Hot air already in carbon tax debate

keith-kendall-thumbKeith Kendall

Given the contentiousness of pricing carbon emissions, whether through a carbon tax or an emissions trading scheme (ETS), it would seem incumbent that the system be designed properly from the outset if this path is chosen. The Minister for Trade Dr Craig Emerson recently delivered an address to the Centre for Independent Studies which gave some small indication of aspects of the Government’s proposed carbon tax. While there was not what one would call a great amount of information, there is enough to concern those familiar with carbon taxes that the Government does not understand what it is doing.

In that speech, Dr Emerson equated a border tax adjustment (BTA) with a carbon tariff. This was raised to respond to union and other interest group pressure to penalise our trading partners who do not price carbon. While Dr Emerson is right in resisting any pressure to reinstate protectionism under another guise, equating a BTA with a carbon tariff displays a disturbing ignorance of the design of these economic measures.

A carbon tariff selectively applied is merely disguised protectionism and almost certainly violates Australia’s international trade obligations under the World Trade Organisation (WTO). A BTA, in contrast, is a means of providing a level playing field so that goods coming into Australia are subject to the same rules as Australian produced goods. To be consistent with the WTO, a BTA needs to be applied indiscriminately, that is, to all goods entering Australia, not just those from countries that have environmental policies with which we disagree.

Dr Emerson’s ignorance is demonstrated further by claiming that a BTA will not deal with the problem of Australian exporters competing on the world stage. In fact, it does. A full BTA mechanism not only imposes an equivalent charge on imports, but it rebates exports of the charge faced in Australia. In this way, adverse effects on Australia’s international competitiveness are relieved. Incidentally, this is exactly how exports and imports are treated under Australia’s goods and services tax (GST) and almost every other GST system in the world.

This system under a GST has been confirmed as legal under the WTO and while there is something of an open question whether an energy tax BTA is similarly consistent, there are very strong arguments that it is. At a minimum, the legal basis is certainly much stronger than the tariff suggestion put forward by the unions and a BTA does deal with the problem of maintaining international competitiveness much more effectively than Dr Emerson seems prepared to admit.

Dr Emerson’s alternative to a BTA is to hand out free permits under the Government’s preferred system; in other words, allowing polluters to continue to pollute as they always have done – for free. At first, this system is of questionable legality under the WTO, with every prospect that this would represent a subsidy (remembering that it is only those businesses that face import competition that would be eligible for this assistance). While the WTO does incorporate exceptions for genuine environmental policies that have the ancillary effect of reducing free trade, these exceptions are largely untested and the Government is taking a large risk if it is relying on these provisions for the legitimacy of a major aspect of its climate change policy.

It is also interesting that Dr Emerson attacks proposed tariff protection on the basis that it encourages abuse in the form of rent seeking behaviour. A genuine BTA does not suffer from this problem, as it applies indiscriminately, but handing out free permits does. First, there will be lobbying around who is eligible for these free permits, which will be followed by behaviour changes leading in to the system to maximise the free assistance, which will then be followed by lobbying to extend the free assistance scheme beyond original intentions. The original Carbon Pollution Reduction Scheme suffered from exactly these defects. It appears that not only does the Government not understand the system that it is trying to put into place, but it does not learn from its mistakes either.

The Government’s announced policy seems to be as confused as it is confusing. As a sop to the Greens, the Government has decided to introduce a carbon tax, but only as a precursor to an ETS. But the assistance provided under this carbon tax will be free permits, being the mechanism most suitable under an ETS, not a carbon tax. But one of the primary advantages of using a carbon tax over an ETS, a (legal) BTA, has been specifically rejected by the Government in favour of a system that could be an illegal subsidy under international law. The basis for the rejection, that a BTA is the same as a tariff, does not exactly foster confidence that our Government knows what it is doing in this important area.

Keith Kendall is a Senior Lecturer in the School of Law at La Trobe University, Melbourne.