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Taxation and the Environment

Environmental Economics Seminar Series
Department of the Environment, Sport and Territories
March 1996
ISBN 0 642 24878 8

Discussion

Hugh Saddler (Economic and Energy Analysis Pty Ltd) - Session discussant: I thought I would try in these remarks to reiterate a number of the points raised in Mick Common's admirable background paper.

The first issue that I want to draw attention to is: what is the place of the carbon tax in the overall tax mix? In the debates about carbon tax over a number of years now, as well as in what has been said today, the conflation of a discussion about carbon tax with a discussion about what we should do about greenhouse policy has been very damaging to a good understanding of what a carbon tax might do in the context of overall management of the economy.

I think I am correct in saying that the proposal for a carbon tax was first raised internationally some time in the 80s outside the context of the discussions about what policy instruments would be appropriate to reduce greenhouse gas emissions. I think there is a lot of merit in trying to get back to considering the matter in that context. Mick says some very sensible things about that in his paper.

I was confused - possibly because of time constraints on his part - about Andrew Chisholm's last remarks on that score. I wasn't quite sure whether he was saying that any tax is a bad tax, or whether a GST is a worse tax than an income tax or whatever. Possibly that is a little unfair to him because he had little time to expound on that aspect. But I think it illustrates that there are a lot of very important issues there that could and should be discussed for reasons of trying to get good policy quite separately from discussing what we do about greenhouse emissions, our international obligations and so on.

Turning to the question of greenhouse emission, the framework convention and so on - a matter also raised by Mick - the question is: what is the best instrument to achieve emission reductions? I think that in the debate that has taken place in Australia in the past five years too much of the analysis has begun from the presumption that carbon tax must be the best instrument and has gone on to analyse different types of carbon taxes and different levels. The results presented to us by Rob McDougall and Andrew Chisholm were clear presentations on what we have learnt. But there is somewhat of a feeling that maybe if it had been possible within the economic policy research community to plan a strategy of research and study to find out more about these instruments five years ago, there would have been more results for less input. There seems to have been an awful lot of running round in circles and trampling on the evidence, as it were, to mix a few metaphors.

The next point in Mick's paper, which is very pertinent to what we have heard this afternoon, is that the gross welfare costs of meeting the commitment to reduce emissions, whatever they might be, will very much depend on the use to which the revenue is put. That point was either explicit or implicit in all the presentations in this seminar today. It is a very important point. To my recollection though, somewhat surprisingly, it was two or three years into the discussion on this issue - and certainly after the Industry Commission brought down its report - before that aspect began to be explicitly addressed in the modelling. Up to that point it was not an issue that was seen as an important option to model. I think that was one factor that got the debate off on the wrong foot or wasted a year or two.

Rob McDougall presented a very clear categorisation of the distributional impacts of a carbon tax. We all know that the phrase no-regrets is bandied around by all sorts of people and has all sorts of meanings. I regard it as very important to appreciate, as I am sure all here do, that there is a difference between no-regrets for an individual and no-regrets for a nation or for the planet. We need to be very clear as to which we are dealing with. I am sure the lack of clarity on that point has been a source of many of the myths that Rob alluded to. Many people we have seen parading their views around Canberra and in the newspapers have certainly used the no-regrets phrase as very much talking about the impact on them or on their company alone, and not from the national point of view. If we are talking about greenhouse policy and either about what Australia should do or indeed what the world should do, obviously there will be winners and losers whatever policy instrument one applies. And greenhouse policy is no different from any other aspect of public policy or anything else that governments do. But there is confusion on that.

It is clear that one's views on the question of whether no-regrets measures exist very much affects what one think the cost of a carbon tax to achieve any given level of emission reduction would be. I do not think we should here go into this very complicated issue on which much ink has been spilled or many electrons sent round and round computers.

To those of you who may not have seen it, I would commend to you the October 1994 special issue of the journal Energy Policy dealing with the different outcomes one gets looking from so-called top -down or bottom-up and from economists and engineers getting together and sorting out their differences. I found a number of the papers in that issue most illuminating on this very important topic which has been far from resolved in the policy debate in Australia.

Two more points. One is that I welcome the reminder Rob McDougall gave us that abatement by other countries would be costly to us. This has almost been lost sight of in the discussion. One hears many extraordinary statements on this matter. I heard one minister on the radio the other day, who should have known better, who got clearly confused between carbon tax and the taxation of economic rent from low cost oil resources in Saudi Arabia. The reason Saudi Arabia and other oil exporting countries don't want greenhouse gas emission reductions is that they would lose income, which is the very point that Rob made, and they are correct in perceiving what their self-interest is in that area.

I can remember saying very many years ago that we need to think about greenhouse policies and how Australia should proceed in the context of how we are seen internationally. It may affect the decisions made by people who buy our export commodities and the way in which they respond to us. This thought seems to be coming back a little into public awareness in the context of the lead-up to the review conference in Berlin.

I will conclude on the point made by Andrew Chisholm about what we should do now and suggesting that we should wait. I found that rather a strange remark. It seems to me the opposite of a risk-averse strategy, unless you don't believe what is generally accepted and known about the greenhouse effect from a scientific point or view, or unless it is based on faith in technological progress and what it will bring us, which I think goes beyond the rational.

