The Superpower Institute put forward two new policies — a Polluter Pays Levy (PPL) and a Fair Share Levy (FSL) — because we believe they are the most efficient way to reduce emissions, strengthen the budget and put Australia on the strongest economic footing.
It seems almost all economists and public policy experts agree. There is little debate that pricing pollution is the most efficient way to reduce it, or that taxing economic rents from the gas industry is rational and fair. Professor Frank Jotzo, in this publication, described our proposals as “simple, elegant and effective.”
But despite this near consensus, there is sometimes a divergence in views about the preferred approach to climate policy. This mainly centres on what is ‘politically possible’ with some voices gravitating to politically safe, incremental changes that are attractive because they seem within reach. The problem with inferior policies is that they yield inferior outcomes.
At current rates of progress, incremental change will not see Australia meet its emissions targets. Nor will it repair a federal budget already under long-term structural strain. Policies that manage prices by shifting costs onto taxpayers or consumers may feel politically safer, but they deepen the fiscal problem rather than solving it and they cause resentment.
The Safeguard Mechanism and Capacity Investment Scheme are the principal policy levers we currently have for decarbonising. To be clear, these policies were important to maintain some forward momentum post-repeal of the carbon price in 2014. But progress under these policies has been unacceptably slow and exposes taxpayers and consumers, rather than polluters, to the costs of progress.
The PPL addresses these shortcomings head-on by placing the costs of pollution upstream, on gas and coal producers, as well as on fossil fuel imports.
Our work shows the material benefits a PPL would deliver. It would result in an additional 100 million tonnes of carbon emissions abated each year after a decade of operation, and more than double total emission reductions within those first ten years. It would generate an average of more than $22 billion in revenue per year.
Would a carbon levy delay electrification?
What about claims that the PPL will introduce friction to progress on electrification? We share the view that electrification is an efficient way to reduce emissions and drive efficiency in our energy system. But the PPL should strengthen incentives for electrification rather than slow them down.
To start, let’s be clear on how the PPL differs from the Safeguard Mechanism, and how it does not.
Our report is upfront in acknowledging that the PPL will increase energy prices to some extent. Indeed a key feature of our package is that we explicitly, and generously, compensate households for any increases. We also provide an additional cash payment in acknowledgement of the barriers that some households face to electrification. This still leaves many billions of dollars of annual revenue that governments could put to electrification efforts where needed. Existing policies lack any form of revenue generation that could do this. Indeed, current budget constraints limit what the government can do in these and other areas.
By applying the PPL upstream, all fossil fuel use is relatively more expensive in the economy. That means coal and gas-based electricity generation, natural gas use in homes and businesses and liquid fuel use such as petrol and diesel in transportation.
This is a design feature, not a bug. By changing relative prices across the economy, the PPL strengthens incentives to electrify, making electric vehicles, heat pumps and renewable-powered homes more attractive relative to fossil fuel alternatives.
The story for electricity generation is more complicated, but directionally the same. Yes, the PPL will push up the cost of coal and gas-fired electricity generation. But at the same time it makes investment in renewable energy sources relatively more attractive. As we know, according to authorities such as CSIRO, these sources are lower cost.
So as the energy mix tilts more to renewables as a result of the PPL, electricity system costs come down and electrification becomes more attractive. In addition, it provides a strong, and system-wide incentive for fossil-fuel generation to exit, and certainty for renewable investments.
Why the Safeguard Mechanism isn’t the future
It is also worth pausing to ask: how would the Safeguard Mechanism work to reduce emissions if it was extended to the electricity sector?
We can assume that either individual generators or the sector as a whole would be subject to emissions constraints that would get gradually tighter over time. What would this do to prices?
If a coal-fired generator is constrained in the emissions it can produce it can do one of two things. It can reduce output which will withdraw capacity from the market and, with nothing to replace supply, increase prices. Or it can buy credits for which it must be able to recover costs, so the generator must bid higher, again pushing up electricity prices.
In other words, there is no free lunch here. The Safeguard Mechanism, if applied to electricity, would be attempting to do precisely what the PPL does, but much less efficiently and without raising revenue.
Some might argue that it’s the combination of the Safeguard Mechanism and the Capacity Investment Scheme that provides an attractive option. The CIS has the government underwriting the price risk of renewable energy and storage projects selected by government.
But again, we need to scrutinise who pays for this. The CIS creates very large contingent liabilities for the government budget. The PPL generates large revenues very efficiently while correcting rather than creating other distortions.
Voter sentiment has shifted
Public support for our policies is very strong. A Redbridge survey found that 68 per cent of Australians support a Polluter Pays Levy and 87 per cent support a Fair Share Levy. You will not find public sentiment more receptive to bold economic policy reform.
It is clear the public sentiment has shifted materially since the carbon and rent tax debates under Prime Ministers Rudd and Gillard.
Reform in challenging areas of policy has always been politically difficult. Medicare, tariff reform and the GST are prominent examples that faced fierce resistance, but the ultimate success delivered profound benefits for Australians.
We have a similar opportunity now. There’s no need to settle for inferior, more costly and less effective policies.
There’s also no need to be held hostage to yesterday’s political debates regarding a price on pollution. Times - and voters - have changed.
Baethan Mullen
Chief Executive Officer
Baethan Mullen has over 20 years of experience in public policy, economics and advocacy. Prior to joining the Superpower Institute, Baethan was General Manager of Economics & International at the ACCC, and led the largest energy efficiency program in Australia as Executive Director at the Essential Services Commission.
