Climate tax about-face

10 March, 2011

The news this past week in Australia has been dominated by the government's plans to introduce a climate tax. The proposal has provoked something of a storm. Politics and the media here in Australia are rather more polarized and populist compared to the Netherlands. Scenes that you might expect from Fox News are part and parcel of Australian TV's daily offering. Opposition leader Tony Abbott is milking all the drama he can out of the situation, even in parliament. He says he will fight the carbon tax every minute of every day of every month of his political life. The Prime Minister, Julia Gillard, has been called a liar by a TV journalist; he came up with a nickname for her that I'm sure he thinks is really funny: “Juliar Gillard”.

What's going on? The Labor government of Australia wants to assign a monetary value to greenhouse gas emissions as a financial incentive to reduce emissions of these compounds. A system of emissions trading was chosen for this purpose. We've been using a similar system in the EU since 2005. Businesses must see to it that they have enough emission trading rights. If they have a surplus of rights due to the introduction of energy-efficiency measures, for example, then they can sell them. Companies can also earn tradable rights by investing in clean energy in other countries (e.g. by financing a hydroelectric plant in a developing country). This makes reducing greenhouse gas emissions interesting from a financial point of view. Emissions trading systems like these are very complex, however, and it takes time to get them set up. This is why it has been decided to introduce a fixed price for CO2 emissions until 2015, and to let the market determine the price thereafter. The system will initially function as a fixed fee, or tax. All this has been proposed even though Gillard promised in her election campaign last year that she would tackle climate change, but not through fiscal means...