Lets stop arguing about Market Pricing of Carbon Credits

Yesterday I heard Professor Ross Garnaut address the National Press Club in Canberra on Climate Change. The comments below represent my 'rant' that generally supports Garaunt's proposals. There is little doubt that a tax on carbon will make a significant contribution to government tax revenue. It is 'a great big tax on everything'... but the aggregate amount of tax collected by the Government need not necessarily increase. We can reduce the tax take on personal incomes and business incomes while balancing our budget through the new revenue from a tax on carbon. The Henry Tax Revue provides just one possibility to re-set the tax mix in a way that makes collection more efficient, provides better equity of treatment between tax payers and presents a tax regime with less traction in our efforts to improve productivity.

I hope the Coalition continues to believe in the importance of achieving a 5% reductions in greenhouse emissions by 2020 (as supported in Parliament).

To meet our international commitments on carbon emission reductions, we need to make carbon emissions credits a scarce resource. Arguably, the current Coalition policies rely on central management of carbon emissions to achieve target reductions, rather than placing reliance on market pricing to allocate a scarce resource. While central management of carbon emissions cloaks the taxing of carbon, it will eventually be seen as a tax (in the same way that Australians eventually saw tariffs as a form of taxation). Surely the Coalition should prefer to focus their political argument on the areas where they have historically had an advantage... economic management! Why would the Coalition choose to push policies that are deficient in economic logic. Market pricing is almost universally accepted as the most effective way of distributing a scare resource. Even the Chinese Government has acknowledged the superiority of distribution through market pricing. 

Where should the Coalition focus their policy initiatives? If the major political parties took a bi-partisan position on the mechanisms of allocating scarce carbon credits and the mechanisms for collecting the carbon tax, they could then focus on the more important areas of:

• the rate of carbon tax to be applied
• the change in the aggregate tax to be collected 
• the tax reductions applied to other tax sources to improve efficiency, equity and productivity

These are the areas where the Coalition has a 'home ground' advantage.