I must say, speaking personally as someone who was trained in the scientific and technical area, that I have always been quite astonished at the way many economists look at technology and technological progress. It seems to be not much better than faith. I do not think many scientists would place as much weight or reliance on what science might achieve in future for the benefit of humanity or all living things or whatever in the framework decisions that countries make. That faith certainly seems to be implicit in quite a number of economic discussions of these big issues which affect the way we live now and in future.

Steve Dovers: I would like to make a few points on Andrew's comments about uncertainty. One is that the uncertainty cuts both ways and we do have a debate that is dominated on the impact side in the science of greenhouse by the medium to low projections of science. It can cut the other way.

Natural scientists generally will not go out on a limb without a confidence factor of 95 per cent plus, but I do think that in some of the economic policy debate it seems to be justifiable to run the level of confidence limit at far less than that.

I am not sure that the scientific uncertainty on greenhouse is that much worse than on some other issues. It may be different, but if you look at, say, biodiversity we are looking at the basic uncertainty across all of the bits. So I am not sure greenhouse is particularly different.

Regarding uncertainty, we do have in policy - and in some states of Australia in law, and internationally in law - an accepted principle which we are starting to define through the courts and debate, which is the precautionary principle - that we shouldn't delay reform on the basis of scientific uncertainty. It is a very difficult proposition and you may disagree with the precautionary principle, but it is the agreed policy principle of democratically elected governments as are the targets we have.

So uncertainty pervades, but I am not sure greenhouse can be singled out. There are policy ideas and processes being set up to handle that. I think we have to couch them against that.

Andrew Chisholm: Without tackling the issue of the science, in the greenhouse context the issue of risk and uncertainty as far as the economics goes is more important than it might be for perhaps the risk of losing a particular species. What we have here is an economics policy which has a national dimension. So in a sense once you put that policy into place if it has high economic cost, you can't diversify that away. So the risk from an economic point of view is quite high because it can't be diversified away in investments. Therefore, I think there is a higher degree of feedback from the economic debate on the greenhouse issue than there is perhaps in terms of the science, saying: 'We want to know whether you scientists are certain about this - we want to know what the damage effects might be.'

Basically, if we are going to impose the carbon tax, it will affect far more across the board, whereas in other areas perhaps where you are looking at biodiversity, where there might be a small regional impact, yes, there is the same degree perhaps of scientific uncertainty or certainty about that area, but the economic impacts can be basically absorbed within the economy slightly better. That doesn't really fully answer your question - I could take a long time to answer all of it.

Ian Booth: One of the examples of that uncertainty is the admission in our first inventory about land clearing - not only the rate of it but the carbon sequestration effect of clearing and regrowth after clearing. At the moment assumptions have to be made about what grows back. Because these assumptions were too difficult, our first report card on inventory gives no figure for regrowth. So there is an area where the Bureau of Resource Sciences and CSIRO will have to do quite a lot more work to quantify the land clearing effect.

Charles Jubb: My question or remark is directed towards Rob. You indicated that we do know the cost and that it is one per cent of GDP but it could be two per cent. I suppose the remark you could make is that it could be zero as well. In respect of the modelling - and this is relevant to Andrew as well - to what extent have the models been improved? I know work has gone on to improve the dynamics of the models, especially in respect of how they coped with technological change. Indeed, ABARE has been doing a lot of work with MENSA for it to be better able to deal with technical change. Do you have any remarks or insights to provide there? I think there are potentially important issues associated with that.

Rob McDougall: Certainly the last word on even the simplest question, the ongoing direct economic cost, has not been spoken. The work that we have been doing has been directed in the first instance towards getting a more detailed picture of the energy sector itself. As we have done that, it has tended to make the model a little more rigid and to raise abatement costs a bit.

One contrast is that we keep getting lower abatement costs than MENSA, and given what we know about the limitations of the two models, it is likely that the truth is somewhere in between. There are some technical rigidities which they have taken account of that we haven't. On the other hand, there are some substitution possibilities that we have taken account of that they haven't.

Our current efforts are towards integrating these two models and combining the tops down and the bottoms up approaches. So it will be quite interesting to see whether their plan is closer to ours or whether ours closer to theirs.

As far as the dynamics goes, obviously there is a lot of interesting work there, and Warwick McKibbin on that issue is out in front of us now and will be for some months to come at least. There is some interesting information there, but for the long run costs he comes up with pretty similar numbers to us. So it doesn't look as if that is typically a critical factor on that issue. Obviously there are lots of other questions that one can ask for which none of the dynamics is critical.

If we come out with, say, 0.8, no one would be surprised if it got to 1.6, but when we look at the way these numbers are used in the debate, I think the political impact of 0.8 and 1.6 would be close to indistinguishable. We can improve, but I don't think it is a real constraining factor. I think there are other constraining factors on making good policy in this area.

Warwick McKibbin (ANU): I am probably asking the question from the wrong side of the debate, but one thing that worries me with some of the presentations and from the modellers is that there really are standard errors in these models, especially once you try to estimate the models, as we do. If you find there are standard errors, we know there should be a statistical statement, and I agree with the mean estimates that were shown.

