On Sunday, the Australian Government announced the details of its ‘Clean Energy Future’ package. Suzi Dafnis and I, along with all the ABN’s resources are working hard to bring out the details on how this change will impact the small business owner. This is a complex and fundamental change to our economy and the devil is in the details, that we’re only just going down into.
However, let’s start our journey by first going through the package’s design, the context and the timeline. This special edition post will attempt to look at it in parts, 1) FAQs; 2) what has been announced; 3) economic analysis from our leading analysts and 4) where to now. Is Australia going in alone on carbon pricing? No. Carbon pricing schemes have already been introduced into many countries who adopted the Kyoto Protocol earlier than Australia. Carbon pricing has been active in New Zealand (2008) and throughout the European Community since 2005. It’s a fact that Australia’s institutions and institutional investors – including some superannuation schemes – already trade in carbon credits in these overseas markets just like any other share market. Is it a price or is it a tax? Economics define a price as something that is paid ‘once’ for the purchase of a good/commodity/service. While, the definition of a tax is a fee payable on income on a recurring basis. World-wide carbon trading schemes are seen as a price, as users or producers only pay once for each tonne of carbon emissions. Like other countries, Australia relies on its taxation system to deliver a government’s economic plan. So this is why everyone plays the language – price vs tax – to suit their occasion or opportunity. What’s the package? The elements have been widely published (probably to death). Let me do it one more time at a high level so that we’ re on the same page. The Carbon Pricing Mechanism:
| Fixed price | A start price of $23 from July 1, 2012, rising to $24.15 in 2013 and $25.40 in 2014. |
| Then ETS | On July 1, 2015, carbon price will transition to a fully flexible price under an emissions trading scheme. For the first 3 years, there’ll be a fixed bottom price of $15 and a fixed top price of $20 above expected international price. (there is allowance for inflation) Think of a share market: Companies will have carbon credits for sale & others will need to buy these credits |
| Gases covered | Carbon dioxide, methane, nitrous oxide and perfluorocarbons from aluminium smelting. |
| Scheme coverage | Will encompass stationary energy, transport, industrial processes, non-legacy waste and fugitive emissions. 500 companies will be required to comply to the leglisation. These companies are responsible for around 60% of the nation’s emissions. |
| Fuel & Transport | Transport fuels will be excluded. However, the carbon price will be applied through changes in fuel tax excise for domestic aviation, domestic shipping, rail transport and non-transport fuel use. Heavy on-road will be covered from 1 July 2014. |
| International linkage | From the start of the ETS’s flexible price period companies can use approved international credits for up to 50% of their obligations. |
| Carbon Farming Initiative linkage | From the start of the ETS, credits under the Carbon Farming Initiative (CFI) can be used for compliance subject to a 5% limit. After the start of the floating price, these credits can be used for 100% of your liability. |
| Financial impact on the Aussie Budget | Revenue from sale of permits will raise $7.74bn in the first year with $4.2bn being distributed for the household assistance measures (ie the changes to the tax scales) and $3.0bn for the “support for jobs” program (assistance for people employed in affected industries). |
What are the economic impacts? Talking to some of the economists inside Australia’s banks and the RBA, their summaries are:
- The introduction of the plan removes some of the uncertainty that has been dogging the Australia economy.
- The policy is broadly neutral in economic terms.
- The compensation packages are very complicatedso it is still not clear if all the policy uncertainty has been resolved in all sectors or all industries.
- Smaller impact than the GST: The direct impact is smaller than the introduction of the GST – i.e., it raises just 1/3 of the income that the GST does so the impact on prices should be the same.
- There should be no implications for monetary policy: As the direct impact on prices should be small and transitional, the RBA should look though the temporary spike in inflation. Thus the carbon price has no direct implication for interest rates or money markets.
- Minimal impact on overall economic growth or jobs: This does not mean there may not be significant adjustments within and/or between industries. For example, the estimated carbon price burden on the coal industry appears to be relatively small ($1.80/t) but some mines may face higher cost structures and/or higher emissions burden than the average. So while the coal industry, on average, can still grow at solid rates, not all mines may be able to grow with the industry.
- Compensation: Lower income households will be over compensated, while higher income households (around 10% of households) will receive no compensation at all. It has been estimate that up to 1/3 of households will be worse off after the introduction of the carbon price (i.e., no or under-compensated).
- The compensation payments will be delivered in the 2nd quarter of 2012 (worth around $1.5bn).
Unfortunately, the mountain of debate has overshadowed the significant taxation reforms involved in the package. The tax-scale changes contained in the package are those many have been calling for and formalised in the Henry Tax Review. Very important to expanding Australia’s workforce is the raising of the tax free threshold from $6,001 to $18,201. Not only does this help to offset the impact of the package, it removes the point that for some ‘benefits were more economical than earning and paying tax.’ In turn, this should help expand our workforce, especially in the areas of skill shortages. It will be particularly relevant for part-time and casual workers. What’s Next?
- The carbon price scheme will be legislated in September/October (it does appear that the Government has the numbers to secure safe passage of the package through both the House of Representatives and the Senate).
- Obviously, we will continue to see fierce political debate on this issue.
- Australian business will adapt, innovate, improvise and overcome.
As I mentioned, there are many more details to pour through as this is not simple and the real analysis has only just begun. I will update as I learn more. One thing you and I DO know! What’s said in opposition stays in opposition. A new government will not roll back a revenue raising scheme. Change it yes, roll it back no! And so, just like when Australia introduced decimal currency, the metric system, floated our dollar, the GST and the online revolution, we adapted, learned and now live with the changes. It will be the same with the carbon price scheme.
