So now it’s a coal tax?

Transport emissions by use

What is the point of the “emissions” tax now? By excluding petrol from their proposed tax, the Labor/Green alliance have moved the goal posts to make the tax look less like an “own-goal” to the consumer. In doing so they have made coal production and use an explicit target, although that is where our comparative advantage and some of our strongest trade prospects lie.

Any tax changes relative prices and, therefore, the choices a consumer or investor makes. An economy-wide, go-it-alone production tax such as a uniform tax on carbon emissions changes the expected return on investment in almost all production (anything that currently depends on carbon-intensive energy) in Australia relative to everywhere else. Even if you think that such a tax can be justified by other social benefits (such as a near-zero cut in global temperatures), it’s a big hammer that has to be aimed very, very carefully.

But a non-uniform production tax implicitly subsidises exempted energy sources by moving production and investment away from the tax-burdened energy activities to the tax-free activities. Although the two products do not look like close substitutes—coal and diesel, for example, have not been close substitutes since the 1950s when diesel-electric locomotives took over the rails—the implicit subsidy will distort the structure of production and future investments. For example, we can expect coal investors will look for opportunities outside Australia; petrol refiners will breathe a sigh of relief but they won’t fill the investment gap left by discouraged coal miners because there is no underlying resource to justify more assets in this market.

Australian emissions Growth By Sector

The tax penalty for our export-oriented coal sector is made all the more acute by the significance of the sector given the free-kick. Transport emissions are the second biggest after emissions from the coal/gas-fired stationary energy sector and have grown almost as fast as the emissions from power generation (see the second chart). It accounted for 14% of our 2009 emissions. Yet, bizzarrely, the emissions intensity of this sector is highly price sensitive; unlike the stationery energy sector, transport energy emissions are highly likely to fall with a rise in the petrol price!

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