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. Read the rest of this entry »


-Why should we “go it alone” on carbon?

600,000 years of CO2 - with music

I regularly hear the argument that there’s no point in Australia putting a price on carbon because we’re so small it will mean jack shit at an international level. We’ll suffer the pain, so the argument goes, for no gain.

Australia is one of the world’s highest emitters of greenhouse gases on a per capita basis, but because we’re small, we only account for around 1.8% of world emissions. By 2020, our emissions are supposed to be 5% below what they were in 2000 – if we were to achieve that target it would, in quantitative terms, amount to an extremely small reduction in total world emissions (although on current policy settings we’ll actually be 24% over the target!).

It’s commonly argued that we should therefore hold off until the big emitters like the US and China take parallel action.

There are a number of reasons for not accepting the “we can’t act alone” argument. Some argue that action now will give us an early start on sustainable industries; some that a carbon price could foster a culture that is more receptive to the wider idea of sustainability; and some that a carbon price is a more efficient way of addressing climate change than direct expenditure.

But there are two arguments for rejecting the “we shouldn’t go it alone” thesis that particularly resonate with me.

The first one is an unashamedly moral argument – I think we should clean up after ourselves as a simple principle of ethical responsibility. If we despoil the quality of the world’s environment we should fix up the damage we create, independent of what other nations do.  We should do the right thing.

The second reason is more instrumental. It’s in our interests to encourage the big emitters to take action because we all suffer from the build up of greenhouse gas. They’re hurting us so we should be prepared to accept some pain to try and make them change their ways. It’s worth it for us to show, by example, what needs to be done, how it can be done, and that some nations think it’s worth doing. In other words we’re not so much “going it alone” as “setting a good example”.

P.S. Here’s another version of the Time history of CO2 – it’s clearer, but no music.


Will a carbon tax double the price of petrol?

Possible future petrol prices under different oil market/carbon price scenarios (CSIRO)

Tony Abbott made a surprising claim on Sunday that a $40/tonne carbon tax would increase the retail price of electricity by 100%. Fortunately, John Quiggin has ‘done the maths’ on Abbott’s assertion and points out that it would result in a much lower increase in the retail price to households – around 20%.

So let’s look at the likely effect of a carbon tax on the price of petrol. This CSIRO report, Fuel for Thought, estimates that a $40/tonne emissions permit would only increase the retail price of petrol by 10 cents per litre. So the additional cost of the $23/tonne carbon price touted by the Greens would seem to be no more than the weekly fluctuations in price at my local servo!

That’s hardly a great big new tax. But what’s important from a policy perspective is that a price on carbon of this order isn’t really going to have a significant effect on what we drive and how we drive. Read the rest of this entry »