The second point is that when we are doing these projections out over long horizons and we are running our work out to 2100 or whatever, the uncertainties expand at an incredibly large rate. So that when you start to talk about what do we know as to the position 30 years from now, we are talking about enormous standard errors. That is something to keep in mind, and you can use it on either side of the debate, so it is an embarrassing statement for me to make speaking as a modeller. But I really think we need to worry about the equilibrium models that are being used.

I think the dynamics story is very important because it is something that happens in the very near future. So in the dynamics story, what happens next year or the year after when we impose one of these taxes is understood with a lot more certainty. The standard errors don't explode out anywhere near as they do 30 years from now. So there is a danger in using equilibrium models without standard errors. I wouldn't minimise the dynamics story. I think it is most important because it gives us the most information that we can feel reliable about.

Andrew Chisholm: Perhaps I may comment on that. Despite Hugh Saddler's cynicism, I think that ultimately if there is a greenhouse problem the answers have to be technological. With our current state of technology, to try to avert the greenhouse problem and get the sorts of magnitudes of reduction of 60 per cent plus that IPCC is talking about to stabilise concentrations, it couldn't be done. There has to be a long term technological solution. I am not cynical about that, and think there may be technology in the longer term, but what the economic models are telling us is very relevant to the medium term - the next 10 years.

I am relatively confident. I am not an economic modeller in the greenhouse context but am an economic model user. Having looked at in a number of ways and worked with John Zeitsch on the matter, my view is that one can do a lot of different things to these models and they still keep coming up with the number 0.89 per cent for loss in GDP, or 0.8 per cent or 0.1 per cent or one per cent. It all seems to be around the same order of magnitude. It is a relatively stable result for a scenario looking up to 10 years hence. That is an important timeframe. That's why I think we shouldn't leap into carbon taxes straight away. A ten-year time delay could make all the difference in terms of both our knowledge of the economics of it and our knowledge of the science of it, and we do not run the risk of putting into place a policy which may end up being a bad rather than a good tax.

So in response to what Warwick and Charles were saying, I feel that from the point of view of certainty in terms of 10 years, the model is relatively good. There are standard errors around it but I think we have a relative confidence about impacts. Those impacts are important. One per cent of GDP is about the loss we get from a recession. A hundred years hence, well, who knows what the story is both from an economic and technological point of view.

Clive Hamilton: Well, in 10 years' time I think we will have a hell of a lot more greenhouse gases emitted into the atmosphere as well. Also, as we know, slowing down emissions is a bit like stopping an ocean liner, and it will take a very long time. So 10 years increase in subsequent years will mean a great deal more by way of carbon emissions. So I think we do have to take seriously the precautionary principle and look at the gathering volumes of scientific evidence, not only on emissions, which is now reasonably solid, but particularly on impacts of emissions.

Also, on Andrew's point about the models consistently showing a cost of around one per cent, I think that says not so much about the accuracy of the models but the way the models are constructed, and the consistency with which they miss out on some quite critical aspects.

I would like to ask all of the three speakers here about no-regrets, and what the willingness of industry to embark upon voluntary agreements says about their perception of the availability of no-regrets measures. And whether it is the case that each of the models that we have heard discussed makes the assumption that the economy is sitting on the production possibilities frontier in good neo-classical style, but industry's willingness to enter into voluntary agreements suggests that the economy is somewhere inside that frontier.

Rob McDougall: That's one way to tell the story. I suggested other inferences that are equally consistent with the evidence. The one I would suggest is that no-regrets options may be there but overall there are only two choices which are worth considering for long on this matter. One is to introduce an economic instrument, plus other things, but a policy in which an economic instrument is the centrepiece, and the other is to do nothing much. I think industry's willingness to enter into cooperative agreements shows that it sees that situation pretty similarly too, and has a strong preference for doing nothing much - indeed, a strong preference that Australia should do nothing much.

If we look at what has come out since Senator Faulkner announced that he would not proceed with the levy proposal, and at the industry reaction to the relatively moderate target that he was suggesting, the BCA's response to that was that it was not the game they were proposing to play at all and that they didn't in any case think that those targets were necessarily anything like what they had achieved. I think that confirms that the cooperative agreement approach may be a worthwhile thing to do. It may perhaps inspire certain companies to do some things which are good for the environment and good for their bottom line and which for some reason that we don't very well understand they wouldn't otherwise have done. It is not an option for significant debate.

When you concentrate on carbon taxes in the modelling, in my case I don't say that means you must do nothing else but a carbon tax - that you must have no moral suasion, no information provision and so on. But it is saying that all those things will get you only a fraction of the way towards the kind of abatement targets that have been discussed in the IPCC context.

Let me take this opportunity to make a quick reply to Warwick. In all my reading of the empirical modelling literature, I have come to the conclusion that about the most unreliable number to forecast out of virtually any model you could mention is next year's investment and any other macro-economic variable that depends upon that.

