Industrial Revolution-sized reform for our climate

Though imperfect, the Resources Super Profits Tax and the Carbon Pollution Reduction Scheme should have started economic reforms.

Short-termism has left us overly reliant on taxing good things like income and not bad things like carbon.

Tax reform always hurts, but it’s worse than the alternative. Holding on to the past rather than looking to the future means we have been short-changing ourselves in recent decades.

Nowhere is this more visible than the patchwork of perverse outcomes in the field of climate change and broader economic reform. For years complacency and laziness have governed our approach to economic reform placing us well behind the curve when it comes to the transition to a net zero economy.

Last week, the Albanese government released its proposal to use the Coalition’s safeguard mechanism to reintroduce a price on carbon in a more systematic way. The economic evidence is clear – doing nothing meaningful to mitigate climate change would damage the economy, while doing something meaningful would be good for economic growth and jobs.

But just a decade or so ago, short-term opportunism rejected monumental reforms on climate and tax – the Resources Super Profits Tax and the Carbon Pollution Reduction Scheme, which were precursors to the now-scrapped mining and carbon tax. And we are paying the price for that today with a suboptimal tax system which is holding back our economy.

As a general rule, market-based mechanisms tend to be favoured over straight fiscal interventions, especially those interventions subject to short-term political interference. After all, taxes in our lives are a given, and business generally knows how to invest (or not) given different tax regimes.

Taxes (and transfers) have multiple uses – to simply raise revenue, to reduce economic inequality, to correct market failure, to price natural resources better and more in line with the value to the community, or some combination of these.

When we think of the climate change debate, we must recognise it’s an agenda of industrial revolution proportions, but in less than half the time, because it goes to the very transformation of the production system of the economy.

At its core, the critical economic and policy issues are, first: how we price natural resources to reflect a public resource and the fair share of returns to the community and, second: ensure that the cost of negative side effects of resource use – known as negative externalities – are captured within the price that private actors pay.

For a long time, our economic system operated as if natural resources – including nature, the environment, and our biodiversity – was essentially a free resource. And when things are free, we tend to overuse them. There have been side effects from the use of these resources, and private actors have not been accountable for that.

This is all a long way of coming to the point of taxes and carbon prices.

Remember when the RSPT was first mooted by the Henry Tax Review, there was much debate about how revenue could be raised. The Global Financial Crisis had already strained the federal budget, so concerns about revenue were forefront.

The RSPT was just that – an idea to tax those businesses that were making “super normal” profits and then have the revenue circulate back into the budget to pay for things like compensation for consumers and business alike captured by the proposed CPRS.

In short, the profits of some of our heaviest emitting companies would directly subsidise emissions reductions by other businesses and consumers in the broader economy.

Super profits taxes are good, rational economic instruments, but the devil is always in its definition and implementation. Of course, history tells us that the RSPT morphed into a narrower mining tax, and then was ditched.

In that time Australia’s terms of trade have continued to improve, as has Australia’s profit performance, spectacularly over the past two to three decades. But it is dominated largely by mining. It’s a great case of opportunity cost, given the economic challenge.

But the real loss is in not having both the economic instruments for revenue raising and economic pricing working together.

A revenue instrument – like the RSPT – to fund the economic transformation – was repealed and the CPRS was abolished, depriving business of a rational market instrument to guide investment and resource allocation, meaning that the Australian economy was rudderless for the economic transformation challenge we have faced for well over a decade.

When you start late and you have a shrinking window, then the cost of transition and transformation gets higher.

Of course, policy design for reform is one thing, implementation is all together another thing. The RSPT and CPRS were not perfect. But a rational debate should have been about long run economic reforms. As taxpayers we can’t avoid any short-term pain and disruption, and then lament our lack of economic prosperity over time.

As we face the greatest economic transformation since the industrial revolution, respectful, evidence-based, rational debates are what is required, lest we trap ourselves in today instead of creating a new tomorrow.

Pradeep Philip is the head of Deloitte Access Economics.