Friday, November 01, 2013

Carbon Tax vs emissions trading vs direct action

It is hard to discuss tax policy, or indeed anything without agreeing on premises.
There is an equivalence between a carbon tax and emissions trading with a fixed price. There is also an equivalence between a carbon tax with a variable price that is set to match the market price of emissions in an international emissions trading scheme, and being part of that emissions trading scheme.

Any scheme can be "gamed" in the sense that the European scheme allocated or grandfathered too many credits, to appease emitters and to bribe them to get in the scheme, and then allowed financial pressures of the debt crisis to further water down the scheme.

In Australia, the scheme seems scheduled to be gamed by lobbying from industrials for the tax to be scrapped. Either way, instead of acceptance, and long term plans to avoid the price efficiently by moving away from carbon intensive industries, plans are on hold on a wait and see with the hedge on what one can bet the future scheme to be. Hold back plans for renewables in the hope of a fat grant from the new "direct action" plan, rather than do what makes sense now, with the energy prices as they are with the carbon tax and assuming they will stay at the relative level.

Avoid the tax by switching to low carbon, or avoid the tax by switching the Government? I prefer the first. Grudging acceptance that the tax may effectively be there for a while. Even the thought that it will be gone soon changes the behaviour of industrials to bet on a low effective carbon price.

14 comments:

Dr Clam said...

It is hard to discuss tax policy, or indeed anything without agreeing on premises.

Too right. You are arguing that the special St. John's Wort we need to smear on our letterboxes to keep the leprechauns at bay should be provided by giving large corporations tax concessions based on how many letterboxes they own, while other people say the government should grow the magic St. John's Wort on unused portions of Tasmania and deliver it personally to each citizen by unicycle.

The premises of the argument are orthogonal to rationality. IMHO.

Marco Parigi said...

I'm not sure I agree with your analogy. I am not happy to "give tax breaks" for large corporations. They avoid the tax by providing a commercial service that avoids the tax somewhat, completely or in any way the corporation sees fit. Having letterboxes smeared is how they avoid the tax. Avoiding a tax by being in a favoured industry like fresh food, education, or low carbon emission energy is not the same as being given a tax break (or emission credits) to bribe you into a more specific behaviour. Fresh food, education, etc. as well as renewable power can be given broad goals - feed people, teach people, power people with goals of health, employability and reduced pollution. Giving GST tax breaks or carbon tax breaks should be seen similarly.

Dr Clam said...

The key word in the analogy is 'leprechaun' ... there is *no point* discussing the "best way" to waste resources and mental effort keeping lepreachauns at bay.

Marco Parigi said...

My point is that the "best way" is best because it doesn't waste resources - it just reallocates them in a way that can make sense whether leprechauns are real or not. To demonstrate that we could keep Leprechauns at bay, given that so many otherwise wise people believe in them would be a source of pride for me. Just as I have pride in my solar panels despite it not being a particularly financial benefit now that electricity prices are going back down.

Dr Clam said...

it just reallocates them in a way that can make sense whether leprechauns are real or not

Er, how could it make sense, given that leprechauns are not real?

Marco Parigi said...

To give an example knowing that Islamic view on God isn't real, but the things muslims do to appease God have benefits such as reduced AIDS rates among other benefits. I cannot prove those benefits, just as it is hard to prove those benefits are important and that smearing letterboxes will lead to a net overall benefit without a net expenditure of resources.
I don't mind if keeping Leprechauns at bay is why other people feel that it is a worthwile policy, just as I don't mind people being Islamic.
My premises are different to yours in the sense that I calculate that these side benefits are real, and that the net cost really is zero. On top of that, demonstrating to foreign Leprechaun believers that we can smear letterboxes better is the same feeling as winning in sports.

Dr Clam said...

So, I will not expect you to prove these benefits, but what *are* those benefits?

I can see very clear, obvious benefits from a strategy of 'adaptation' to leprechauns which I am confident are easily provable. These are, for instance: reduced environmental impact on fragile ecosystems and scope for creating larger and more viable reserves; reduced death and destruction due to natural disasters; reduced distortion of food markets by subsidies.

Marco Parigi said...

The benefits of a carbon tax are holistic - ie. I can't give you a list and say x will be better by y amount., or even that x will be better, or that we can even measure y.

One similar example of what I am talking about is the benefits of unilaterally reducing tariffs. The direct provable effects are bad - those industries that relied on the tariffs are at a severe disadvantage.

The holistic advantages are a more efficient allocation of resources which benefits everybody in a small, long term permanent way.

The benefits that I'm talking about are not only ones that cannot be proven - The aspects that appear provable actually go the other way. Carbon intensive industries appear to suffer, but resources will be allocated to more smoothly move away from them, and that will actually make them more efficient and competitive, and drive out of business the marginal ones. It will instil upgrades to our energy infrastructure through the necessity of change. This will benefit everybody in a small way. Because the tax is a proxy for fossil fuels, new energy developments will use less of them and will find less resistance from the public and Nimby's.

Marco Parigi said...

So when the Government slashes or abolishes the CSIRO, renewable energy targets and clean energy investment funds I go Yay. The savings there are real.

