Photo by Nicholas Doherty on Unsplash

After its 2019 election loss, the Australian Labor Party is considering dropping carbon pricing from its climate policy. In shaping its new policy, Labor should look to the success of the Government of the United Kingdom (UK) in reducing emissions, down over 42 per cent from 1990 levels and now at 1890 levels. A key component of the UK’s climate policy is its climate change levy. Although arguably a ‘tax’, features of an Australian climate change levy could make it more palatable to business and voters. Chief of these would be a commitment to return all revenue raised to business in the form of business tax cuts.

The need for a new strategy

Following Labor’s election loss, Opposition environment spokesman Tony Burke foreshadowed a policy reconsideration that might see the party abandon carbon pricing as the centrepiece of its climate change policy. Burke rationalised that the voters had again rejected a market pricing mechanism, suggesting that the very flexibility that such a measure offered made it difficult to cost–thus opening it to attack by Labor’s political opponents. This was notwithstanding that the vast majority of economists supported carbon pricing as the most effective way to tackle climate change, with business particularly attracted to a market mechanism.

The alternative to carbon pricing is direct regulation of emissions. While all jurisdictions employ regulatory measures to tackle some sources of emissions, these by their nature are ad hoc and limited in effect. To encourage economy- or even sector-wide change, pricing mechanisms that incentivise transformative behaviour are viewed as more effective.

The two primary ways to price carbon are a carbon tax or some form of emissions trading scheme. The former has the attraction of simplicity but does require the government to determine the price, a highly problematic activity in the face of opposing interest groups. Although it is argued that an emissions trading scheme leaves the pricing to the market, in reality the features of the mechanism can largely influence the price, so government remains a slave to interest groups. Such a measure does, however, present business with flexibility: depending on their circumstances, they can either reduce emissions or continue to emit and purchase permits. The theory is that this will lead to emission reductions that are the most cost effective.

Furthermore, conventional wisdom is that, notwithstanding its complexity, a market mechanism is easier to sell to voters than a policy containing the politically poisonous term ‘tax’. Hence, the Liberal-National Coalition’s relentless claims during the 2013 election campaign that Gillard had broken her promise not to implement a carbon tax when she introduced an emissions trading scheme with an interim fixed price, on the basis that this really amounted to a tax. If the 2019 election campaign is anything to go by, it does not matter in any event if the proposal is a market mechanism, as it will still be branded a tax by your political foes. Try telling Labor that an emissions trading scheme is more politically acceptable than a carbon tax.

Burke did express his frustrations with business, who have been calling for climate policy certainly for years and for whom a market mechanism is tailored, for not coming out during the election campaign to support Labor. To be fair, some support was expressed, if not muted possibly by the tax cut sweeteners on offer if the Coaltion was to be re-elected.

So, if carbon pricing is a superior policy response than regulation but a market mechanism is an impossible sell and the concept of a new “tax” is political poison, then what might be the future for Labor’s climate change policy?

Look to the United Kingdom

Burke foreshadows that one option might be to borrow from the United States Democrats Green New Deal. While this model might be laudable, it is more aspirational rather than a specific plan.

Burke is right to look at what is happening overseas, as developments in some countries are quite exciting. Remember the argument back in 2013 that Australia should not lead the fight against climate change, but rather wait for other countries to act. If that argument was bunkum back then, it certainly has no validity now.

One country worth looking at is the United Kingdom. Having passed the Climate Change Act back in 2008, which legislated for a reduction in emissions (maybe Australia was not leading the way in 2013 after all), some extraordinary headlines are now surfacing: “UK electricity generation in 2018 falls to lowest level since 1994”; “Coal’s rapid decline drives carbon emissions down to 1890 levels”; “UK has first coal-free week for a century”; “UK Parliament declares climate change emergency”; “Theresa May commits to net zero UK carbon emissions by 2050.”.

