Menu Close

Plugging the leak: the carbon tax must reduce emissions, not just save jobs

If the carbon tax doesn’t address carbon leakage, it’s not doing its job.

Australia is currently considering legislation to put a price on carbon. An important part of the legislation is assisting high-emitting industries. The aim should be to reduce those industries’ emissions, but we believe that fears about job losses mean the current legislation is not doing this job well.

Like much of the world, Australia has debated putting a price on carbon emissions, looking for the best way to induce structural change in the economy to reduce greenhouse gas emissions.

Pricing carbon is the basis of the recently announced Climate Change Plan and associated draft Clean Energy Bill 2011). In debate over this approach, a dominant concern is that Australian industry and jobs might be lost to overseas competitors who don’t face a carbon price or equivalent restriction.

“Carbon leakage” is the term generally applied when such a loss does not result in any net reduction in global emissions.

This outcome would be contrary to the objective of the policy. Climate change is a global problem, and the atmosphere doesn’t care where the emissions originate.

Avoiding “carbon leakage” is the only clear justification for assisting trade-exposed industries under the government’s proposed Clean Energy Bill. The Productivity Commission should base any future inquiries on this principle.

If an industry faces the risk of carbon leakage, that provides a legitimate justification for helping them. This can be done, for example, by supplying free emissions permits.

In our April 2010 report, Restructuring the Australian Economy to Emit Less Carbon, we at the Grattan Institute noted this was likely to be the case in industries such as cement and steel.

A carbon price could force these industries to offshore locations that would not have substantially lower emissions.

On the other hand, if the carbon price is likely to force an industry to an offshore location where they will emit substantially less greenhouse gas, then it has been successful.

Reducing emissions is the very purpose of imposing a price on carbon. Our 2010 report concluded this was likely to be the case in industries such as aluminium and oil refining.

Industry assistance is not justified in these circumstances, and may act directly contrary to the intent of the carbon pricing policy.

That said, there may be a case for helping affected workers and communities adjust – painful as it might be in the short term – to a low-carbon economy in the long term.

And if the government wants to help develop technologies that would reduce emissions and therefore retain an industry or facility in Australia, it would be better to target the assistance accordingly, rather than to prop up the existing facilities.

The government’s Clean Energy Plan provides assistance under the “Jobs and Competitiveness Program”.

Our recently released Report, New Protectionism Under Carbon Pricing, is critical of several elements of this assistance. They are unjustified and costly.

But our Report also identified a matter of greater concern. When asking whether a company should get assistance, it appears the draft legislation has dropped the need to prevent carbon leakage as a rationale.

Instead, it concerns itself with preserving equivalent government burdens and benefits, providing a “level playing field”, between Australian industry and its competitors.

This is a reversion to a form of protectionism. Over several decades Australia has moved away from this approach. Such assistance imposes greater costs on other Australians. On this critical point, we believe the draft legislation should be amended.

This article was co-authored by Tristan Edis, Research Fellow in Energy at the Grattan Institute.

Want to write?

Write an article and join a growing community of more than 171,100 academics and researchers from 4,743 institutions.

Register now