Henry Ergas answers the questions that the Gillard government has forgotten even to ask:
“…in terms of Australia’s national interest, it is difficult to think of a policy more harmful than such a unilateral tax” Extract from Unilateral action creates costs without benefits, in The Australian
But I think Henry might be too optimistic about the benefits of a border adjustment approach to exempting exports from the tax.
Finally, would these problems be ameliorated were the tax only on domestic consumption, exempting exports but taxing imports, as Geoff Carmody has proposed? Of course they would. But that is only because we are acting unilaterally, damaging our exports. Shifting the burden on to domestic consumption reduces the harm. But the harm does not go away: it is just diminished.
I will need to review this more closely, but I think the outcome might be much worse than Henry believes. I suspect that exempting exports from the tax would force us to choose between large losses for Australian industry and consumers, or contravention of the World Trade Organization (WTO) rules.
If the Australian government exempts goods from a tax on condition that they are exported, the tax-benefit amounts to a prohibited export subsidy under the WTO rules. But a special WTO rule applies to economy-wide value-added taxes (like the GST). These taxes may be adjusted at the border to exempt exports even while the tax is levied on imported goods. The levy on imports must be in precisely the amounts that would have applied to the production of such goods had they been manufactured in Australia—even if we do not manufacture those goods in Australia. This is exactly what happens now in Australia with the GST: exports are exempt and imports (of $1000 value or more) are levied at the statutory rate.
It is likely that WTO members will treat any carbon taxes they impose in their own territory as a “GST-like” value-added tax under this special WTO rule. Now, the imposition of the equivalent tax on imports is not compulsory under WTO rules: it seems to me it would be consistent with WTO rules to waive the import taxes completely (although, not selectively). But what government would give imports a free ride under a regime where they taxed the local manufacturers of the same or directly competitive goods? None, ever has, as far as I know.
So, if the Australian government exempts exports from the carbon tax it is very likely to have to tax imports of goods imported from the rest of the world where they would not otherwise have been taxed.This would be a significant increase in import costs, not to mention a book-keeping nightmare. It will be very difficult to determine the required rate of tax on each product and each determination will be open to challenge by importers and by our WTO partners. Although the tax revenue comprises a transfer to government that could be returned to firms and households by other means, the border duty would lead to large inefficiencies in our economy (and probably a reduction in growth and demand).