Is exempting petrol from the carbon tax such a big problem?

Is transport the main game? Source: Productivity Commission: Carbon emission policies in key economies

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.

9 Comments on “Is exempting petrol from the carbon tax such a big problem?”

  1. Peter Hill says:

    Yes, exempting fossil carbonaceous (i.e. petroleum) fuels from a carbon tax is just plain dumb. Note the title of the tax contains the word “carbon”, in reference to carbonaceous emissions to Earth’s atmosphere. The government’s carbon “pricing” strategy is a joke and is just a backdoor attempt at tax-heisting. The flaws and lack of credibility in the government’s approach so far only serves to antagonise people, thence make it harder in the future to put forward realistic carbon abatement proposals that have public costs but would nevertheless be realistic and credible. It’s the triumph of bonehead politics over good technical and management strategy in government. My business contacts in Asia politely yet increasingly view Australia with incredulity and see increasing sovereign risk in doing business within Australian jurisdiction.

    Economist Geoff Carmody (former federal Treasury executive and Access Economics founder and partner) points the way to a realistic and feasible basic carbon tax strategy with his consumption-based carbon tax proposal. Refer to his presentation in Internet cyberspace at “Carmody_presentation_20090814” for his paper ‘Reducing emissions contributions to global warming: should policies actually work?’.

  2. John Bates says:

    Probably the wrong question. Perhaps a more relevant question is; will the proposed ‘carbon’ tax produce/lead to the target reduction in National GHG emissions? Furthermore, even if we assume it will achieve that target, we are left with a bigger question; will this make a signifiacnt difference to AGW over time? I think you have missed the big issues.

    Also I don’t think your pie chart fairly depicts the current situation with GHG emissions. How can it when ‘landuse, land-use change and forestry’ are omitted? That would be what, around 20% plus of GHG emissions?

    Political compromise may in your view have been ‘inevitable’ , but it does not mean the community ought to accept the consequences of it. Poor public policy is just that. It ought never be tolerated and certainly not merely becasue all our policticians lack the integrity and courage to do their best by the country they have been electd to lead. I concur with Peter Hill.

    • Alan Davies says:

      There’s no such thing as the ‘right’ or ‘wrong’ question, that’s subjective. I just didn’t happen to address the question you’re interested in. Others however may be interested in my question, even if it’s not the ‘bigger’ question.

      That’s not my chart. It was prepared by the Productivity Commission from data in the Dept of Climate Change and Energy Efficiency’s National Greenhouse Gas Inventory. Data on those areas is not collected for the Inventory.

      Re your third point, I take the view that reality can’t be ignored.

      • John Bates says:

        Yes, speaking generally there is no such thing as a ‘wrong’ question. However, when looking at planning and development issues our questions define the problem set and determine what we focus on. In that context the questions we pose become very important. Some lead us to new knowledge and positive outcomes, others merely take us down blind alleys or off on tangents.
        I concede the chart is not “yours”, but you did choose to use it.
        As for ignoring reality, well Peter Hill also makes a point about the need to get the policy response right. The reality is that the social and economic consequences of the carbon policy choices we make now mean that politicians are unlikely to have the luxury of ‘fixing’ a bad policy later.

        • Alan Davies says:

          I think it’s easily forgotten that the Gillard Government relies on the support of the independents. I agree that governments shouldn’t be permitted to get away unnoticed with doing what’s politically expedient rather than what’s the sensible thing to do, but in this particular case the Gillard Government doesn’t have the power to do the sensible thing – it’s a minority government. It’s either a carbon tax that excludes petrol or no carbon tax at all (a choice we’ve confronted before, when the wrong decision was made – thank you Greens).

  3. alanjae says:

    Just a thought, but could excluding fuel from the carbon tax give the government enough political wiggle room to implement a higher per-tonne starting price?

  4. Brad Hall says:

    Any money raised by the carbon tax can’t buy the carbon out of the atmosphere.

    I think that what many forget is the purpose of a carbon tax is to provide an incentive towards using alternatives. The price of petrol is already high enough to stimulate R&D into alternatives. This is evident in the majority of car companies exploring electric cars. The price of carbon on electricity won’t send people back to petrol but rather stimulate research into alternative forms of electricity generation.

    • Daniel says:

      I think also, with the dollar being so high at the moment that has kept the price of petrol down. As the dollar goes down, petrol will go up in price, and I don’t think the government would have wanted to deal with the political ramifications of that (most people would just assume the rise was due to a carbon tax).

      But peak oil, potential drop in the dollar, and increasing demand area already putting upward pressure on petrol prices. This on it’s own will have a similar (possibly greater) impact at reducing consumption, and increasing investment in alterntatives as petrol.

  5. Geoff says:

    We would probably have a better balance in Australia if the price of petrol here was near the A$ equivalent of the price in England, Europe, etc
    … and if the Australian government/s used the extra revenue wisely.

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