Tuesday, July 12, 2011

Boon for the carbonocrats

The Gillard government's carbon tax package is a triumph for fiscal churn and bureaucracy over wealth creation and, for that matter, the environment.

The animating principle of the package is to use the $27.2 billion of revenue raked in by carbon permits and associated measures over the first three years to spread handouts across favoured constituencies.

And one major beneficiary will be a new army of carbonocrats.

The centrepiece of the Gillard government's bureaucratic empire building is a $10 billion clean energy finance corporation to invest in renewable energies and energy efficiency technology.

This agency, already dubbed the Brown Bank, is a throwback to an era in which governments maintained financial corporations bankrolling politically favoured, yet inefficient, ventures.

Think of the State Bank fiascos in Victoria and South Australia to recall how government acting as banker all panned out.

Closely aligned with Brown Bank is an Australian renewable energy agency, announced last week by the Greens deputy leader Christine Milne with no government minister in sight.

It will dole out $3.2bn in government research and development grants displacing the market for the commercialisation of renewable energies.  This is the ill-fated policy of picking winners and risks a repeat in the realm of environmental policy of the NBN fiasco, with its rollout of unnecessary infrastructure.

An energy security council will be set up to advise government on emerging risks to energy security, including from carbon pricing, and to recommend financial support measures for electricity generators.

If you think that these new entities are more than sufficient to manage our new climate change state, wait, there is more.

A clean energy regulator will assess liability to pay carbon tax, manage an Australian national registry of emissions units, and educate the public about carbon pricing for good measure.

Charged with the responsibility of measuring the emissions of the invisible, tasteless and odourless gas of carbon dioxide, there are obvious risks of carbon trading fraud directly affecting the integrity of that body's future work.

Finally a new climate change authority, chaired by former RBA governor Bernie Fraser, will advise government on medium and long-term pollution reductions and conduct reviews into aspects of carbon regulation.

The creation of this overseeing commissariat, that removes emissions abatement policy from the hands of government, was a major focus for the Greens in their negotiations over the carbon tax design.

As the experience of many independent regulatory bodies show, there is a risk that the authority may become overzealous, in this case, in recommending abatement trajectories at the expense of national economic welfare.

Ironically it would be exactly this kind of regulatory bias, for the sake of environmental precaution, that any political adherent of climate change action would want.

While the authority would maintain a veneer of independence, a future government could game future abatement paths by appointing an authority head with similar attitudes towards the anthropogenic climate change narrative.

A significant omission from the carbon tax package is a detailed explanation as to how these new entities will relate to existing bodies, such as the 1000 strong Climate Change Department or the Climate Change Commission headed by Tim Flannery.

While the details will hopefully be spelled out in legislation later this year, the fact is that the government has not explained how the spaghetti strands of new agencies will fit into the existing bureaucratic structures.

Whether the plan has a coherent structure or not, Canberra's army of bureaucrats can rest assured that the tax presents a boon for existing agencies as well.

For many households, carbon taxes collected by Treasury will boomerang back towards low and middle-income households.

But while raising the income tax free threshold will provide relief for lower income earners, this will only be temporary as bracket creep will erode those gains.

And contrary to the stated policy objective of boosting workforce participation, there will actually be an increase in effective marginal tax rates for many low income earners.  Combined with an increase in benefits this may encourage many Australians to remain on welfare.

The only clear winner from this unsatisfactory outcome would be Centrelink, doling out additional payments to households.

There will also be an increase in corporate welfare as some industries affected by the carbon tax receive handouts, in the name of saving jobs and installing clean energies.

This includes $9.2bn for a jobs and competitiveness program, a $1.3bn coal jobs package and $1.1bn for manufacturers such as steel makers and food processors.

It is questionable that these handouts will avert employment losses in energy intensive industries particularly as domestic firms move offshore avoiding payment of the tax.

What is certain is that the Department of Innovation and Industry will increase its influence within the government and over industry as it selects applicants for the fiscal largesse.

Other departments, such as Environment and Sustainability, will receive new program toys such as the Biodiversity Fund to alter the general direction of industry activities.

Prime Minister Gillard has vowed to wear out her shoe leathers in a quest to persuade voters across the country of the merits of her plan.

But adjustment problems for directly affected industries, cost of living increases, a long-term reduction in national income and negligible temperature change will make the tax a hard sell.

And the fiscal churn enterprise sapping welfare handouts and an enlargement of Canberra's bureaucracy, the carbon tax will compound the government's difficulties.

The danger for the government is that environmentalism has already become a dirty word for middle Australia, and no amount of carbon tax detail will overcome that.


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