When the Government says abolish the carbon tax, I say what the?
The costs to industry are imaginary and the holistic benefits are real - I just can't prove it.

Dr Clam said...

Carbon intensive industries appear to suffer, but resources will be allocated to more smoothly move away from them, and that will actually make them more efficient and competitive, and drive out of business the marginal ones. It will instil upgrades to our energy infrastructure through the necessity of change. This will benefit everybody in a small way. Because the tax is a proxy for fossil fuels, new energy developments will use less of them and will find less resistance from the public and Nimby's.

1) Internationally, we have a competitive advantage in energy-intensive industries, and it doesn't make sense to hobble them. We do not live in a vacuum.

2) We are already paying through the nose for upgrades to our energy infrastructure as a consequence of decades of neglect... there is no need to force more investment into this.

3) There is *no point* in driving new energy developments ahead of the market when we have 1500 years worth of coal. This is again just hobbling our natural competitive advantage in energy.

Marco Parigi said...

1)We categorically do not have a competitive advantage in energy intensive industries. We have high wages and high regulatory overheads. Our best advantage is to export carbon intensive fossil fuels because we have more than we can usefully use.

A case in point is Collinsville (coal mine, power station, export through Abbot point). The power station and other moribund coal industry there is not competitive. The Abbot point export facillity would be more efficiently managed by overseas operators. A Carbon tax would hasten the shift for the power station to convert to solar there, and the tax would mean Australia gets some income from the coal even if the coal mine, rail facilities and port facilities are all foreign owned.

Marco Parigi said...

To answer the points one at a time.
1) Our competitive advantage is easy access to energy intensive resources not industry.
2) A tax doesn't force more investment it tweaks the investment to a more forward looking one.
3)We don't just have lots of coal. We have lots of sunshine, Uranium, hydro capable rivers and gas seams. To use the coal effectively requires investment just as the others do. We are not hobbling income to Australia - a tax IS income to Australia. It is swapping corporate income that could well be foreign or tax-evaded with to government income.

Dr Clam said...

We categorically do not have a competitive advantage in energy intensive industries. We have high wages and high regulatory overheads.

High wages and excessive regulations apply to *all* our industries. These will hamper a solar power plant as much as a coal power plant. We have an advantage in energy-intensive industries in comparison to labour-intensive industries or knowledge-intensive industries. Though I will concede your second comment, Our competitive advantage is easy access to energy intensive resources not industry

A tax doesn't force more investment it tweaks the investment to a more forward looking one

'Forward looking' means nothing. It 'tweaks' investment from useful places to places that do no conceivable good- such as 'carbon capture' and lawyers.

We are not hobbling income to Australia - a tax IS income to Australia. It is swapping corporate income that could well be foreign or tax-evaded with to government income.

Again, we don't live in a vacuum. A tax doesn't just redistribute income within Australia: it encourages investors to derive their corporate income from *other places*.

Marco Parigi said...

These will hamper a solar power plant as much as a coal power plant.These are hampered by wages etc. in completely different ways - Coal power plants are very marginal, and a small further increase in costs would mean they are mothballed. Because virtually all the costs are upfront with solar power plants huge increases in costs of wages/regulations would make virtually no difference once they are there. Our advantage in solar over say Germany is insolation rates of about 4.5 hrs a day over about 3 in Germany/ China/Japan or wherever. That advantage in return in investment overcomes the disadvantage in wage/installation costs. Compare that to Coal, which needs a lot more "jobs" to run coalmines/transport/coal power stations which cost a lot more here than say China. Solar/Hydro/Wind really don't create any long term employment.
'Forward looking' means nothing. It 'tweaks' investment from useful places to places that do no conceivable good- such as 'carbon capture' and lawyers. Carbon capture is a complete red herring. The savings from triple the highest carbon tax in the world wouldn't pay for the investment required to even research carbon capture. I think you are thinking of "direct action" not "carbon tax" as no commercial entity in their right mind would invest in carbon capture to evade the tax, but if a research grant was offered....
And lawyers? why would a tax engender more litigation? Again you are thinking about a floating carbon price in a cap and trade system.
No, taxes tweaks investment to thousands of small marginal decisions to go one way or another way where the tax may have done just enough to change the decision.
Again, we don't live in a vacuum. A tax doesn't just redistribute income within Australia: it encourages investors to derive their corporate income from *other places*.
Again, you could say that about any tax - We can't have no tax, as you can't even have a Government with no taxes. You can't have the minimum tax to have a Government, otherwise the Government would just be there to say that they have no money, so can't achieve anything. So knowing we have to tax something, the important thing is to have a fairly broad base. With the carbon tax, even though corporations collect it, we all pay a little bit through our carbon intensive energy of our electricity and goods.It is the sum of taxes, including income taxes, GST and the Carbon tax that is important for multinationals in general. It is the overall tax burden that influences the overall investors. I don't mind losing some energy intensive investors for some other ones. The overall tax burden has not really changed - so unless you are claiming there is an overall increase, you're not making sense to me.




To me, it is the wrong use of Ockham's Razor to make the broad claims that you and others make.