Fresh thinking: the carbon tax that would leave households better off

The UNSW climate dividend proposal will be launched on Wednesday by the Member for Wentworth Kerryn Phelps.
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Richard Holden, UNSW and Rosalind Dixon, UNSW

Today, as part of the UNSW Grand Challenge on Inequality, we release a study entitled A Climate Dividend for Australians that offers a practical solution to the twin problems of climate change and energy affordability.

It’s a serious, market-based approach to address climate change through a carbon tax, but it would also leave around three-quarters of Australians financially better off.

It is based on a carbon dividend plan formulated by the Washington-based Climate Leadership Council, which includes luminaries such as Larry Summers, George Schultz and James Baker. It is similar to a plan proposed by the US (and Australian) Citizens’ Climate Lobby.

How it would work

Carbon emissions would be taxed at A$50 per ton, with the proceeds returned to ordinary Australians as carbon dividends.

The dividends would be significant — a tax-free payment of about A$1,300 per adult.

The average household would be A$585 a year better off after taking account of price increases that would flow through from producers.

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If those households also cut their energy consumption as a result of the tax they would be even better off.

And the payment would be progressive, meaning the lowest-earning households would get the most. The lowest earning quarter would be A$1,305 a year better off.

Untaxed exports, fewer regulations

For energy and other producers making things to sell to Australians, the tax would do what all so-called Pigouvian taxes do — make them pay for the damage they do to others.

But Australian exporters to countries without such schemes would have their payments rebated.

Imports from countries without such schemes would be charged “fees” based on carbon content.

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This means Australian companies subjected to the tax wouldn’t be disadvantaged by imports from countries without it, and nor would importers from countries with such a tax.

The plan would permit the rollback of other restrictions on carbon emissions and expensive subsidies.

Our estimates suggest the rollbacks have the potential to save the Commonwealth A$2.5 billion per year.

It’s working overseas

Our plan is novel in the Australian context, but similar to one in the Canadian province of British Columbia which has a carbon tax that escalates until it reaches C$50 per ton, with proceeds returned to citizens via a dividends.

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Alaska also pays long-term dividends from common-property resources. The proceeds from its oil reserves have been distributed to citizens since 1982, totalling up to US$2,000 per person.

It could be phased in

We would be open to a gradual approach. One option we canvass in the report is beginning with a A$20 per metric ton tax and increasing it by A$5 a year until it reaches A$50 after six years.

The dividends would grow with the tax rate, but the bulk of households would immediately be better off in net terms and much better off over time.

And it would be simple

Our plan doesn’t create loopholes or incentives to get handouts from the government, as have previous plans that directed proceeds to polluters.

It will not satisfy climate-change deniers, but then no plan for action on climate change would do that — other than perhaps the governmment’s direct action policy, which provides a costly taxpayer-funded boondoggle to selected winners.

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But for those who understand that climate change is real, our plan balances the important benefits we gain from economic development and associated carbon emissions against the social cost of those emissions.

It does it in a way that provides compensation to all Australians, but on an equal basis, making the lowest-income Australians substantially better off.

It is the sort of policy that politicians who believe in both the realities of climate change as well as the power and benefits of markets ought to support.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW and Rosalind Dixon, Professor of Law, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Policy overload: why the ACCC says household solar subsidies should be abolished

Lucy Percival, Grattan Institute

The keenly awaited report on retail electricity prices, released this week by the Australian Competition and Consumer Commission (ACCC), has made some controversial recommendations – not least the call to wind up the scheme that offers incentives for household solar nearly ten years early.

The report recommends that the small-scale renewable energy scheme (SRES) should be abolished by 2021. It also calls on state governments to fund solar feed-in tariffs through their budgets, rather than through consumers’ energy bills.

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The ACCC has concluded that offering subsidies for household solar was a well-intentioned but ultimately misguided policy. Solar schemes were too generous, unfairly disadvantaged lower-income households, and failed to adjust to the changing economics of household solar.

The lesson for policy-makers is that good policy must keep costs down as Australia navigates the transition to a low-emissions economy in the future. Failure to do this risks losing the support of consumers and voters.

Runaway rebates

Rooftop solar schemes were much more popular than anticipated. This might sound like the sign of a good policy. But in reality it was more like designing a car with an accelerator but no brakes.

Generous feed-in tariffs and falling small-scale solar installation costs encouraged more households to install solar than were initially expected. Premium feed-in tariffs were well above what generators were paid for their electricity production. Historically solar feed-in tariffs paid households were between 16c and 60c per kilowatt-hour, while wholesale prices were less than 5c per kWh.

At the same time, installation costs for solar panels fell from around A$18,000 for a 1.5kW system in 2007, to around A$5,000 for a 3kW system today. The SRES subsidy for solar installations was not linked to the actual installation cost or the cost above the break-even price. So the SRES became relatively more generous as installation costs fell.

