Could smaller be better? Shrinking the carbon tax scheme

With a carbon price, is it OK to start small? ntr23/Flickr

There is considerable media speculation that the Government will announce a carbon tax applying to a much smaller number of companies than had previously been expected.

As with much of what is announced on Sunday, the devil will be in the detail. In advance, however, the ramifications for the climate change policy and its impact on business are worth considering.

In the context of an emissions trading scheme with a cap on emissions, excluding any sector can weaken the overall policy. It addresses fewer emissions and the cost is probably higher.

Of course, if the cap is not reduced proportionally, then exclusion means that other industry sectors will have to carry a greater burden. There will be higher cost both to those sectors and to the scheme generally.

A carbon tax, applied to emissions from a narrower base, will raise less revenue and produce less reduction in emissions than would a tax applied to a broader base.

The cost to the sector paying the tax is most likely the same. However, the narrowing may exclude some trading that could take place at less than the tax rate if sectors now not covered could have delivered cheaper emissions reduction.

So, that’s the convoluted theory. In practice, political pragmatism is a reasonable justification for just getting it done. Broadening can come later.