Australia Under New Management: Abbott’s Promise to Abolish Carbon Tax, What Does it Mean and Why Greens Will Turn Red

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By Sunny Peter | September 10, 2013 4:55 PM EST

With victory in his pocket and claiming a mandate to act, Prime Minister-elect Tony Abbott has vowed to immediately scrap the hated tax on carbon polluters, popularly called Carbon Tax. He is reported to have instructed his team on Sunday to begin drafting legislation to abolish the carbon-pricing scheme. Meanwhile, businesses are warning that the economy will face a multi-billion-dollar drag, if the opposition Labor and the Greens succeed in thwarting Abbott's plans.

Taxing Carbon was one of most significant legislative achievements of the Julia Gillard government. The legislation was the result of several years of debate and discussion. The approach was to introduce the so-called carbon tax, which would later shift to an emissions trading scheme. For Labor, the importance of this piece of legislation was that it, addressed a major policy concern raised by the Greens and independent MPs, on whose support the government depended.

Considered as one of the most radical taxes to punish polluting companies, the Carbon Tax imposed a flat charge of $23 per tonne of emissions levied on top polluters. The objective was to change patterns of energy use and encourage investment in clean energy sources such as solar, gas and wind. However, beyond the corridors of legislature, businesses and the public in general seemed resentful.

After much politicking, only the top 500 polluters, half the number originally planned, came under the tax. Studies say, in total, 0.02 per cent of Australia's 3 million businesses will be taxed. This is partly due to the government's decision to exclude fuel from the scheme. Fuel suppliers and distributors and companies emitting synthetic greenhouse gases, including the refrigeration and air-conditioning industries, are exempted. Under the proposal, in 2015, the tax was to be replaced with a market-driven system called Emission Trading Scheme.

To offset the impact on the community, the government promised that 90 per cent of households will be partly compensated and 70 per cent fully compensated either through tax cuts or increases to family payments. Pensioners receive a rise, in line with cost of living increases. Money is allocated to high-polluting industries - such as coal - to help them move to cleaner energy practices.

On the other hand, Liberal-National Coalition's plan says it will replace Carbon Tax with a $10 billion direct action plan. It would clean up the dirtiest power stations; provide financial incentives to the ''big polluters''; and invest in reforestation programmes and solar and other renewable energy methods.

Greens and pressure groups supporting the implementation of Carbon Tax argue that, when buying products that rely on carbon-intensive materials or manufacturing processes, the price consumers pay, does not represent the cost incurred by the environment.

They point out that with a price on carbon, this equation would change. Businesses will be forced to factor in the cost of carbon pollution into its final price of their products. Thus products produced through polluting processes will become more expensive, thereby making it possible for other products produced through cleaner processes to compete on price.

They agree that the price of certain goods that are reliant on carbon pollution for their production will go up. However, they argue that majority of Australians will be compensated for this cost, and this cost will be relatively small for most items.

The argument sounds theoretically sound, but is bad theory for a political decision.

If products made from pollution-intensive processes are made more expensive, they will turn to be less competitive. Companies will be forced to look at technologies to reduce their pollution footprint in order to lower their costs.

However, the argument discounts the fact that companies have invested in existing technologies and processes and will seek to maximise profits. Shifting to new technology required investments and carbon reducing mechanisms is a long-drawn process. Till then, the burden of tax will be passed on the consumers. High cost does mean shrinking markets, but it also means higher cost of living, loss of jobs and opportunities.

As public anger and opposition against the carbon taxing model grew, it came as a political advantage for Tony Abbott and his Liberal-National Coalition. Saturday's election results demonstrate the capitalisation of this advantage. However, the going is not easy for Abbott. Labor and the Greens have threatened to block the plan to abolish the Carbon Tax in the current Senate.

That leaves Abbott with two options. Wait till the newly elected senators take office which will only be in July next year, or otherwise call a double-dissolution election, which means dissolving both houses of parliament and calling for full elections to the House of Representatives and the Senate. With both the options not seeming plausible at the moment, the coming days will reveal what Abbott had up his sleeves, when he asked his team to draft a legislation to abolish Carbon Tax.

Reports suggest that the Abbott may likely find enough support from new and continuing senators, next July, to repeal both the carbon and mining taxes, but may find it more difficult to secure the numbers to implement his pet direct-action climate change response. Meanwhile, industry bodies do not want the government to wait till next July. They have appealed to the opposition to respect the Coalition's mandate to scrap the carbon pricing arrangements.

They fear that if the carbon tax repeal is postponed until the new Senate, it would only take place in mid-2015 because of the complexity of a repeal in the middle of a "compliance year," and prices would have already been set by then. Media report quoted Energy Supply Association of Australia estimates that business would pay $4.6 billion for the carbon price in 2013-14, and $5.2bn in 2014-15, after allowing for the free permits for the electricity sector and energy-intensive, trade-exposed businesses that Labor's carbon price provides as partial compensation. Of that, $4bn in 2014-15 will be paid by the stationary energy sector -- mostly power generators -- with the costs passed on through higher energy costs to households and businesses.

The report also quotes, Minerals Council of Australia chief executive Mitch Hooke saying the carbon tax was costing the economy more than $100 million a week and that the mining tax had undermined confidence. "This is a deadweight cost that goes to the bottom line of companies that our competitors do not face," Hooke said. "The impact of these unsustainable costs is particularly severe for the coal sector, causing projects to be cut, job losses and carbon leakage."

In its costing, the Liberal-National Coalition estimates have projected that by abolishing the Carbon Tax, the government stands to lose $2.2bn in revenue in 2014-15. However, this loss will be offset by $2.3bn in savings by cutting business compensation measures, energy market compensation and other measures, and dumping bureaucracies. On the campaign trail, Abbott forcefully asked voters for a mandate to scrap the hated Carbon Tax. The voters have had their say, now it is for Abbott to lead the way. The coming days will tell, how he intends to do that.

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