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October 17, 2011 / Mike Piskur

Australia’s Progressive Carbon Tax

The previous post about carbon taxes discussed the importance of creating a dividend or payment system to ensure that the tax would be revenue-neutral and progressive. Australia’s recently approved carbon tax includes important safeguards that will protect low- and middle-income families from price increases. In a comprehensive post about the tax, Andrew Revkin of Dot Earth linked to the Australian government’s Clean Energy Future site, which offers this explanation:

  • The Government will deliver household assistance ensuring millions of households are better off.
  • There will be tax cuts, higher Family Tax Benefit and increases in pensions and allowances.
  • The tax-free threshold will be more than trebled to $18,200 in 2012-13. Together with $445 of low-income tax offset, this means people on annual incomes of $20,542 will pay no net tax.
  • Household assistance for pensions, allowances and family benefits will be permanent and will keep pace with the cost of living, automatically rising in line with the consumer price index (CPI).
  • Tax cuts will increase over time with a second round of tax cuts in 2015-16 that will further raise the tax-free threshold to $19,400, matching the impact of the carbon price to 2020.
  • These two rounds of major tax reform will free over 1 million people from having to lodge a tax return and boost the returns to work.

Families making less than $20,000 per year pay no net taxes, resulting in a million people who no longer have to pay a tax return. A carbon tax is a market solution to a problem of market failure: it internalizes costs that are external to prices that affect behavior.  When done correctly, it reduces carbon emissions while reducing taxes on the poor. As Tim Worstall wrote in Forbes:

All of which is just excellent and what most economists have been saying everyone should be doing for the past decade or more. The problem this reveals of course is that only one country has in fact done what economists have been recommending.

This tax seems likely to become wildly popular and difficult to repeal, which is a why the anti-carbon crowd was so vehement in opposing it. While the carbon tax alone won’t end Australia’s dependence on fossil fuels or solve climate change, it will make progress toward both goals. When will these gains become apparent, and when will the politic landscape shift enough to place a carbon tax even within the realm of possibility in the United States? Here’s Revkin quoting Steven Sherwood, professor and co-director of the Climate Change Research Center at the University of New South Wales:

If I were trying to pass a carbon price, I would absolutely make it revenue-neutral and sell it from the get-go as a tax reform (replacing an existing tax with a more beneficial carbon-based tax of the same size). This nips in the bud the “big new tax” argument that would otherwise kill any carbon price plan in the US as it so nearly has even here. I would fund new energy development programs, if any, by separate legislation.

The last decade brought major swings toward both ends of the American political spectrum, but the issue of climate change has mostly lost ground in that time. Both nations suffered from droughts and floods in 2011, however those problems were far more acute in Australia than in the US. It’s tempting to be optimistic and believe that an American carbon tax is possible in the foreseeable future, but odds are good that we don’t get serious about reducing greenhouse gas emissions until every major city is rationing water and agricultural outputs take a major hit. And even then, a certain percentage of the population will argue that everything is fine and nothing should change.

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