Warwick McKibbin: In terms of the models that are out there, I think the neo-classical paradigm that infests the literature is a bit of a red herring. Although G3 in the very long run is a neo-classical model, we got it to relate to involuntary unemployment. So when it is said that all these models are neo-classical, we have unemployed resources.

When we do no-regrets we assume that we are inside the frontier, and we have a way of describing how you get from the inside and onto the frontier in the long run, and carbon taxes may or may not affect the rate at which you get there. So to say 'neo-classical' and everyone scoffs is wrong and is a misunderstanding of the way these models are constructed.

Andrew Chisholm: I have a certain cynicism about no-regrets. I think the no-regrets policy is identified in the national greenhouse response strategy. For a start, in terms of electricity reform I don't believe there was a genuine no-regrets policy. I think electricity reform is more likely to lead to increased emissions. Hopefully, if the reforms achieve what they are meant to, there will be a lower price of electricity. So that would not really be a no-regrets policy even though it was identified as such. Maybe there are some localised externalities which should be included in the price of electricity, but the Victorian externalities study, leaving aside greenhouse issues, showed that the externality cost due to sulphur dioxide emissions under localised pollution costs were very small. And they are certainly nothing like the gains which have been forecast from reform process - whether it goes the full way to selling off or remains at the corporatisation stage.

I don't see that as a no-regrets policy. I see it as a worth-while policy, but it certainly shouldn't have been part of the national greenhouse response strategy.

Energy efficiency is another area identified in the national greenhouse response strategy. If one looks at history, it takes about 30 to 40 years for a new technology to come on stream. If you follow that through, it is relatively consistent in a number of new introductions - like the motor car, for example. When I say 'come on stream' the technology is known about almost for decades, and then suddenly it takes off.

There are a lot of options out there technologically, but unless the pace is forced - and I don't think the pace should be forced - those options will not be adopted. And if they are proven, then they will take off. That applies to things such as solar energy, and possibly solar energy may be a goer in future; possibly deep drilling for geo-thermal power may also be a goer in future. But there seems to be the testing phase of 30 to 40 years. I think there is an economic cost to force that testing phase. The reason is that there is a lot of uncertainty attached to new technologies. It takes a long time to get familiar with what they actually mean.

If in terms of, say, energy efficiency you go in there and force people to adopt things more quickly because you have evaluated the net present value without taking things into account, such as the risk associated with product failure or the uncertainty associated with the expected stream of returns, then you are forcing the pace by adopting such things. That doesn't say I am cynical about the potential in the longer term, but I do think that we shouldn't be too cavalier about forcing the pace when we are ignoring issues of the failure rates associated with new technologies. Tasman has done a little work on light bulbs in a paper we are about to release. We found that if you just introduce standard probability distributions of failure into net present value calculations of light bulbs, you find that they go from being positive to being negative under some sets of assumptions. That is not a comprehensive study but illustrates that risk and failure probability curves for new technologies need to be introduced into our so-called no-regrets policies before we can genuinely say that these are 'no regrets'.

Peter Kincade: The point really boils down to the extent of no-regrets that is out there, which in terms of energy emissions comes back to whether you believe current energy markets are performing and operating well. Many of the assumptions behind the beliefs that there are no no-regrets options out there are that energy markets do perform well more or less as currently structured, give or take a few reforms that are needed in the electricity industry.

What we are saying is that there is a lot of evidence out there to suggest otherwise - that if you are not looking at just overall energy costs but are looking at energy services and how to produce the most cost-effective outcome in terms of the provision of energy services and not in terms of the provision of units of energy, then energy markets aren't operating well, the question then arises: what is the best way to overcome the problem of energy markets not operating well? It then comes down to the question: do you implement a one-hit carbon tax or do you implement a range of other options? Again, there is a lot of evidence to suggest that a package of measures specifically targeted at those sections of the energy market that aren't performing well is a more cost-effective means of achieving emission reductions. I guess that is a fundamental issue.

Mick Common in conversation with me raised a point about our carbon levy proposal, which perhaps is not well-recognised. Basically we argue that our carbon levy as hypothecated is a short term or temporary measure aimed at overcoming those energy market distortions. If that market for energy services, as distinct from market units of energy supply, is operating reasonably well, then the case for a larger revenue -neutral carbon tax is much stronger.

Hugh Saddler: Obviously this is an area where there is a lot of confusion. I think one of the points that is well made in the articles in the journal I mentioned in my earlier remarks is that there is a lot of competition between energy markets, but that doesn't mean that they are markets that are perfect in the theoretical sense. Once again I am sure all of us present know that, but that is one of the major sources of myth out there in the general debate. Energy markets are no different from the vast majority of all other markets and they don't work perfectly according to what theory says a perfect market is.

That leads on to the next point. In the great majority of areas of our economic activity most firms are not at the production frontier. I think there is an interesting issue here for us if we are concerned about greenhouse: are the energy markets special? Should we have a measure specially targeted to them, or should we have measures that improve efficiency, moves towards the production frontier, across the economy overall? I suppose it gets down to micro-economic reform or whatever you want to call it in the political buzzword generally. Probably that aspect is not thought about enough when we are talking about greenhouse policy and it does merit thinking about.

