Reactions to and implications of the carbon tax repeal

Mike Kane of Hedgeable
August 4, 2014

Overview: Implications of Australia’s carbon tax repeal (Part 3 of 3)

(Continued from Part 2)

Consumers, of course, also disapproved of rising prices as costs were passed on to them, including the sharp increase in retail gas and electricity bills. International trade was also impacted by the carbon tax, as Australia is one of the world’s largest coal exporters and supplies China (FXI) with much of its energy demand.

Market Realist – The prices of electricity and retail gas in Australia have increased over the years. According to the Australia Bureau of Statistics, from June, 2007, to December, 2012, average electricity prices increased by 70%. According to national average figures provided by the Federal treasury, carbon tax accounted for 9% of the average electricity bill. The previous graph charts the electricity prices for households and the manufacturing industry.

The manufacturing Producer Price Index (or PPI) has been used along with the household Consumer Price Index (or CPI) in the chart to give an idea of the rising electricity prices due to non-availability of data and the predominance of the manufacturing sector as an industry user of electricity.

Despite carbon playing an integral role in the economy, the legislation was effective in its aim to control emissions, as carbon output slowed down after the tax was introduced in 2011.

But with the levy now a thing of the past, that trend will likely reverse and Prime Minister Tony Abbott envisions a boost to the economy, to the tune of about nine billion AUD. In the short-term, the average cost of living in Australia is set to decline by an estimated 550 AUD annually, as long as businesses pass cost savings on to consumers.

The biggest change may come in Australia’s (EWA) ability to compete internationally. The tax hampered many natural resource companies that faced an extra cost compared to various competitors. Many of the key natural resource players outside of the European Union (EZU) don’t face any stringent regulations.

For the international community attempting to push climate change legislation, Australia’s repeal is a devastating blow. Given its location and economic stature, Australia was an important piece of the expanding global carbon pricing infrastructure—it was scheduled to join the EU’s Emissions Trading Scheme in July, 2015, which would have been a major victory for the emissions-reduction effort. The repeal also comes just before the world’s top nations meet at the 2014 G20 summit—coincidentally hosted by Australia. If climate change makes the agenda, any progress on that front will be stunted.

Market Realist – The repeal in tax has been touted by carbon pricing advocates in Europe and U.S. as a regressive measure. However, it strengthens the stance of countries like Canada which opted out of Kyoto Protocol 2011 citing failure to include the biggest emitters—China (FXI), U.S. (SPY), and India (EPI) as the reason.

Next year’s United Nations Climate Change Conference, to be held in Paris, marks a pivotal time for the international community. Before the repeal, that meeting had been targeted as a major turning point since Australia would have integrated emissions trading with the EU. Those in favor of a more global network for carbon emissions were depending on Australia’s regulatory success in order to make their case. Now, all of that is up in the air and many nations will be hesitant to participate because of the Australian reversal.

This serves as another example of the clash between economic prosperity and the heavily politicized issue of climate change, as well as a reminder that one nation’s actions can have far-reaching ramifications in the increasingly global and interconnected economy.

Market Realist – Read our series on Why the new rule may cut power plant CO2 emission by 30% by 2030 to learn more about the new U.S. Environmental Protection Agency (or EPA) carbon emission proposal.

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