A new report shows how making polluters pay will not only diminish the threat from climate change, but it can also help restore the budget and the economy.

The key domestic policy challenges facing Australia’s national government right now are climate change, restoring Australia’s fiscal capacity, and lifting Australia’s stagnant economic growth rate.

The best way forward in responding to these challenges are the tax changes proposed by the Superpower Institute in a very important report released on 29 January. Unfortunately, this report has been received very little attention by the mainstream media, and hence this summary that follows.

Climate change

As the Superpower Report demonstrates we are not on track to meet our climate targets.

“Sectors representing nearly 40 per cent of Australia’s emissions in 2005 have not begun to reduce. Transport emissions have risen by more than 20 per cent, industry by about seven per cent and stationary energy by more than 20 per cent. Almost all progress has come from land-use change”.

As the report says, “Australia’s current emissions-reduction policies are inefficient because they are narrow and fragmented, with large gaps in coverage… The current policy mix is also expensive to the Budget”, and none of the present policies raise the revenue required to support households and businesses in making the transition to net zero.

More than 50 years ago, the member countries of the OECD, including Australia, agreed that the polluter must pay.

Allowing free pollution is of course economically inefficient, as economic efficiency depends upon the people who destroy productive capacity and well-being being responsible for paying the costs of remediation. Otherwise, they have no incentive to stop polluting.

But making the polluter pay is not what we are presently doing in Australia, and most polluters incur no cost. The present Safeguard Mechanism is capturing only 30 per cent of Australia’s emissions. While the other main instrument for reducing carbon emissions – the Capacity Investment Scheme – has only commenced construction or commissioned less than 3GW of capacity compared to a target of 40GW of new renewable energy capacity and storage.

In addition, gas companies in Australia do not pay an adequate return for being allowed to extract the gas resources that really belong to all Australians. As the report finds, “Currently Australian state and federal governments take approximately 30 per cent of fossil fuel companies’ profits, through a combination of the corporate tax, royalties, and the Petroleum Resource Rent Tax”. This compares with the between 75 and 90 per cent that other major fossil fuel exporting countries typically take, without damage to their trade.

In particular, when fossil fuel prices rise to generate super profits, unlike in other countries, these additional profits in Australia do not translate into additional government revenue.

The Superpower Institute report has proposed two major new taxes to limit carbon emissions and secure a fairer return from our gas supplies: a Polluter Pays Levy (PPL), and a Fair Share Levy (FSL).

The PPL is a tax on the carbon embedded in fossil fuels extracted or imported for use in Australia. If applied to around 140 extraction sites operated by fewer than 60 companies, the Superpower Institute estimates that will cover more than 80 per cent of Australia’s emissions – well above the 30 per cent currently covered by the Safeguard Mechanism and the 34 per cent covered by policies for the electricity sector.

The PPL would begin in 2026 at $17 per tonne of CO2 equivalent and rise until it meets the EU carbon price in 2034, after which it would follow the EU price. In addition, the PPL should be accompanied by a European-style Carbon Border Adjustment Mechanism, or CBAM, applied to energy-intensive imports so that domestic producers are not disadvantaged.

Modelling in the report shows that PPL would accelerate the reduction in emissions, delivering about 100 million tonnes of additional abatement after ten years, and more than double the total reductions expected under current policies.

The FSL is a tax on economic rents modelled on Norway’s Special Tax on Petroleum Income. Because rent taxes leave normal returns untouched, they do not affect future incentives to invest or trade, or Australia’s international competitiveness, and do not increase prices. In addition, because most of the profits from Australia’s oil and gas industry accrue to foreigners, a substantial share of this additional tax burden is borne offshore, while Australians are better off.

The proposed FSL of 40 per cent would lift Australia’s effective tax on fossil fuel profits to around 58 per cent, still at the lower end of global norms.

Restoring Australia’s fiscal capacity

The official forecasts show ongoing structural budget deficits forever of around two per cent of GDP. This represents a real danger to economic management, but it will not be fixed unless the government raises additional revenue or cuts government expenditures.

Of course, no-one wants to pay more tax, but the fact is that many government programs have been chronically under-funded for a decade or more. For example, the punitive university fee regime imposed by Morrison continues to distort tertiary education, equitable school funding under Gonski will not be fully realised until 2034, and public investment in universities, the CSIRO and R&D is lower in real terms than it was a decade ago. Hospital waiting lists remain too long, in part because aged care is still inadequate, with home care packages delayed for more than a year. Income support for unemployed people is widely regarded as insufficient, rent assistance remains too low, and public housing funding is well short of historic norms. In addition, it is generally agreed that we will need to spend a lot more on defence in future.

So clearly we need to raise more revenue, and the two taxes proposed in this report, represent by far the easiest way to make a substantial start.

It is estimated that together the two levies would raise on average $35.6 billion a year in additional revenue over the next 25 years.

However, the report recognises that many small businesses and households have limited opportunities to avoid the additional energy costs. The first call on this additional revenue must therefore be compensation payments to small businesses and households.

To insulate small businesses, the report proposes a Small Business Energy Compensation Payment of $325 per year, similar to the support provided by the former Energy Bill Relief Fund (EBRF) from 2023 to the end of 2025. It is estimated that this relief would require around $325 million per year of PPL revenue and would support around one million eligible small businesses.

The report proposes two payments to households to help insulate them from rising energy costs. However, as households electrify their homes these costs will fall.

First, a Household Compensation Payment will cover conservative estimates of the increases in energy bills before they are able to electrify their homes. The report estimates that this payment will cost an average of $4.1 billion each year, between 2026 and 2050, and it will be worth an average of $330 per household between 2026 and 2050, peaking at about $500 per household in 2033.

The second payment would be to those households, such as renters, those living in apartments and any others who face barriers to electrifying their homes. For the first decade of the PSL the report recommends committing $4 billion per year to supporting these people.

After these compensation payments are netted out, the report estimates that the PPL will deliver an average of $18.5 billion in net annual revenue through to 2050. In addition, it is estimated that the FSL will raise an average of around $13 billion a year.  So together these two taxes will make a very significant contribution to fixing our budget problems, as well as accelerating the desired reduction in carbon emissions.

Lifting Australia’s stagnant economic growth rate

Australia’s economic stagnation over the last 15 years or so largely reflects low investment as manufacturing investment has been wound back and we have switched to service industries. In addition, Treasury modelling released last September predicts that the annual value of fossil fuel exports will fall by more than $60 billion by 2030 as countries decarbonise their economies.

However, as the report says, Australia has a remarkable opportunity to accelerate its economic growth and maintain its exports in a decarbonising world. Australia’s renewable energy, mineral, and other natural resources give it a comparative advantage in producing and exporting zero-carbon, energy intensive goods such as green iron, aluminium, silicon, ammonia and fuels.

By embracing taxes on carbon pollution Australia will create the necessary incentives to promote the development of these new green industries and lift overall economic prosperity.

This report has provided a pathway for the Albanese Government to provide the leadership we expect from government and make a real difference to both the environment and the economy. Action along these lines will not cost the government electorally and it could well help isolate the Opposition.