The third comment I would make, in response to Andrew's points which certainly have some merit, is that that governments or other agencies can do to affect the rate at which technologies move through the phase to full commercialisation.

Looking back in history, one sees many examples of this from the United States in particular and other countries, not necessarily in the energy area. There is now a jargon phrase used in the demand management industry called 'market transformation'. Utilities that are very keen on demand management measures in North America, New Zealand and other places are increasingly structuring their demand management programs and are placing emphasis on market transformation.

It seeks to bring forward technologies by increasing the volume of the market and bring down production costs and maybe accelerating the process of testing and improving the technology. This gets us into industry policy, which obviously we don't want to get into. I think that issue raises a whole lot of issues of other policy areas and we should be aware of them.

Charles Jubb: I would comment on the forcing of technologies. There is a difference between demanding that a particular technology be brought on stream more quickly as opposed to changing the incentive structure, such that the market may well decide to invest more in a particular technology and accelerate its development. In terms of the work you are talking about, it seems to me that it would be quite interesting to look at a range of products and see if there were any what one might describe as structural shifts that led to an acceleration in the development. You can take certain products and potentially they take 40 or 50 years to be fully commercialised, but are there other products which, because of some shock to the system, were commercialised more rapidly?

In respect of product development, I think that oft times it is the case that a product that was being developed for a particular purpose, given a change, suddenly takes off and is applied more widely. When one looks at spillover effects and the like in respect of product development, there has been some analysis of the development life of products. Certainly some work has been done in that area.

Andrew Chisholm: At this stage I certainly would be more favourably inclined towards government intervention which involved an emphasis on research in technological areas. If there is a means, other than carbon taxes, I would say that possibly there could be a justification for the argument. If it is felt that there should be more research on, say, solar power or some subsidy to that effect, one would have to address all the boundary problems and get into picking winners and all the rest of it. I would have a leaning that way at this stage more than towards carbon taxes. I would lean more towards lump sum-type grants for technological research.

Chair: If I may take up Andrew's point about the slow pace of technological change, I recall two things. First, the first fax was used over 100 years ago. And secondly, of all the steel and steel alloys now in use, half of them were not in use 10 years ago.

Ben Smith (ANU): If we believe - and there are serious doubts about whether we should believe - that the emission of carbon dioxide and greenhouse gas into the atmosphere imposes a social cost on Australia, and we may believe it imposes a social cost on the world, then whether we should be doing something about it depends a lot on whether we think anybody else is going to do something about it.

It is very interesting that Rob suggested that if everybody else did something about it, this would increase the cost to us, without remembering to tell us that if nobody else did anything about it, we would not get any benefits at all out of reductions in greenhouse gas emissions. If we were the only people doing it, we certainly ought to be doing very little - in fact, we ought to be doing nothing.

But let us suppose we do believe that there is this social cost associated with these things, then surely the appropriate thing to do, if we believe at all in the market mechanism, would be to price that social cost and that price would itself provide the incentives for the technological development. We would not sit down and form ourselves into a nice government committee and say: 'Okay, we've got to do something about this. What shall we subsidise?' and try to pick winners. I am astonished that Andrew Chisholm thinks that that is the way we ought to fix our social ills.

Michele Smith (DEST): First, in terms of multilateral action, I wonder whether Rob has considered what opportunities there are for the rest of the world to reduce their use of dirty brown coal and increase their use of our high quality black coal.

My second question relates to the double dividend issue. Rob argued that it is a mirage and that the gross costs of a carbon tax would be positive. If the carbon tax were to replace other taxes and those taxes had higher costs - and perhaps payroll tax, or taxes on savings or any of the other taxes, even income tax or company tax, do have higher costs - how is it that there is not that economic dividend as well as the environmental dividend?

Rob McDougall: To take the second question first, there was a rush of excitement around the world a couple of years ago when people realised that they had a way of getting economic benefits out of a carbon tax in some of the models. The way it went is as follows. Well, there is a European version and the US version. A lot of guys in the US have got models in which taxes on investment or taxes on saving are extremely distortionary and have very high welfare costs. So they said: 'Okay, if we run our models, we put on a carbon tax, we recycle the revenue and, by reducing this extremely distortionary tax, we can even come out ahead.' As an abstract proposition about behaviour of a model, that's true. I think there are some people who doubt that these taxes on saving are quite as costly as the models say they are, but that's another story.

One of the main counter arguments is as follows. If you really believe that those taxes are highly distortionary, much more distortionary not just than a carbon tax but almost every other tax in your current policy repertoire, you don't have to wait for a carbon tax, and you won't wait for a carbon tax to go and cut those highly distortionary taxes. If you don't believe they are highly distortionary, then when you do bring in a carbon tax, there is no particular reason to believe that those taxes are the ones you will cut anyway. So you have to have a very peculiar psychology and a very peculiar political situation for that argument to run through.

Michele Smith: If I may comment further, I feel we do have to find alternatives. But the argument doesn't seem to refute the potential for a double dividend. If you can show taxes that are more costly than a carbon tax, then it seems to me straight-forward that there is an economic dividend to be had. I would be interested in an answer to the first part of my question in relation to the sale of black coal.

