Cut tax, carbon to green economy

There is always a strong case for replacing relatively inefficient taxes with relatively efficient taxes.

And with government raising new carbon revenues, the total tax take should be kept constant, or reduced.

But it is not only an issue of compensating the most vulnerable.

An emissions trading scheme in which permits are auctioned and traded will interact with existing taxes in a complex way. As a result, the deadweight costs of many existing taxes could rise. When viewed through the lens of climate change policy, tax reform in other areas makes good economic sense.

Consider stamp duties on property transfers. We want markets to work efficiently and we want to eliminate barriers to trade. Right? Well not exactly. We eliminated stamp duty on stock market traded shares many years ago for precisely that reason, but stamp duties still remain in other areas notably on transfers of real estate.

Is that a property tax? Not at all. Stamp duty is a tax on changing locations. The more you buy and sell, the more you are taxed. And yet at a time when housing affordability is so much debated wouldn't we want a property market that was as unfettered as possible, where there are as few barriers as possible to trade?

Well we should, but every year states raise about $11 billion in stamp duties on property transfers. This is just one example of an inefficient tax.

Australia has much at risk in this epic transition to a low emission future. And there will be a price to pay. Being green is far from easy. The design of our ETS, its response to international developments and the way it interacts with the rest of our economy will determine how high that price will be.

The emissions trading system will open up a major new source of government revenue. If we were to invest much of the revenue earned from the ETS into removing inefficient and inequitable taxes we would not simply keep the tax share of GDP neutral, we would also be reinvesting those revenues into a more efficient and productive Australia.

The challenge of climate change will not simply be met by the ingenuity of a free society finding unimagined technological solutions tomorrow to the intractable problems of today. Our capacity to respond to climate change is founded in the strength of our economy. We must use the transition to a low carbon future as an opportunity to make our economy stronger, so that the costs we impose on carbon will be more than matched by the dividends from a more productive future.