Treasury analysis released today shows the Opposition's 'Subsidies for Polluters' scheme will more than double the economic cost of reaching the bipartisan carbon pollution reduction target of 5 per cent on 2000 levels by 2020.
The Treasury analysis states that the economic costs of Direct Action would be higher for two reasons:
First, direct domestic action would forego opportunities for cheaper, internationally sourced abatement. Second, direct action programs are generally less effective at driving take up of all potential abatement opportunities.
The Treasury has advised that putting a price on carbon pollution is the cheapest and most effective way to cut carbon pollution and transform our economy to a clean energy future, and the analysis released today on the Treasury website confirms that.
It is consistent with the advice we've seen from leading economic institutions like the IMF, OECD, Productivity Commission and the overwhelming majority of respected economists across the nation.
Direct Action is funded entirely on Budget, using taxpayer funds to pay polluters to lower their pollution. In contrast, a carbon price is paid by polluters. It raises revenue and this will be used to assist householders, support jobs and invest in climate change programs.
Tony Abbott's 'Subsidies for Polluters' scheme will cost the Budget at least $48 billion to 2020, almost 5 times the stated cost of the Coalition policy. This would mean that the average Australian household will have to pay an extra $1,300 in taxes.
This is likely to be an underestimate, as it assumes that the cost to the Budget of each tonne of abatement would be the same as the carbon price. The Treasury explains that much of the abatement funded under Direct Action would happen anyway, resulting in a more expensive cost per tonne of real abatement. This is in addition to the inefficiency of grant-based tenders compared to the price signal generated by a market mechanism such as a carbon price.
The Treasury also dispels the argument that Direct Action could deliver abatement at a price below the carbon price by paying different prices for different abatement activities. The Treasury finds that this is impractical because businesses have more information about costs of abatement and are likely to bid strategically. This finding is backed up by detailed analysis by the Department of Climate Change and Energy Efficiency.
For example, if the Coalition were in Government, farmers would know that Mr Abbott would be paying for abatement in other sectors at $40 or $50 a tonne for example, and so would have no incentive to sell soil carbon abatement for $8 a tonne (the price assumed by the Coalition).
This is borne out in practice in multi-round environmental tenders in Australia and internationally, where bids quickly converged close to the highest expected bid from previous rounds.
So Mr Abbott's scheme is based on ripping off farmers and would not work in any case because it is based on an unrealistic and naive market assumption.
The Gillard Government is putting a price on carbon pollution so that Australia can move towards a clean energy future in the least cost way, protecting our environment and strengthening our economy.
2 September 2011