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A destination-based ETS?

According to Laura Tingle in yesterday’s AFR  (15/6, subscription required) the Department of Climate Change is looking into a ‘destination’or consumption-based ETS. This is something I have advocated for many years – most recently here.  It is called a destination-based tax base because it is where emissions end up being consumed – their destination. This is opposed to an ‘origin’ or production-based tax which describes where the emissions are produced.

A consumption based tax will tax on emissions produced (so the tax will be collected from producers) but will exempt exported output and impose border tax adjustments on output which is imported but is not subject to comparable greenhouse gas emission controls in its country of origin.  Effectively then carbon emissions consumed in Australia are taxed.

What is the difference between this proposed scheme and the earlier ETS – the Carbon Pollution Reduction Scheme? Well quite a bit. On the export side things won’t be that different since there were many tax exemptions given here under the old CPRS.  But for import competing industries there will be big changes because their competitiveness will be protected against unfair competition from countries which do not mitigate emissions by the BTA’s imposed on imports.  This was the protective measure advocated under the US Waxman-Markey Bill.

Why do I like this approach? Well now the issue of carbon leakages is largely eliminated. Exports don’t suffer and neither do import competing industries. There is now literally no incentive for firms to set up operations in a ‘pollution haven’ country because they get no advantage, on this account at all.  A country which does not currently mitigate because it fears carbon leakages – Bush’s US or Howard’s Australia – now should have no such fear. Its a good deal as there are generally enhanced global mitigation incentives.

Longer-term as more countries mitigate there will be a natural propensity to switch to a production basis for an ETS.  This eliminates the messy BTAs. But getting to this position is more likely if countries in the interim mitigate on a consumption basis.

Oh yes, a consumption-based tax also has the nice feature of being consistent with the rules of the GATT/WTO.

8 comments to A destination-based ETS?

  • How does this work — do you need to attach a carbon amount to every transaction through to a retail sale? If so wouldn’t that be very expensive? Or can you just charge this at the point of ‘first use’ i.e. the company that mines the coal doesn’t pay but the company which burns it does?

    And how do you calculate the amount of carbon for an imported good?

  • P.S. obviously you can’t simplify it like that — as the electricity generated from burning the coal may be used to make aluminium which someone else when then use to make a widget, half of which may be exported…

  • Tom,

    Domestic goods would be treated in the same way an a production based ETS. There are methodological issues with imported goods which mean that the estimated emissions will only approximate the actual emissions. The way that the Waxman-Markey bill proposes to deal with imports is to require importers of emissions intensive goods to purchase a different type of permit, which is priced at the same price as the domestic permit.

  • hc

    Tom.

    In most cases the charges would be levied on producers to minimise transaction costs but the output they produce which is exported would be exempted – aluminium exporters could claim a rebate. Thus you would capture only consumption. Imported very carbon-intensive goods would have their carbon content assessed – in the main only a few products (fuels, cement, aluminium, steel) though these products would need to be distinguished by country of origin.

    Harry

  • Apu

    Hi Harry – isn’t there some question of WTO regulations deeming this to be illegal?
    This came up when the EU was looking at a similar carbon tariff before Copenhagen.
    Personally I think this is the only way for the EU to make sense of their $122 Billion internal cost of carbon while all the rest of the world has a free ride.

  • Apu

    Sorry – here’s the link and extract –

    “It would be illegal under World Trade Organization (WTO) rules to impose a tariff on imports if the purpose was to offset what Canada might consider lax environmental and other non-tax policies in foreign countries. If China fails to regulate its coal sector so as to reduce carbon emissions, Canada cannot raise tariffs on Chinese good imported into Canada.”

    Click here for the full article.
    Read more: http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/04/01/wto-would-blow-away-carbon-trade-war-corcoran.aspx#ixzz0r0PyCToA

  • observa

    Glad to see you’re coming round to the notion carbon credit creation stinks Harry, but straight carbon taxing at the mine and well-head beats any other empire building hands down. However that means honesty and transparency with taxing and simply raising more taxes via carbon has its problems for the usual tax and spenders as noted here-
    http://www.businessspectator.com.au/bs.nsf/Article/higher-electricity-bills-capex-pd20100611-6B4SM?OpenDocument&src=mp
    If you’re gonna stick up their power bills, etc, you’d better be prepared to consider some serious tax tradeoffs elsewhere and explain yourself very clearly to the punters the whys and hows. The notion of taxing embedded carbon in complex manufactures won’t cut it in my opinion and besides is too open to the usual rent-seeking and special pleading. That was always the killer with the ETS and any CO2E taxing needs to stick rigidly to the KISS principle. It doesn’t get any simpler than straight carbon and resource taxing(RSPTees anyone???), with land use as a resource (nil tax for natural) and an ANWT for the top end with franking credits for expenditure on natural environment protection and creation. It’s got all the bases covered and the world would have to follow, lest we become the multinational headquarters of the world.

  • hc

    No Apu the WTO says this first ruling (Article 1 of the GATT) doesn’t apply for consumption-based taxes. Look at Taniotti et al in the paper I link to in my earlier post. If this view is challenged by China/India or someone else there are other parts of the GATT that can probably be used to levy such taxes – protecting life, stopping extinctions etc. A consumptio-based tax like a VAT is hard to object to. For example suppose you slap a 10% duty on cigarettes because you dislike cancer. Would you exempt imported fags? Of course not.

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