Cut tax, carbon to green economy

The Rudd Government is set to introduce its emissions trading scheme in 2010 which will impose a price on carbon, as would a carbon tax.

The key difference is that under an ETS the government sets the amount of emissions permissible and the permit price is set by the market, whereas under a carbon tax the price is set by government and the amount of emissions is the result of market behaviour.

An ETS is preferable not simply because it allows the market to find the least cost abatement but it will be able to interact with similar schemes elsewhere in the world. Under an ETS the commonwealth will collect substantial additional revenue. The Department of Climate Change projects that Australia's greenhouse gas emissions will be about 600 million tonnes in 2010.

So even if Labor's ETS only covers two-thirds of all emissions, an auction price of $25 per tonne would raise $10 billion per annum in the early years. In 2010 this would almost offset the revenue that will be foregone as a result of the income tax cuts.

What should be done with this revenue? The Rudd Government has committed not to allow tax revenue to increase as a percentage of GDP and the revenues from the ETS should, for that purpose, be classed as a tax.

We will be holding the Rudd Government to account on this vital point. This means that ETS revenues must be matched by a reduction in other taxes.

There are other claims on the ETS revenues apart from tax cuts, of course.

We should continue to invest in research and development on low emission technologies.

We should also consider providing additional incentives to households and businesses to invest in energy efficiency.

But the sums flowing from the ETS are going to be much greater than these items are likely to absorb.

We should take the opportunity with the revenues from the ETS to address both inefficient taxes as well as inefficiencies and inequities in our income tax system. A lot has been said about assisting low-income households who will be hard hit by higher energy and fuel costs. Reducing tax, including high effective marginal tax rates, on low-income households should be a key priority.

But the objective should be this: compensating tax and welfare measures must ensure that low-income or pensioner households are not overall made worse off by reason of the introduction of the ETS. The ETS also offers an opportunity to phase out inefficient state government taxes.