Sunday, July 10, 2011

Environmental Savior or Nothing More Than Tax Restructure?

At midday today the Prime Minister, flanked by the Treasurer and Climate Change Minister, conducted a press conference where details of the introduction of the Carbon Tax were announced. The main talking points at the press conference, and by the media on their websites, concentrated more on the income tax changes and how much taxpayers are going to get, rather than on how the carbon tax will actually allow Australia to reach its goal of carbon emissions reduction by 2020.

As far as small businesses and individuals are concerned, the key taxation points are:

An effective increase in the tax free threshhold to just over $20,000 from 1st July 2012. The change in the effective tax free threshhold since 2000/2001 has been created as a graph here, by Twitterer @MattCowgill.

Small businesses will be able to immediately write off plant and equipment purchases of up to $6,500. This has the potential impact of reducing income tax payable by many thousands of dollars.

Centrelink and Family Assistance Office recipients will get more.
  • Up to $338 extra per year for single pensioners and self-funded retirees, and up to $510 per year for pensioner couples combined.
  • Up to $110 per child for a family that receives Family Tax Benefit Part A.
  • Up to $69 extra for families that receive Family Tax Benefit Part B.
  • Up to $218 extra per year for single income support recipients and $390 per year for couples combined for people on allowances.
  • Up to $234 per year for single parents in addition to the increased family payments they receive.
(information courtesy of ABCOnline)

There will be an eventual and gradual reduction in Fuel Tax Credits claimed by eligible businesses over the next couple of years.  It will be interesting to see what the exemptions will be here as currently these credits are claimable by primary producers, owners of trucks with carrying capacity of greater that 4.5 tonnes and mining companies.

If you are interested in finding out how much money you will be entitled to under these announcements there has been a handy calculator on a newly created website,

Now this money is being provided to the Australian public because the 500 largest polluters in the Australia will be paying a carbon tax of $23 per tonne, from 1st July 2012. This tax will be replaced by an emissions trading scheme in a few years time.

The economic modelling of the carbon tax is actually quite complex. From a simplistic point of vew here is what will happen:
  •  The carbon tax will mean that prices will go up in a number of key areas, such as food, electricity, consumer goods and transport (though petrol itself is not subject to carbon tax). The expected increase in prices is shown in the following ABS graph (The key thing to note here is that the anticipated CPI increase is expected to be much lower than the increase in prices caused by the introduction of the GST):
Taken from Peter Martin's blog -
  • The tax cuts and Centrelink payments have been announced to compensate the majority of people from the effects of this increase in prices. This will be paid for by the introduction of a carbon tax.

  • For the 500 companies paying the carbon tax they will have an economic incentive to become more efficient emitters of carbon so that their carbon tax payable will reduce over time. And it is this point that is the key to the expected reduction of the carbon emissions.

Now the details of the economic modelling from Treasury can be found here. There is lots of detail which will no doubt will be analysed and pulled apart by economic analysts and expert commentators over the weeks and months ahead.

Now I have sat through and watched the press conferences of the Government, the Greens, the Independents (well two of them, anyway), and finally the Opposition.  Here are my views:

There has to be some discussion as to how much of the government's announcement today is about income tax reform, as opposed to the reduction of carbon emissions. In particular a point was made by Greg Hunt (opposition environment spokesman) that Australia is seeking to reduce carbon emissions by 160 million tonnes and only 60 million tonnes will be reduced through the measures announced today. That other 100 million tonnes will come from ...?

90% of Australians will not be worse off, and to be frank the remaining 10% will only be worse off by a little bit. How does this provide an incentive to make the average Australian change their energy use to assist in overall carbon emissions? It doesn't. The announcements today are designed to only change the attitudes of the country's top polluters. If the government is serious about carbon emission reduction there will need to be more announcement in the future that will either provide additional incentives for energy efficiency or disincentives for maintaining the status quo. Especially when you consider that the three tiers of government in Australia would have to, collectively, be one of the top carbon emitters in the country.

It sounds as though this is a done deal as the Government has the support that is required to get these measures through both houses of parliament. That means that the Abbott and Co's bellyaching and additional photo opportunities that will be reported on by the media will ultimately be a waste of everyone's time. By refusing to take part in the multiparty taskforce on climate change, the opposition have effectively been sidelined from the policy discussions. In the end, it would have been better for Tony Abbott's position for him to have been involved from the inside at the start, rather than the petulant displays we have seen  (and unfortunately we will continue to see).  A colleague of mine earlier this week had stated that the Opposition's main job is to oppose. I disagree with that statement and am sure that I am not the only one in this country that is sick to death of the combatative nature of politics here. I think a better outcome would have been achieved for Australia if the LibNats were actively involved in these negotiations.

The Opposition may need to go back to the drawing board to rework their Climate Change policy. There doesn't appear to be any support for their direct action model, as it will be costly and lacks economic credibility. It's easy to oppose. It's harder to come up with a good alternative plan.

The announcements today weren't budget neutral. What I mean there is that the carbon tax will not fully cover all the spending measures and tax cuts announced this morning. This has to mean that there will added difficulties in the Government attempting to balance the budget by 2013 (which, by the way, is becoming a pointless exercise. Why keep saying that the budget will be in the black by 2013. Any credibility that the Government still has will be destroyed when a budget backflip is announced in May next year).

Ultimately this is a modest attempt at tackling the climate change issues intertwined with some income tax reform. Whilst the policies have now been articulated it is up to Gillard and Co to successfully promote these policies to the general public. Judging on their performances today they will do OK. Whether this will be enough to combat the negativitiy of the Opposition and some of the more poorly informed media commentators will be another matter.

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