Even the iconic London cab is turning electric as part of UK’s drive to reduce emissions.
(Photo by Justin Dabner)

The UK Government has a reduction target of 80 per cent compared to 1990 levels by 2050. By 2016, the UK’s emissions were already down 42 per cent below 1990 levels, notwithstanding that the economy had grown by two-thirds over the same period. Government initiatives focused on encouraging renewable energy generation (mainly through using competitive long-term contracts) and placing a price on carbon (including implementing a carbon floor price to support the European Union’s emissions trading scheme). The promotion of energy efficient buildings, electric cars, bio-energy and wind energy have also been significant policies.

Although no country has a perfect record, and detractors will always be able to point to some aberrations (the UK still produces 21 per cent of its power from nuclear sources), there must be lessons for Australia in this success.

The Climate Change Levy

One policy measure that stands out is the climate change levy, aimed at providing business with an incentive to reduce energy use. That is, ‘levy’ not ‘tax’.

The UK climate change levy dates from 2001 and has gradually been extended since its inception. It is collected by energy suppliers but paid by industrial, commercial and public service energy users (including agriculture), with households and transport exempt. It is imposed on supplies of electricity, gas and certain solid fuels (not oil-based fuels) with the rates differing depending on the commodity–the lowest rate is imposed on natural gas. There are varying percentage discounts for energy intensive industries that have negotiated measures to reduce energy consumption relative to a baseline (a climate change agreement). Prior to 2015, electricity from renewable resources was exempt.

Hybrid, fully electric and hydrogen powered buses on London’s streets.
(Photo by Justin Dabner)

The levy appears on electricity and other fuel bills. Importantly, revenue is (or has been) returned to industry in the form of reduced labour social security contributions.

Notably, the UK is currently phasing out its cap-and-trade scheme in operation since 2010, known as the CRC energy efficiency scheme, in favour of increasing the climate change levy. Furthermore, the price floor that the UK introduced in 2013 (and doubled in 2015) for UK-based facilities covered by the European Union’s emissions trading scheme is imposed as an additional charge under the climate change levy.

It is not perfect, but it might pass the pub test

Could Labor be able to persuade Australian voters and business to support an Australian climate change levy?

The levy/tax distinction might have duped Australian voters in relation to Medicare, but it is unlikely to provide much of a smokescreen for Labor’s climate policy in an election campaign. However, the levy would have the advantage of being able to be easily explained and its cost to the economy more readily approximated. Most importantly, if it was coupled with an undertaking that all proceeds would be returned to business in the form of business tax cuts, this might derail any characterisation of the levy as a big new tax on business. Labor could sell the levy as simply changing the tax base towards imposing it on a ‘bad’ that business might be able to avoid by adopting energy efficient and emissions reducing strategies.

It would not be perfect or without its difficulties. Deficiencies identified in the UK’s climate change levy include that the negotiated agreements have been characterised by over-compliance (possibly reflecting generous baselines), that the levy is not related to the carbon content of fuels and is applied to downstream users, such that electricity generators have no incentive to switch to low-carbon fuels. It has been suggested that these features reflected the UK Labour party’s concern for its coal mining constituents, a concern most definitely (now) shared by its Australian counterpart.

Legislating a mechanism to fulfil the promise of returning revenue to business might also be problematic. Although a business tax reduction in the form of a company tax rate cut and tax offset for non-corporate businesses would be the simplest approach, these would be blunt measures. Determining the quantum of the tax reduction would require some heroic assumptions. The financial impact of a climate change levy on business might be easier to estimate than that of an emissions trading scheme, however, much like the superannuation guarantee levy, its success would be measured in the least amount being collected. A means to cater for the uncertainty in the amount of levy revenue raised, such as some form of adjustment mechanism or, even, deferral of the business tax reductions to the following fiscal year could be considered.

While lacking the refinements of a carbon tax, the climate change levy has one major advantage. It is a tried and tested contributor to the UK’s real success story. Those voices opposing a carbon price prophesise that it will doom the economy. But this has not been the UK experience, providing tangible evidence (not mere speculation) that such a measure can contribute to emissions reductions without savaging the economy.

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