Decoupling Australia's economy from pollution

28 Nov 2011

Governments introduce legislation for the public good or to introduce structural changes. The introduction of Medicare in the 1970s and the introduction of superannuation in the early 1990s are good examples of utilitarian public good policies. The introduction of the goods and services tax in 2000 fundamentally changed how federal governments raised tax revenue hence was structural reform.

The introduction of the Gillard government’s 18 pieces of legislation that make up the Clean Energy Future legislation could have been sold to the Australian public as a utilitarian public policy. By decreasing Australia’s reliance on fossil fuels and reducing pollution, it is good example of how public policy can have positive and long-term generational benefits.

Instead, this legislation is more a case of economic restructuring. With the carbon tax as the centerpiece of the legislation, the aim of the legislation is to decouple the link between economic growth and pollution. The redistributive aspect of the tax, the AUS$15 billion tax revenue that will be passed onto households to offset polluters recouping costs, is at best pragmatic.

Australia has two core industries that couple pollution to the economy: electricity and transport. The more we consume of both is an indicator of a growing economy. Economic growth therefore drives pollution. This is a fundamental challenge for policy-makers. The way to break the nexus between growth and pollution is reduce emissions. The way to do this is to encourage industries to use less polluting technologies. Taxing is an efficient way to enforce structural change on large industries that are often reluctant to invest in expensive future technology. The carbon tax therefore functions as a mechanism to force structural change. Other arguments about better environmental outcomes are secondary to the decoupling of pollution from growth.

Electricity production accounts for one third of Australia’s emissions. Coal-fired generators produce most of Australia’s electricity. The carbon tax should shift the economy towards cleaner energy, like natural gas and solar, and away from emission-intensive energy, such as coal. Without the carbon tax estimates are that emissions in the energy sector will increase by at least 60 per cent over the next 40 years.

Industries, motivated to reduce their carbon tax burden, will now likely seek out renewables in terms of energy production and delivery. It is in renewable energy developments that Australia can break its reliance on coal. Hydro-electricity production and carbon capture and storage technologies are likely to contribute to Australia’s future mix of energy production. This shift will be driven by the $100 billion government investment in renewable that is built into Gillard’s effort to decouple pollution from economic growth. The other sector that this is targeting is transport.

Australia’s transportation network is a significant source of emissions, producing around 14 per cent of national emissions in 2010. Over 85 per cent of transport emissions come from road transport. Rising oil prices might decrease usage, hence emissions, however a carbon tax in the form of adjustments to excise rates and fuel tax credits will provide additional incentives for business to adopt cleaner fuels. This will not however be an immediate shift. The development of mass-produced biofuels and fleet changeovers means this sector will be slow to reduce its emissions. But structural reform in transport infrastructure and investment in less polluting emissions will force the transport industry to more responsively engage with alternative fuel and transport issues.

Maintaining a non-carbon tax policy setting provided no incentives for investments in low-emissions technology in both the electricity and transport sectors. By decoupling the economy from emission intensive industry, the link between economic growth and carbon pollution is broken. This is structural rather than utilitarian benefit of the legislation. Australia needed to break this link. Australia has the highest level of emissions per person in the developed world.

To act now was also economically responsible. Changes introduced now will reduce the costs associated with climate change. Deferring action on climate change will only lead to higher and longer-term costs for states with high emission-producing industries. For each three years in delaying action there is a 20 per cent increase in social and economic costs. Both the Stern Report and the Garnaut Climate Change Review found the long‑term economic costs of inaction are greater than the costs of action.

As structural reform, Gillard’s Clean Energy Future legislation is also aimed at our future trade. Without a carbon tax it was foreseeable that future exports could be penalised in a low-emission global market. This would have a negative impact on exports particularly in minerals, the key employment sector of the national economy and the driver of what is permanently becoming Australia’s two-speed economy.

Structural reform in the case of decoupling pollution from economic growth was not the easiest path for the Gillard Government to take. It would have been simpler for the Government to acknowledge its dependence on the Australian Greens and introduce the measures shrouded in the rhetoric of the ALP’s commitment to the environment (which Gillard in fact did a bit of). This would have also given the Labor Party a change to win back some of the left-wing votes it has been losing to the Greens at successive elections.

Instead, the Government engaged in the much harder sell of introducing a new tax regime in a minority parliament with no mandate to do so. This type of structural reform, taxing Australia’s 500 highest emitting producers a $23 per tonne carbon tax will have negative impacts on the economy. Because the cost of the carbon tax will be passed onto households it will slow income growth. Treasury modeling indicates that the tax will produce an immediate rise in the consumer price index of at least 0.7 per cent. This will equate to about $10 increase in the weekly expenditure of each Australian. The political cost for Gillard at the next federal election will be if Australian voters decide that a ‘clean energy future’ is worth $10 a week.

There will also be impacts on Australian workers. The already dwindling manufactured goods sector, often energy intensive industries, will likely go into free-fall. Conversely, the agriculture industry, excluded from the carbon tax, will likely benefit from the federal government’s Carbon Farming Initiative. There will also be varying effects of the carbon tax depending on region or rural location.

Australia’s clean energy legislation, while increasing costs for Australian consumers and likely to have some impacts on workers, will force large polluters to shift to cleaner technologies, particularly in the energy and transport sectors. While a higher tax rate would have forced more rapid and concerted efforts at developing cleaner ways to produce electricity and transport goods, the reforms will force structural changes. Therefore, the Clean Energy Future legislation will have been effective at the structural decoupling of an economy from emissions production. This is a story that Gillard government should be telling. It is one of the most significant in Australia’s industrial development.

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