Rob McDougall: I would not claim to have explored the issue of black coal with total thoroughness, but our predisposition is that there is not a great deal in it.

Australia has some nice clean coal, and as other countries around the world are getting more sensitive particularly to sulphur dioxide emissions, we are getting some better export opportunities for that coal. In the greenhouse debate most of the modelling involves significant cuts - you have got to get out of coal altogether, all kinds of coal. You have to switch towards gas or oil or else reduce your total energy usage. In our modelling for Australia, for instance, we get big cuts in usage both of black and of brown coal.

So all the signs are that while maybe Australian coal would fare somewhat better than other dirtier coals, overall the impact for us as an energy exporter and as an exporter of what are dirtier than average kinds of energy is that we have to lose on the trade effects.

Mick Common: Ben was totally amazed I think to hear someone from the Tasman Institute advocating subsidies. I was slightly surprised to hear Andrew say, as I understood him, not that he was implacably imposed to carbon taxation, but that it probably wasn't right to do it today. I think that is what he was saying.

I would like to put this to Andrew. Australia has, for better or worse, signed an international treaty which commits it to reducing its greenhouse gas emissions to 1990 levels by the year 2000. We are now into 1995. It is generally agreed that in the absence of policy initiatives, that international treaty obligation will not be met by Australia. Given that timeframe, as an economist what would Andrew suggest to the government that it ought to do, if not carbon taxation?

Andrew Chisholm: I think first of all we have to be very careful about reading into the convention words that it doesn't actually say. The only statement it makes about targets in the commitments section is that OECD countries will aim at - not reach, but aim at - meeting 1990 levels in carbon dioxide. And they are also to implement policies which will reduce emissions and enhance sinks. That is the statement, so we are reading more into it if we say that Australia or any other OECD country has to meet that target. There are also quite clear provisions which are generally said to apply to developing countries, but when you read the convention it can also apply to OECD countries for burden sharing, particularly if the economy is affected and is fossil-fuel dependent. The definition of fossil-fuel dependent is a matter for debate as is the topic of how these things apply. But Australia, to my reading, has not committed itself to achieve that target, except in a domestic sense. So there is a domestic policy to achieve 1990 emissions levels by the year 2000. That is a domestic political decision, so obviously there are some political sensitivities in moving away from that.

I think the reality is that we will not achieve that target. It is now 1995 and I doubt we will achieve that figure - in fact, I am almost 95 per cent sure we will not achieve it. It is a difficult thing to admit politically. It shouldn't be a difficult thing to admit politically on the international scene because we haven't committed to it.

If we want to talk about policies, we had committed to exploring some policies which would reduce our emissions and enhance our sinks. I certainly think we should be exploring the joint implementation provisions. I think it is far more effective to finance emissions reductions in countries which have dirtier technologies than Australia has. There are a lot of problems in that, but I certainly think those options need to be explored and a lot more emphasis needs to be placed on that rather than the arbitrary level chosen for a carbon tax - and a rather restricted carbon tax which doesn't apply to all emissions or all sources and sinks.

Secondly, I think that the area of energy efficiency and no-regrets options needs to be explored, as stated in the national greenhouse response strategy. I am not so adverse to thinking there may be some gains in that area. I am a bit cynical about the level of gains that has been cited that we will achieve seven per cent reductions in energy efficiency, but that may still be the case. So I think that is a valid option to explore.

I certainly think that in the longer term, if science is shown to be correct - maybe temperatures will increase but we need to show that there will be damages - and if we can demonstrate that there will be some form of damages and if that is done in an iterative sort of process of consultation as to what the cost would be in avoiding those damages, then maybe we do need to address an economic instrument. Assuming that that is the goal we are aiming at, then a broadly based tax or tradeable permit system or tax subsidy mixture will be the thing to choose. But it is too early to impose that at this stage.

Hugh Saddler: I would like to get back to the point about coal. My company did quite a large study last year for the Department of Primary Industries and Energy on this topic. It is quite correct, as Rob said, that if you want to get significant reductions in emissions, you have got to move away from coal towards gas. A lot of countries in Asia have an emphasis on use of natural gas because that is the main energy resource that they have or have access to.

When you are talking about coal in the Asian area, of course you are talking about China and India. The facts are that if you burn high moisture content brown coal such as found in the Latrobe Valley, you do have an inherent thermo-dynamic efficiency problem. But most of what is burnt in those countries is not that sort of semi-peat stuff. It is just high ash black coal. In fact, the inherent difference in thermal efficiency with the high ash content is very small between burning low ash export Australian steaming coal and the high ash stuff they dig up there, with properly designed power stations for both of them - and with equal size power stations in both instances. A lot of the ones that are there at the moment are very small and sub-optimal. In that sense there is very little thermal efficiency gain. You would be lucky if the figure were one per cent going from the high ash to the low ash.

Warwick McKibbin: I have two questions. In one I wish to get back to the question of double dipping. A paper I did with Peter Willcox in 1992 looked at the recycling question for the US Environmental Protection Agency. We found that in the short run there was no way you could ever get a double dividend. After 10 or 20 years you could find a double dividend, but that doesn't mean that you want to use a carbon tax as a part of that double dividend. If you find these distortionary taxes that you want to get rid of and if you want to use the carbon tax as the optimal way of paying for that, then the answer is clearly no. In the US context it is much better to use an income tax to get rid of the capital tax.

