COLUMN-Australia dumps working carbon tax, keeps failed mining tax: Clyde Russell

Mon Jul 21, 2014 2:10am EDT

--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, July 21 (Reuters) - Australian lawmakers have voted to dump a tax that was arguably working and keep one that is demonstrably failing in yet another example of petty politics trumping sensible policy.

The conservative government of Prime Minister Tony Abbott finally managed last week to pass legislation through both houses of parliament that ended the carbon tax and the floating emissions scheme it was to morph into from July 2015.

However, his ruling Liberal Party failed to convince enough senators to scrap the Mineral Resource Rent Tax (MRRT), which taxes the so-called super profits of major iron ore and coal miners.

Getting rid of both taxes was the centrepiece of Abbott's successful election campaign last year, which saw him defeat the Labor Party, which had introduced both imposts during its six years in government.

The problem for Abbott is that while he has a comfortable majority in the lower House of Representatives, he doesn't control the upper house Senate and has to negotiate with minor parties and independents, assuming the main opposition Labor and Greens oppose his legislation.

This situation has resulted in maverick mining billionaire Clive Palmer, who sits in the lower house, and three senators from his eponymous Palmer United Party, largely being able to determine which pieces of government legislation are approved.

Palmer initially blocked the repeal of the carbon tax, holding out for guarantees that the savings would be passed on to consumers.

He was also instrumental in the failure of legislation to end the MRRT, deciding that he would only support the bill if the welfare payments that were supposed to be funded by the tax were kept and not scrapped as well.

This decision showed the inconsistent nature of Palmer, given that he had previously indicated that he supported ending the MRRT, which wasn't surprising given his money is largely made from mining.

But he is also trying to be something of a populist conservative, and the scrapping of welfare measures, such as a schoolkids bonus, didn't suit his attempts to court wider support.

What Australia has ended up with, for the time being at least, is the demise of a tax that worked and the retention of one that didn't.

The carbon tax would have raised around A$8 billion ($7.5 billion) in the current 2014-15 fiscal year, revenue that is now lost to the Treasury.

However, the MRRT has proved a revenue disaster, falling hopelessly short of the A$22.5 billion it was expected to raise over four years when it was introduced in 2011.

It brought in about A$200 million in the 2012-13 tax year, and the pre-election budget update in August last year estimated it would raise A$6 billion over the next four years.

However, even this lower amount seems optimistic, given the tax is only triggered when miners are making strong profits, something not currently happening and given the outlook for lower coal and iron ore prices, something unlikely to happen any time soon.

The government now faces the situation where it is collecting a tax where the compliance costs almost outweigh the revenue raised, while it still has to fork out an estimated net A$13 billion through 2017-18 in welfare payments that were supposed to be covered by the MRRT.

It's possible that the MRRT will be scrapped as the government is likely to continue to try and convince Palmer's and other senators to back its plans.

However, it also seems likely that the government will have to compromise on the associated welfare payments, denting its hopes to return the federal budget to surplus.

OVERLY OPTIMISTIC GLOBAL HOPES

In a further blow to Abbott's efforts to re-balance the government's budget after six years of Labor deficits, the scrapping of the carbon tax wasn't accompanied by the end of some of the associated bureaucratic entities, such as the Clean Energy Finance Corp and the Climate Change Authority.

But more than the hit to revenue from ending the carbon tax was the fact that it appeared to be working insofar as Australia's emissions declined 2 percent in the year to June 2013 compared to the year to March 2013.

However, the argument from the Abbott government was that the tax was still a failure as the modest reduction in emissions came at too high a price, with retail electricity costs rising 80 percent over the past five years, a factor in Australia's loss of international competitiveness.

There is also the signal sent by Australia's decision to scrap its carbon tax and the eventual move to emissions trading.

While some commentary has said the decision makes it harder for a global emissions system to develop, it's possible that the Australian move merely highlights that hopes for a coordinated worldwide scheme to lower carbon pollution were overly optimistic.

What Australia has shown is that domestic politics is likely to trump global concerns about climate change caused by the burning of fossil fuels. (Editing by Muralikumar Anantharaman)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.