A carbon tax will obviously help reduce carbon emissions and achievement of the net zero target, but it will also help raise the revenue needed to fund essential government services and promote Australia’s economic development.

Many Labor supporters, including such Labor giants as Bill Kelty, have been critical of what they see as the Albanese Government’s minimalist policy strategy in the last Parliament. Albanese’s response was that he wanted to ensure that his government survived for a second term as that would secure the sustainability of Labor’s policy initiatives.

Well, Albanese has got his second term, and very likely a third term. So what are the key policy challenges that do need to be addressed?

Some relate to foreign policy and Australia’s national security strategy.

As regards domestic policy challenges, Professor Ross Garnaut, a leading economist, contends that Labor’s historic victory should toll the death knell for the political conflict and policy instability that has plagued Australia’s “energy debate” for so many years. The government must grab this opportunity to get the energy transition right in this term and build new zero-carbon industries that will be in great demand in coming decades.

I agree with Garnaut that if we get the energy transition right in this term, it will make a major contribution to resolving the most important domestic policy challenges, which are:

• Climate change;
• Funding essential government services; and
• Future economic development possibilities and lifting productivity.

Climate change

Clearly, if we want to limit the extent of climate change, we need to reduce carbon emissions to zero, and the sooner the better.

The government assures us that Australia will reach its target of 43% emissions reduction by 2030. This projection, however, assumes a significant acceleration in pace from 2027 onwards, as national emissions have flatlined at around 28% below 2005 levels for the last four years.

Theres is no doubt that renewable energy is cheaper, but progress has been delayed by political conflict and consequent policy uncertainty. As Garnaut recently put it, “we ended up with an approach to reducing emissions that relies on a myriad government decisions, none of them easily predictable in advance by market participants”. Undoubtedly, progress would have been faster if the costs to the economy from carbon pollution were matched by a carbon tax.

Australia did operate a system that was effectively a carbon tax from 2012 to 2014 that was economically and environmentally efficient. However, it was stupidly overthrown by the Coalition Government, which, under Tony Abbott, refused to believe that climate change presented a real threat.

Of course, many Australians are reluctant to pay any new tax. But this tax will accelerate the transfer to renewable energy, and because that is cheaper, a carbon tax will help to bring down power prices faster. If necessary, part of the revenue from the carbon tax could be used to subsidise power prices to users until the further expansion of renewable energy and storage has brought power prices down.

In addition, it is most likely that without a carbon tax other forms of taxation will tend to be higher if the necessary services are to be properly funded.

Funding essential government services

During the nine years of Coalition Government, from 2013 to 2022, many government services were deliberately under-funded in an attempt to get the budget “back in the black”. The alternative would have been to make some major policy changes to achieve expenditure savings, but this alternative was dropped after some such changes were rejected in the first Coalition budget in 2014.

In its first term, the first Albanese Government tried to increase the funding for some of the most damaged services, but it is limited by the availability of revenue. Universities, research and development, and foreign aid remain under-funded, the income support for unemployed people is generally agreed to be inadequate, and the funding for public housing needs to increase over time if homelessness is to be reduced, just to give some examples.

Looking ahead, expenditure on the NDIS, defence, aged care and the investment to support the transmission and storage of renewable energy are all forecast to increase. In addition, Australia already has a structural budget deficit, that is projected to continue for at least the next decade. It would therefore be prudent to return the budget to surplus or at least balance, as soon as economically feasible.

In short, a rough assessment is that Australia needs to increase its revenue by around 4% of GDP. That would still leave the ratio of tax revenue to GDP lower than in most other developed economies.

Even if we can get sufficient agreement on how much extra revenue is needed, there will, of course, be a debate about how best to raise it. But given the merits of a carbon tax, it seems incontrovertible that such a tax should be an important part of the solution. That then leads to the question, how much can we expect the carbon tax to raise?

Professor Garnaut and his colleague, Rod Sims, from their Superpower Institute, estimate that if the carbon tax were equivalent to the European carbon price, then this tax would raise well over $100 billion or about 4% of GDP in its first year. The advantage of setting the carbon price this high is that it would then secure free access of Australian zero-carbon goods into the main international markets (see more below).

Of course, the revenue from a carbon emissions tax will eventually dry up as the tax achieves its intended purpose and those emissions decline and finally stop. But for a significant period, the revenue from a carbon emissions tax can be put to a very useful purpose.

Future economic development and higher productivity

According to Garnaut in a very recent speech: “Political conflict and policy instability has made energy more expensive and less secure. It has been costly to investment and productivity in energy production and use. It has postponed the time at which Australia could take advantage of its extraordinary resources for producing zero-carbon electricity, and its comparative advantage in production of energy-intensive goods in a zero-carbon world.”

Nevertheless, in the last three years particularly, Australia has made some progress. Australia has enormous natural advantages in producing renewable power, and it has now become the developed country with the largest share of low-cost solar and wind power.

But Australia needs to do more to take full advantage of its low-cost renewable energy by fostering the development of industries that are intensive energy users such as the metals industries. By contrast, conversion of Australian iron ore into iron and steel in Japan, South Korea or China presently produces more than three times the carbon emissions as everything we do in Australia.

In future, the energy source for transforming minerals into metals will be hydrogen, made with renewable energy. However, hydrogen is very expensive and dangerous to transport across the ocean and would cost several times as much in importing countries as it costs when it is made in Australia.

Industries such as iron, steel and aluminium that rely heavily on energy intensive production will therefore be better off to relocate to Australia where their energy needs can be met more cheaply.

But to fully exploit these opportunities, policies are needed to support the necessary innovation, where the risks taken by the innovators are often not fully rewarded. In its first term, the Albanese Government, with its Future Made in Australia policy, made a start on the necessary policy foundations to encourage the replacement of emissions-intensive production with zero-carbon energy.

But there has been less investment than there desirably should have been in the industries of the future that rely on cheap energy despite Australia’s advantages. There has been too much uncertainty and the financial incentives for innovation are less than the benefits to society.

The best way forward in these circumstances is to price and tax carbon emissions. That should provide the necessary certainty to give investors confidence as well as financial incentives.

According to Garnaut’s Superpower Institute, this trade offers economic opportunities that far exceed the scale of traditional fossil fuel exports. Revenue from green exports could surpass coal and gas earnings by six to eight times, driving the creation of high-value jobs and new industries.

Further, by using carbon-free energy or alternatively pricing and taxing the carbon at the same rate as in the European Union, we could expect that our metal exports will be able to enter duty-free in the main markets in Europe and NE Asia, countries that are all committed to net-zero emissions.

Garnaut has, therefore, concluded that these new industries involved in the “superpower trade” would be large enough to drive the restoration of Australia’s productivity growth and living standards after the dozen years of stagnation that began in 2013.

The views expressed in this article may or may not reflect those of Pearls and Irritations.