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Carbon pricing versus tariff reform

Crikey.com have an interesting piece comparing the ‘weak-kneeded’ approach of the Gillard Government to carbon pricing to the ‘courageous’ stance of the Hawke Government in promoting tariff reform.

The reforms probably are not comparable since the efficiency gains from carbon pricing accrue to the rest-of-the-world unless it  responds with pricing measures itself.  I think that there is a strong case for carbon pricing because I think very negative signals are sent out if Australia does not price.

The Prime Minister’s comment yesterday extolling the “various elements of the Carbon Pollution Reduction Scheme” when asked about handouts to industries under a carbon price demonstrates that Labor remains committed to a political solution to climate change, not an economic one.

Gillard has referred to the reform courage of the Hawke and Keating Governments on floating the dollar and tariff cuts. 

“Like carbon pricing, much of the debate over how far Australia should go in reducing tariffs was couched in terms of how our trade-exposed industries would fare when we started reducing protection and other countries did not. But the Hawke Government, recognizing the need to complete the opening of the Australian economy they had commenced in the 1980s, decided, on the advice of figures like Ross Garnaut, to adopt a unilateral approach to reform.

What “industry adjustment” assistance did our trade-exposed industries receive as part of the Building a Competitive Australia package? They got nothing. Hawke, Button and Keating put $90 million into a package for displaced workers to help retrain them and move them to other industries. There was also a rural adjustment package and increased services and loans for exporters. Otherwise, the big manufacturers got nothing.

And of course they got nothing. That was the very point of the reform.

The CPRS, in which the Prime Minister says “a lot of good work was done, contained so much industry assistance – –$20 billion over a decade — that it initially cost the Budget money. Far from being any sort of “great big new tax”, for the first five years of operation the CPRS would have cost the Budget a total of $4 billion. The CPRS wouldn’t have provided a net return to the Budget — ie: been any sort of tax, great, bit, new or otherwise, until the 2020s.

Most of the recipients of the industry assistance would have been foreign multinationals. Rio Tinto was largest, followed by Alcoa. BP, Shell, Norsk Hydro, Chevron, Mobil were all big recipients of free permits. Only local steel makers Bluescope and OneSteel and CSR figured among the top ten beneficiaries. None are major employers.

As the Grattan Institute subsequently showed, the exorbitant levels of assistance were far in excess of the actual level of actual impact of the CPRS on the most trade-exposed companies.

It’s appalling that the CPRS provided massive handouts to a number of the world’s biggest companies. It was indeed “good work” if you were a shareholder in Alcoa or Shell. But that’s a moral issue, not a policy issue. If the exorbitant handouts had no impact on the goals of the CPRS, or even facilitated them, there would have been a case for the CPRS.

Instead, by muting nearly the entire carbon price signal for our biggest polluters, the CPRS would have created an incentive for them to maintain business-as-usual at least until the 2020s, when the handouts were scheduled to start winding down — assuming the then-government was prepared to let them do so. It would have transferred the task of reducing emissions to the domestic economy and the power sector, which had its own set of less generous handouts.

Labor figures acknowledge the CPRS turned into a rentseekers’ frolic, with each government backdown encouraging more executives to book a flight to Canberra to wave rubbish modeling and warn of massive job losses, production cuts and the four horsemen of the Apocalypse. Australian innovation at its finest.

Nonetheless, despite the campaign waged by it all sides, Labor’s CPRS remained popular with voters right up until its axing last May. As far as voters were concerned, they wanted action on climate change, and the CPRS, which they didn’t have the faintest understanding of, ticked the box. After all, if Malcolm Turnbull was prepared to sacrifice his leadership for it, it must be OK.

Labor’s primary goal remains to convince voters it is taking action on climate change. Whether that action is effective is less important. That’s why they want to keep the handouts, and why there is going to be a fight with the Greens over them.

Thank goodness Hawke, Keating and Button were smarter than this lot”.

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