Thomas White Global Investing
Green Reports

August 17, 2011

The Green Report


Australia’s Carbon Tax: Heating up

Australia’s Carbon Tax:  Heating up

Australia plans to levy an emission tax on some of the country’s largest carbon emitters. Many industries such as steel making, glass manufacturing, and coal mining along with utilities producing electricity will be taxed under the scheme.

 

Two years back anyone flying lowly in a helicopter over the plains of Queensland, a state in Eastern Australia, would have called the place a dry desert. The sun-baked rocks, the parched land, and the reddened surface that had been starved of its share of rains were there for everyone to see. The arid place had been witnessing a drought for more than twelve years.

In the February of 2009, the thirsty earth could take no more, and eventually unleashed a hellfire. That fire rose to 100 meters into the sky, spread over millions of acres, razed the remaining sparse vegetation and killed more than 170 people. Kangaroos, which ordinarily hopped over the lands, were now forced by the fire to climb trees.

Australians called the weekend in which the fire started the “Black Saturday”.

Exactly two years later, in February 2011, Australians witnessed another Black Saturday. Only this time it was from torrential rains. The downpour that many termed as “biblical” quickly filled the nooks and corners of the country, destroying houses and invading buildings. In cities like Brisbane, houses were turned into islands.

Some call both these happenings a misfortune. But such dramatic changes in the weather pattern have led Australians to believe that climate change is a major reason behind the calamities. Many climatologists have also said that Australia is one of the most vulnerable countries to change in climate patterns. Consequently, in order to slowdown the pace of the changing climate and mitigate such natural disasters, Australia is planning to cut its emissions dramatically through some serious measures. One such measure is the introduction of a carbon tax.

By putting a price on carbon produced by Australians, the country’s present Labor Party-led government thinks it can reduce the amount of carbon emitted by the country. Australia is one of the largest emitters of carbon dioxide on a per capita basis, primarily because the country gets almost 80% of its electricity by burning coal.


Australia’s ruling Labor Party has come up with a carbon tax.
According to the tax scheme, the country’s largest contributors of
carbon emissions will have to pay nearly A$23 for every
ton of carbon emitted starting from July 2012.

In July 2011, Australia’s Prime Minister Julia Gillard announced the carbon tax. According to the tax scheme, some of the country’s largest contributors of carbon emissions will have to pay nearly A$23 for every ton of carbon emitted starting from July 2012. And for the next three years through 2015, the price of carbon per ton will rise by 2.5% plus inflation. After 2015, the price to emit a carbon will be determined by the market as companies seek to buy and sell carbon permits. Her plan will identify and tax nearly 500 companies that produce at least 25,000 tons of carbon dioxide per year. Ms. Gillard says that the proposed carbon tax will help shave off nearly 160 million tons that Australia will emit by 2020. In her words this is “the equivalent of taking over 45 million cars off the road.”

By legislating a carbon tax Australia will join the European Union and New Zealand that have already enacted a carbon tax.

Many emission-intensive industries such as aluminum smelting, glass manufacturing, steel making and paper manufacturing will now come under the tax. But the maximum effect of the tax will be borne by the country’s mining sector that extracts coal, and the power sector that burns the coal to produce power.

But it appears that the passage of the carbon tax in the country’s parliament will not be easy; not the least because the initiative has been met with vehement opposition from some quarters.

Understandably, the industries such as mining and exploration that will be negatively impacted by the new carbon tax are against it. They point out that among the developed world, Australia had a relatively shallow downturn following the global financial crisis of 2008, primarily because natural resources industries such as coal mining provided jobs to thousands of workers.

They reason that taxing such an important industry will strangle further investments in the segment and stifle the growth of the industry. Many industrial lobbies such as the Minerals Council of Australia have openly criticized the tax. The Australian Coal Association has been airing television advertisements against the carbon tax. One of their contentions is that if Australian coal becomes more expensive due to the tax, consumers like India and China will simply move to other coal-supplying nations such as Indonesia where there is no tax on carbon. Mining company Anglo American Plc has said that the carbon tax will put future coal investments in jeopardy and Australia now risks losing nearly 40,000 new jobs.

Another problem cited is the effect the carbon tax will have on Australia’s own citizens. The Australian government already plans to close some of the carbon dioxide-fuming utilities that have been producing electricity over the past several decades. With this, electricity bills will most likely go up for ordinary consumers. Even Ms. Gillard’s government admits as much. Gilliard’s administration has said that household expenditures, including food costs, could roughly jump by 1% due to the carbon tax on power producers. Many of Australia’s airline companies such as Qantas have said that some of the price-rises resulting from the tax will eventually be passed on to consumers.

Mindful of such adverse effects and the opposition to the green initiative, Ms. Gillard has sugar-coated her carbon tax pill heavily. To offset the increased burden on households, the government has promised tax cuts for low and middle-income households. It has also announced that the government will bear most of the increases in electricity bills for many households due to the carbon tax. To counter criticism from businesses, Ms. Gillard’s government plans to provide nearly A$9.2 billion in aid over the next three years. Nearly A$1.3 billion will go to the coal industry alone in helping them cope with the tax over the next six years. The government has also set up the Clean Energy Finance Corporation, which will fund initiatives dealing with renewable energy.

Still, the tax is a hard-sell for Ms. Gillard. Currently, opinion polls indicate that over 60% of the country’s citizens are against the tax primarily due to issues relating to job creation. What’s more, the Labor Party seems to have timed the announcement of the tax poorly. Although the initiative was in the making for more than a decade, Ms. Gillard announced the plan in early May, when many of the country’s manufacturing industries were shedding jobs by the hundreds due to the burden of an unusually strong Australian dollar.

The plan will come for approval in the Australian Parliament later this year. Although Ms. Gillard has been assured the strong support of one of the partners of her current coalition government, The Greens, she will have a tough time defending the plan to the country’s voters.

Meanwhile, the Liberal Party, the country’s main opposition party led by its mercurial leader Tony Abbott, is turning the heat on Ms. Gillard to roll back the carbon tax. Mr. Abbott has said that the carbon tax will serve little in combating emissions, and claims his plans to address the emissions by a phased mechanism will be more effective. Mr. Abbott, who is largely viewed as business-friendly, has said that the 2013 Australian elections can be viewed as a “referendum on carbon tax”, and if elected, he will repeal the tax.

In any case, just like Australia’s parched lands, the politics of carbon in the country is heating up. And the more the country’s politicians wrangle, then perhaps the more the Australia’s native kangaroos will be forced to spend their time in the trees rather than freely on the land.

Image Credit: Monika Thorpe on Flickr under a Creative Commons license

 

 


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