New Australian Carbon Tax Offers Comprehensive Model for All

Last Sunday the Australian Prime Minister, Julia Gillard, announced a new a plan to tax carbon emissions from the country's 500 worst polluters. Starting next year, these companies will pay for each ton of carbon dioxide emitted, first through a fixed carbon tax and from 2015 via a carbon trading scheme. This plan came to the world after a heated debate and a fierce political battle that reminded many of the fight we had in the U.S. over climate regulation not so long ago. But although the Aussie battle is not over yet, it looks like the side favoring action against global warming is actually winning this time.

The plan introduced by Gillard is interesting not only because of its carbon regulation component (carbon tax transforming into a trading scheme), but also in the way it was structured to help selling it to the public and the business sector and defuse their resistance. This structure means of course the plan is full with compromises, but it also gives the plan a better chance to succeed and finally put a price tag on carbon emissions in Australia, the developed world's worst emitter per capita.

On the news conference last Sunday Prime Minister Julia Gillard said "As a nation, we need to put a price on carbon and create a clean energy future... This has been a difficult debate that has brought us to this moment. But we are here now and now is the time to get this done." And what a heated debate it was, with rallies for and against the tax and a coalition of grass-roots groups, big businesses and the conservative party that ran a loud and effective campaign against the tax. It even got to the point where Australian climate scientists received death threats, after the debate was escalated due to a TV ad with actress Cate Blanchett supporting the tax that got many Australians angry about it.

Gillard promised during her 2010 campaign that she would not seek a carbon tax and eventually had to reverse her position under pressure from the Green Party, one of the partners in her coalition. The political risks of taking this step were obvious to her, which was one of the reasons why she was seeking a more comprehensive package with compensation to both the public and the business sector. Gillard understood that at least for now the plan will be judged more by the burden it places on households and businesses and less by the carbon reductions it will generate (the plan’s goal is 5% reduction by 2020). The challenge was to find the right compromise that would keep the majority happy and Gillard in place.

It actually looks like Gillard found such a path. First let’s look at it from businesses’ point of view. The 500 worst polluters from the stationary energy, transport and the industrial processes sectors (the agriculture sector is being exempt) will start paying on July 2012 A$23 ($24.70) a metric ton for their carbon emissions. The tax will rise by 2.5 percent for three years. Then the mechanism would change into a trading scheme, with a price set by the market, although there will be at least for three years a floor price and an upper limit set by the government to avoid price shocks.

At the same time the government provides businesses with immediate relief to help them adjust to the new tax. First, free carbon permits covering 94.5 percent of carbon costs would be provided for companies in the most emissions-intensive sectors, such as aluminum and steel, while moderate emitting sectors would get 66 percent of permits for free. The government will also set up a $10 billion fund to invest in clean and renewable energy, helping businesses seeking funds to transform to clean energy and increase their energy efficiency. In addition there will be aid packages to specific industries, like $1.26 billion for the coal industry to help protect jobs or $1.1 billion for the manufacturing industry.

The idea behind these measures was to soften the impact of the tax and address some of the concerns brought up during the debate, such as the competitiveness of Australian companies. Some companies responded positively to the offered plan – Bluescope Steel managing director Paul O'Malley said the Government’s package responded to the potential costs the steelmakers could incur of the next four years as a result of the carbon tax. Still, not everyone was happy. For example, the managing director in Australia of the mining giant Rio Tinto called the plan "an unfair tax on Australian exporters.”

Another important part of Gillard’s plan was the compensation to Australian households. According to estimates, the average Australian household will see its bills increase by around A$10 ($10.74) a week. To offset the increase Gillard promised more than half of the expected $24.5 billion to be raised from the scheme revenues over the next three years will go to households in the form of tax cuts and increases in allowances, payments and benefits. She estimated that two-thirds of all households would receive enough assistance to cover the entire carbon price impact.

It will be interesting to see if this is going to work. 60 percent of the public still oppose to the carbon tax, as well as many businesses and significant political powers. Nevertheless the plan seems to be balanced and reasonable, providing enough short-term compensation to sweeten the new tax. If this model will succeed, maybe the U.S. and other countries should be taking a better look down under to learn from the Aussies how to fight global warming.

Image credit: Alex Schlotzer, Flickr Creative Commons

Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is also an adjunct professor in the University of Delaware’s Alfred Lerner College of Business and Economics.