottom end of the labor market would increase, reducing inequality and raising welfare.

    2. The gross costs of employing labor for business would decline, leading to a decline in unemployment.

    3. Government revenue would not fall- if the rise in corporate tax matched the cost of tax cuts and subsidies to low wage employment, which is very possible.

    4. Investment and employment would be more stable, due to the counter cyclical effect of corporate taxation- less businesses would go under during recessions becuase as their profits fell, so would their tax costs.

    Furthermore, a corporate tax rate could be levied at different rates on different industries- for example the bloated, socially unproductive and savings-sucking financial sector could get an extra big rise.

    The biggest losers would of course be industries which are very capital intensive and employ small numbers of people and/or those on big salaries.

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