Is exempting petrol from the carbon tax such a big problem?Posted: July 4, 2011
Given Australia already has a large excise tax on petrol, exempting automotive fuel bought by “families, tradies and small businesses” from the Gillard Government’s carbon tax is not the disaster some would have us believe.
Australia has a minority government so compromise was inevitable – two of the independents, Tony Windsor and Rob Oakeshott, wouldn’t be party to any increase in the price of fuel for their country constituents. It was either put a price on most but not all sources of greenhouse gas, or have the whole idea shot down yet again.
The exemption is expected to apply to petrol, diesel and LPG. Were the tax to apply to petrol, the impact would be modest – a $25/tonne tax is generally estimated to increase the price at the pump by around $0.06 per litre. The CSIRO calculates that even a $40/tonne tax would only raise the price of petrol by about ten cents per litre.
These amounts are much less than motorists already pay via the $0.38 per litre excise tax on petrol and diesel (there’s no excise on LPG). While it might have a “sin tax” dimension in relation to cigarettes and alcohol, in the case of automotive fuel the excise is not aimed at making motorists pay for roads or for the external costs of petrol – it’s just a convenient way of raising revenue (although it’s not as good as it used to be since John Howard abolished automatic indexation of the price in 2001).
Nevertheless the excise tax is a serious deterrent to driving. The Productivity Commission’s recent report, Carbon emission policies in key economies, calculates that “in 2009-10, fuel taxes reduced emissions from road transport by 8 to 23 percent in Australia at an average cost of $57-$59 per tonne of CO2-e”. Although not put in place with the purpose of abating emissions, the excise already has a much more significant effect on driving than any level of carbon price that’s been seriously touted in the political debate. Based on the CSIRO’s estimates, it could be argued its effect is equivalent to a carbon tax of over $100 per tonne (the relationship isn’t linear – there’re diminishing returns from a marginal increase as the fuel tax gets bigger).
Thus there’s a good argument that automotive fuel is one of the few areas where consumers already pay a high level of tax over and above the GST. Indeed, if it were so minded, the Government could’ve imposed the new carbon tax on petrol and diesel and simply provided an equal offsetting reduction in the level of the existing fuel excise tax. There wouldn’t be a lot of political or economic sense in that, but it illustrates the principle.
Somehow the Government still has to meet the bipartisan commitment to achieve a 5% reduction in emissions by 2020. Given the Prime Minister’s careful wording of who is exempt, it seems that business might have to carry a heavier burden, perhaps via reductions in the fuel tax rebate. Thus some proportion of the reduction in petrol consumption avoided by “families, tradies and small business” is still likely to be made, albeit by business (who of course will seek to pass most or all of the costs on to consumers).
The other thing to note is that while transport is an important source of carbon emissions, it is not the main game. As I’ve noted before, the transport sector accounts for only a minority of all GHG emissions. This point is reinforced by the Productivity Commission, whose research indicates the significant role of electricity generation in Australia in GHG production (see exhibit). The widely expected acceleration in the uptake of plug-in cars is another reason to make sure, in an environment where both funds and political capital are limited, that the primary focus of policy is on making electricity clean.
Finally, I think there’s some solace in the fact external forces are continuing to drive up the price of oil – principally demand from China and constraints on supply – thereby encouraging motorists to seek substitutes, independent of any policy choices the Government might make in relation to automotive fuel and the carbon tax.