Black Hole in Carbon Compensation

Henry Ergas gives the lie to claims of permanent compensation to households because much of the money raised will go overseas on carbon credits , not including the billions to be spent abroad buying useless solar and wind generation hardware to keep the Greens happy. It is about time that the Coalition jumped off the AGW bandwagon so they can properly fight this tax. A simple change of keeping their existing policy but delaying any substantive action until the US and China come on board would work politically.

THE government's claim that it will provide permanent compensation to 70 per cent of households for its carbon tax is based on a false premise: that the Australian government will receive the revenues from the tax and of permit sales in the subsequent emissions trading scheme.

But Treasury's modelling of the carbon pollution reduction scheme found that by 2050 nearly 50 per cent of permits would be imported, even with the 2020 target set at a 5 per cent reduction in emissions below 2000 levels. Were the target a 25 to 30 per cent fall in emissions, the share of imported permits would exceed 60 per cent.

When permits are bought overseas, domestic prices still rise, as the purchases add to Australian costs of production.

With the carbon tax increasing at 4 per cent a year in real terms, ensuring households are no worse off requires corresponding increases in commonwealth outlays. But with foreign sellers of permits getting more and more of the revenue, there is a mounting gap between the scheme's costs and the government's income.

The sums involved are hardly trivial. Even in the 5 per cent reduction scenario, by 2050, annual imports of permits amount to $23 billion at today's prices; that is, each man, woman and child in this country will be transferring $600 a year to foreign owners of permits. Whatever one may think of those transfers, they mean the government's compensation promise is vastly underfunded.

Moreover, that funding gap worsens steadily over time as the number of permits shrinks and the share of them purchased overseas rises. And the more successful the scheme is in reducing emissions, the sooner the problems of funding compensation will emerge.

Treasury's CPRS modelling assumed the rest of the world, including our major competitors, implemented a similar scheme. That made possible large-scale international trade in permits, lowering the cost of emissions reduction. Even then, the government's promise could not be funded.

However, it is now clear that there is little prospect, if any, of global agreement, and that our major competitors have no intention of undermining their resource exports. So we will be going it alone. And that makes it even less likely the government can meet its promise.