As solar penetration increased, and network costs rose to cover this, it became increasingly attractive for households to install solar panels. In Queensland, the initial cost forecast for the solar bonus scheme was A$15 million. Actual payments were more than 20 times that in 2014-15, at A$319 million. And the environmental benefits weren’t big enough to justify that cost, as other policies have reduced emissions at a lower cost. The large-scale renewable energy target reduced emissions for A$32 per tonne, while household solar panels reduced emissions at a cost of more than A$175 per tonne.

In most states, premium feed-in tariffs and rooftop solar subsidies are funded through higher bills for all consumers. Everyone pays the costs, yet only those with panels receive the benefits. That means the costs fall disproportionately on lower-income households and those who rent rather than own their home.

The ACCC report recommends the SRES be wound up nearly 10 years ahead of schedule, because the subsidies are no longer financially justifiable. This would maintain the support for current solar installations but remove subsidies for new solar installations from 2021.

The report also recommends removing the direct costs of feed-in tariffs from electricity bills. Instead, state governments should directly cover the costs of premium feed-in tariffs. The Queensland government has already made this move.

Of course, governments still have to find the money from elsewhere in their revenues, which means taxpayers are still footing the bill. But the new arrangement would at least remove the current unfair burden on households without solar.

Fixing the mistakes

How can governments avoid making similar policy mistakes in the future? The ACCC’s recommendations, together with the proposed National Energy Guarantee (NEG), provide a solid foundation for Australia’s future energy policy.

First, the future is hard to predict, so good policy adapts to change. The NEG provides a flexible framework to direct energy policy towards a low-emission, high-reliability, low-cost future. Reviewing and adjusting the emissions target along the way will enable Australia’s energy policy to respond to new technologies and shifting cost structures, while maintaining consistency with economy-wide targets.

Second, it is hard to pick winners, so good policy creates clear market signals. The NEG provides the energy industry with clear expectations, but is technology-agnostic and minimises government intervention. This encourages the market to find the most cost-effective way to reduce emissions and ensure reliability.

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The ACCC report also recommends simplifying retail electricity offers, which would make it easier for consumers to find a good deal, and in turn making the market more competitive.

Politicians have an opportunity to draw a line in the sand on narrow, technology-specific policies such the SRES. An integrated energy and climate policy should focus on good design, and then step back and let the market pick the winners.

Lucy Percival, Associate, Grattan Institute

This article was originally published on The Conversation. Read the original article.

Poor households are locked out of green energy, unless governments help

Alan Pears, RMIT University

A report released this week by the Australian Council of Social Service has pointed out that many vulnerable households cannot access rooftop solar and efficient appliances, describing the issue as a serious problem.

It has provoked controversy. Some have interpreted the report as an attack on emerging energy solutions such as rooftop solar. Others see it as exposing a serious structural crisis for vulnerable households.

The underlying issue is the fundamental change in energy solutions. As I pointed out in my previous column, we are moving away from investment by governments and large businesses in big power stations and centralised supply, and towards a distributed, diversified and more complex energy system. As a result, there is a growing focus on “behind the meter” technologies that save, store or produce energy.

What this means is that anyone who does not have access to capital, or is uninformed, disempowered or passive risks being disadvantaged – unless governments act.

The reality is that energy-efficient appliances and buildings, rooftop solar, and increasingly energy storage, are cost-effective. They save households money through energy savings, improved health, and improved performance in comparison with buying grid electricity or gas. But if you can’t buy them, you can’t benefit.

In the past, financial institutions loaned money to governments or big businesses to build power stations and gas supply systems. Now we need mechanisms to give all households and businesses access to loans to fund the new energy system.

Households that cannot meet commercial borrowing criteria, or are disempowered – such as tenants, those under financial stress, or those who are disengaged for other reasons – need help.

Governments have plenty of options.

• They can require landlords to upgrade buildings and fixed appliances, or make it attractive for them to do so. Or a bit of both.

• They can help the supply chain that upgrades buildings and supplies appliances to do this better, and at lower cost.

• They can facilitate the use of emerging technologies and apps to identify faulty and inefficient appliances, then fund their replacement. Repayments can potentially be made using the resulting savings.

• They can ban the sale of inefficient appliances by making mandatory performance standards more stringent and widening their coverage.

• They can help appliance manufacturers make their products more efficient, and ensure that everyone who buys them know how efficient they are.

To expand on the last suggestion, at present only major household white goods, televisions and computer monitors are required to carry energy labels. If you are buying a commercial fridge, pizza oven, cooker, or stereo system, you are flying blind.

The Finkel Review made it clear that the energy industry will not lead on this. It clearly recommends that energy efficiency is a job for governments, and that they need to accelerate action.

It’s time for governments to get serious about helping everyone to join the energy transition, not just the most affluent.

Alan Pears, Senior Industry Fellow, RMIT University

This article was originally published on The Conversation. Read the original article.