Michele Smith: But does an income tax have environmental benefits? That is the other issue surely. We are not just looking fiscal effect.

Warwick McKibbin: There is a trade-off and then it is ambiguous. It depends on the criteria. Is the point of your criteria to raise economic growth or to reduce the environmental problems? The objective function is presumably aimed at both: the same environmental outcomes with high growth or better environmental outcomes with the same amount of growth. The point is there is a trade-off.

As to the carbon tax, no matter how you do it, if you put all the weight on the environmental issues, then the carbon tax is the optimal thing. It is not a clear choice.

The second issue I wanted to raise was that I am surprised that the environmental groups in this country are focusing so much attention on the greenhouse gas issue. It strikes me that that is the one type of policy which we have no chance whatsoever in the near future of the world agreeing to follow. If the world doesn't do it, the gains to Australia of doing it are epsilon. They are there, we want to be good global citizens, that's fine, but the point is that we are wasting a hell of a lot of resources inside government and inside corporations in fighting these carbon taxes, and by the green movement being diverted to an issue that is a non-issue.

I would like to hear from the environmental groups here as to why they are wasting their time on that. Surely from the point of view of efficiency it is better to focus on local gains than global environmental policy. The focus would be: if we have to pay it, we get the benefit. Let's solve those environmental problems first, get to the regional environmental problems second, and then worry about the global problems when it is feasible that something will be done about it.

Ian Booth: I think that is quite an interesting point. If I can reserve my points, following anyone who wants to reply to Warwick.

Gul Izmir: I support that. I do not know whether you were here this morning for my talk, but that was basically one of the points I made. Any application of economic instruments seems to be heavily targeted to our local conditions and local problems.

Barry Norton (ABARE): It is not new to focus on some local externalities. Internalisation also produces greenhouse gas emissions reductions. Those of course are one type of no-regrets policy, and I agree with the comments that were made earlier. The term no-regrets is glib and skates over all sorts of issues, particularly distribution issues. Certainly there is scope for movement in terms of internalising local emissions that also reduce carbon dioxide or greenhouse gas emissions. That is an area that has been addressed for some time, particularly in the area of urban form and the use of fuel in transport. It is rather remarkable that I don't recall that issue having been raised so far in this afternoon's discussion. To that extent I suppose Warwick's point has some force.

Ian Booth: In regard to no-regrets, I think clearly the sort of voluntary agreements which the government and certainly the big end of town - industry - is talking about, are not a representative for that.

Chair: You are a farmer, aren't you?

Ian Booth: Exactly, and I know something about what they are pushing. As I see it, certainly they go beyond business as usual. In fact, the government was very particular to distinguish no -regrets from mere business as usual. So there is one angle on the no-regrets.

An example of that might be, I suspect, that in terms of some of the sectors such as aluminium, and I think cement, the claim there are new chemical breakthroughs that could achieve 10 to 20 per cent efficiency gains. They are decisions that would cost a lot of money, especially in the short term. To the extent that they are bringing forward those technology investment decisions, perhaps several years before the internal rate of return has been achieved on their present capital, I think you could say that is at least a full no-regrets sort of response.

When you look at the nature of voluntary agreements that the government is looking at, they will have at least three components. There will be voluntary expectations of abatement achievements; there will be monitoring; and there will be reporting. So there will be a transparent process for energy efficiency gains, and without committing to targets, companies will be asked to put down on paper what they think they can do. It is clearly more than business as usual.

I would challenge the brave assumption by Rob McDougall about competitors not being a factor. If you rip the guts out of electricity, coal and aluminium, that may be fine in the very long term, but short of some sort of carefully managed MITI-style short-medium term transformation of the Australian economy, what replaces that in a way that doesn't cause a five to ten year marking time effort with the Australian economy?

Rob McDougall: In terms of the impacts of the policy on our trading position, I feel that the problem isn't competitiveness at all. The modelling work that we have been doing does indicate that Australia with a carbon tax would be a somewhat lower export economy than Australia without a carbon tax.

There are a number of reasons for that of which the sectoral impacts of the tax are not the most important. The most important is that we projected that Australia with a carbon tax would be a relatively less capital-intensive economy. In association with that it would be an economy which had lower foreign liabilities with less need to service interest or dividends on those liabilities. So we projected that exports would be lower because the balance of trade task would be lower.

Looking at individual sectors, it is critically important to distinguish the effects of action by Australia against action by everyone else. It doesn't seem to have the agreement of everyone here, including Ben Smith, but action by Australia with a consumption-based carbon tax has no direct impact on Australian coal exports. It is not a tax on exporting coal from Australia. Of course, if other countries take abatement action, you will see less coal. But if we can assume that their decisions and our decisions are separable, what we do will not persuade the rest of the world either to commit or not to commit to abatement. There is no reason to believe that an Australian consumption-based carbon tax would reduce our coal exports. Conceivably it could even have the opposite effect, at least for a time, because it would stress the coal industry, which would then be prepare to accept lower prices for export coal, at least over some adjustment period.

