Tristan and I are winding up our work in Laos for WWF’s sustainable rattan project. As we’re getting ready to head back home, we looked at the Australian news and were disappointed to read about the Senate Select Committee on Scrutiny of New Taxes’ interim report (http://news.smh.com.au/breaking-news-national/carbon-tax-to-cost-1-trillion-committee-20111007-1lcpw.html).
It’s a Coalition dominated committee, so it being critical of the carbon tax was expected, but what disappointed us was that the parts that grabbed headlines:
The committee found that under the government’s own modelling the carbon tax would impose a $1 trillion cost on the Australian economy, or $40,000 per person.
What they mean to say is:
- Under Treasury modelling, the Australian GDP grows strongly both with and without a carbon tax. The present value of the difference between these two growth rates is around $1 trillion, of course the present value of GDP over this time is much bigger, around $50 trillion.
- Dividing $1 trillion by 25 million gives you $40,000. This is completely meaningless as this is the difference between the present value of growth rates of national income and should not in any way be used to suggest that individual Australians will need to cough up $40K any time soon. Of course household incomes are higher in the future under both scenarios.
OK, so it took a few more lines, but it wasn’t that hard, was it?
There are two fundamental ideas that are made foggy by such reporting.
- A price on carbon would result in a slight delay in reaching a higher level of income the future.
- Some people will be more affected than others and these effects should be handled by a redistributive policy (something that is already planned).
Does all this sound familiar? It should, as it’s the same misconception that was being pedalled by the Institute of Public Affairs a couple of months back. I blogged about it here.
Reporting aside, the Senate Committee’s call for a cost-benefit analysis of the carbon pricing policy is also somewhat misguided. Cost-benefit analysis is a useful tool and one that Economists at Large frequent advocate, particularly for project assessment. The Clean Energy Future package of policies is not a project and should ideally result in long-term structural changes to the economy. Conducting cost-benefit analysis of carbon pricing policies has been discussed by Stern, Garnaut and others. Cost-benefit analysis of long-term policies is an interesting topic and something we plan to blog about – in the future. Stay tuned.
More info:
