Once more with feeling: Principles for reducing greenhouse gas emissions and improving the wellbeing of most Australians

Messrs Denniss and Richardson ( henceforth D and R ) seemed to have found the "magic pudding recipe" ie just place a tax on revenue or output of any given industry and redistribute the tax revenue to families who will all be better off as a result according to their findings on the suggested uses of revenues from a carbon tax Beauty- we could even do away with income tax if only their simplistic analysis was true -but as it has been said many times if something seems too good to be true it probably is D and R repeating the mantra beloved of the economically illiterate Greens that it will be the "polluters" who will pay not the public, ignore the reality that the so -called polluters will pass on any carbon tax to the electricity -consuming public -including industrial and commercial users as well as households. ( the incidence of a tax depends on the relative elasticities of demand and supply and as demand for electricity is highly inelastic in the short run almost all the tax will be passed on ) Indeed it is essential this occurs if the tax is to be effective over the long run to provide incentives to all users to both economize on energy and to be receptive to taking up new higher cost but lower emissions energy forms and for alternative suppliers to be encouraged to produce them as they become more financially competitive with now taxed carbon forms There are so many mistakes and ommissions in this paper that it is hard to know where to start but let me outline just a few Firstly D and R's assumption that all the tax proceeds from a carbon tax are available to government to distribute in some form of welfare churn to familiies overlooks the need of energy -using industries competing on world markets for which compensation will be needed if they are to survive ( ie the trade exposed industries) Given that Australia has a world comparative advantage in coal -based energy -intensive processing industries, it would be a remarkable case of shooting ourselves in the foot big time if we simply taxed that advantage away and other nations did not follow or that we did not compensate those industries over a time period which allowed them to adjust Second why the emphasis on returning the tax income to families any way ?-given D and R's own figures which say there will only be a 1.1% increase in the cost of household consumption expenditure -hardly a great loss of welfare and suggesting there only needs to be targeted compensation ot the lowest income households where the tax impact is likely to be higher This also raises the issue of why it is seen by D and R as a high priority to dissipate the proceeds of the tax in welfare payments when it could be argued that a higher priority need surely would be to use the proceeds to improve economic productivity to increase real incomes over the longer term Also the particular proposal to return ( churn ) the carbon tax proceeds by providing rebates on energy bills to households ( why only households?) is surely self -defeating as the whole point of a carbon tax is to alter effective relative energy prices so as to alter user behaviour The article misses the essential point of a carbon tax which is that users will have to accept and adjust to permanently higher prices for all forms of energy which is an unambiguous welfare loss, whose compensating benefit will (supposedly ) be lower levels of carbon emissions hopefully resulting in slowing or cessation of climate change over the longer term Thats the price you pay for the supposed benefit and to suggest other wise is misleading Then we have the straight out assertion by D and R that owes more to ideology than analysis that "Governments should be willing to commit to ensuring that investment in public transport is greater than expenditure on roads" They may be right but how are we to know ? What is the metric they use to define the respective transport budget cut off points where the last marginal public transport project has a higher cost benefit ratio than the last marginal road project ? Moreover their simplistic underlling assumption is that road building is for consumers ignores the facts that 50 % of traffic on roads is commercial ,while that buses and taxis which form an important part of a public transport network both use roads Lastly this assertion makes no allowance for the possibility of changing motor vehicle fuel technology which could greatly reduce vehicle emissions without herding people onto inflexible fixed rail forms of public transport Lastly while they are right to argue for removal of existing subsidies to renewable energy that do not deliver low abatement costs my response is "good luck with the politics of this one " Can you imagine the outcry from the economically illiterate Greens at proposals to remove subsidies from their pet renewable technologies eg say solar energy TMH