We do not export electricity. We do export aluminium of course, and there would be a lot less of that. But again on our figuring - other people might have slightly different figures - the reduction in exports of the energy-intensive commodities that we sell would be less than the reduction in the size of the export task altogether. There are lots of economic costs involved, but I regard competitiveness as a misconceived reason for opposing the tax on a national basis. Of course, that is not to deny that it will have massive competitiveness effects for particular industries and particular companies. Obviously, they have a lot at stake in this matter.

Ian Booth: Setting aside primary produce, if we were not exporting energy-embodied-intensive products, what would we be exporting to reach a lower balance point, assuming your assumption is right? What will certain industries do, given the very large contribution that they make at present?

Rob McDougall: We do not think it is so very large when you look at the embodied export industries. I think that point is somewhat overstated. It is true that the basic metals are energy intensive - not just aluminium, but the other ones too on average are fairly energy intensive. We project that the whole sector would get it in the neck. But that sector by itself does not dominate Australia's exports when one looks at the others. For example, there are rural exports; there are the fossil fuel exports, which are not damaged by our national abatement action; there is iron ore and a whole range of non-traditional exports which individually do not amount to that much, but which in total are now of some significance.

We are looking at a loss of export revenue of about five per cent in aggregate, and much higher for basic metal products. In general, exports are not decimated and one tends to stress exports as a whole. It is not just a matter of tax but the decreased need for export revenue. Obviously, that is contingent upon whether you believe that the carbon tax will make Australia more or less a capital intensive economy. We can afford to lose the aluminium exports. They are not that huge by themselves. In fact, from a selfish point of view it is a good thing to do - if you say that Australia has a target to meet, we don't really care about the environment, we just want to meet that target! Sending Alcoa out of Portland is, from a national point of view, a relatively cheap option. But it does the world environment no good if they just set up in Brazil.

Mick Common: I think it is quite important to try to answer Warwick McKibbin's question. As I understand it, the answer goes something like this: increasing emissions of greenhouse gases is considered by a great many people, who spend a lot of time thinking very hard and working very hard in assessing the implications, to be a major threat to the integrity of the global biosphere.

If one accepts that, there is a global problem in addressing that threat. Many people think that that problem has equity dimensions as well as efficiency dimensions. I think that is what motivated the outcome at the climate change convention - that the industrial countries being richer undertook on an equity basis to take the lead in addressing this problem. Let us be clear: Australia is by world standards a rich country. When we talk of a cost of one per cent of Australian GDP, that has to be compared with Australian GDP vis-a-vis, let us say, Indian GDP per capita. So the reasons why Australia might be contemplating bearing this cost I do not think are all that hard to find.

Warwick McKibbin: I agree. My point is that there is no way that you will get a coalition formed that will achieve that. Given that, is there any point in going through this? Why do we not spend the resources on things from which we can get a higher return for less cost, and then worry about whether the coalition, when formed, will go along with it?

Mick Common: I think the answer to that is that to the extent that countries such as Australia adopt that view, an initial coalition of such countries is less likely to be formed.

Tor Hundloe (Chair): I will now attempt very briefly to sum up the highlights of this seminar.

Out of Gul's paper I noted the graph showing what people were willing to spend their tax dollars upon. From that paper I got a message about the drivers and barriers, which I think was important. I also took the point that in this argument we should pursue a more rational debate, which is what today's process has been about. For that we can thank DEST and the ANU. Deborah Peterson presented to us some important empirical work on a vital issue. Unfortunately, Deborah is not present to hear those words of encouragement. I look forward to seeing the results of ABARE's work.

Steve Dovers introduced SSMMs - and I will not forget that one - and Charles Jubb made an important contribution in outlining his work on the plastics survey. He met some resistance because the exercise had never been done before.

I think there was a message there.

Trish Caswell and Peter Kinrade talked about the ironies in what we tax and there were jokes about the bed tax. They basically said that resources should be targeted rather than labour or beds. Obviously there is a message for us there too. It can probably be summed up by saying that we have a long way to go in terms of institutional changes in this country. Trish compared what we did with what happened in other parts of the world.

We also got a number of messages from the remarks of Rob McDougall. There are some things that we do know and some things that we do not know on this important subject. I made note of the call for distribution, distribution, distribution, which again is important.

I turn to the contribution to the seminar by Andrew Chisholm. His central message was that we should wait before we impose a carbon tax. He feels that we need more science and he made the point that a bad tax gets worse.

Hugh Saddler made the basic point: no regrets, no regrets, no regrets. There is another important message for us there. This is a matter for continuing discussion, possibly outside this forum.

Near the end of the day Ian Booth mentioned MITI, a reference that I must confess I did not fully hear.

On that note I will conclude by thanking John Dash and Beth Stoodley from the CCE for organising this seminar. I also wish to thank Paul Pollard and DEST for putting up the money for this event. I especially extend thanks to Mick Common for his background paper and the hard work he has done to make this seminar a success.

Last but not least, I wish to thank you all for your participation in what I believe has been a successful day in what will be a successful series. I declare the seminar closed.

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