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Trust the market – why regulation won’t stop carbon tax gouging

Price-gouging might occur under the carbon tax regime, but market discipline will keep it in check. Flickr/dmcneil

Federal Treasurer Wayne Swan has announced that the government will provide the competition watchdog with almost $13 million in extra funding to tackle carbon tax-related price-gouging.

In this context, price-gouging refers to business inflating prices beyond the cost increases reasonably attributable to the tax.

The Australian Competition and Consumer Commission’s extra funding will go toward hiring a team of 20 staff dedicated to identify and investigate price-gouging.

To date there has been no suggestion from the government that the ACCC will be given additional powers, as they were when the Howard government introduced the GST. Instead, reliance will be placed on existing powers under the new Australian Consumer Law (ACL).

The key ACL provisions relevant to price-gouging prohibit false and misleading conduct in relation to the sale of goods or services. Where this occurs, the ACCC has the power to issue warning notices, infringement notices (imposing penalties of up to $66,000 for listed companies) and substantiation notices.

It can also ask the Federal Court to impose penalties of up to $1.1m per contravention and adverse publicity orders.

A party wishing to exploit the introduction of the carbon tax to increase prices may do so in two ways. First, they may claim that they have raised prices (or will raise prices) because of the tax. Second, they may simply raise their prices following the introduction of the tax.

If they adopt the first method, and their claims are false, they run the risk of detection and enforcement action. For example, if a company raises its prices by $100 and claims that this is due to the tax, when in fact its tax-attributable cost increase is only $50, it will be guilty of misleading conduct. If, however, they adopt the second method, the ACCC will have no action against them.

Consequently, while much has been made by Swan and the media of the power of the ACCC to obtain a penalty of $1.1m for a contravention, it must be remembered that to obtain this penalty the ACCC must bring legal action before a court.

The court must then be satisfied that the corporation engaged in false or misleading conduct in contravention of the act.

The court must also be satisfied that a penalty of $1.1m is appropriate. As this is the highest penalty available, it is not likely to be imposed frequently.

It is more likely that the ACCC will make use of its power to issue warning and infringement, which are faster and can effectively “name and shame” offenders.

Stronger powers needed?

In relation to tax-related price-gouging, parallels have been drawn between the introduction of the GST by the Howard government and the introduction of the carbon tax. The powers of the ACCC were, however, significantly different in relation to the former.

When the GST was introduced, specific amendments were made to the Trade Practices Act (as it then was) to prohibit GST-related “price exploitation”.

This involved corporations charging a price that was “unreasonably high, having regard alone to the New Tax System changes”.

The legislation was accompanied by ACCC guidelines, which advised that price exploitation would include business taking the opportunity to increase the difference between their costs and prices. They also advised that price adjustments should reflect only actual and not anticipated tax increases.

Following the transition to the GST, the ACCC concluded that there had been no evidence of “significant opportunistic pricing by business” to increase margins. In addition, most infringements that were identified involved some form of misleading conduct.

The GST price exploitation legislation has since been repealed and no such legislation has been proposed for the carbon tax. Nor should it be introduced.

Market discipline

In relation to most goods and services the market will provide a competitive discipline on any attempt to price-gouge. Businesses that operate without competitive discipline may already increase their prices and, although the carbon tax might provide them with increased incentive to do so in the short term, it is not something that should be regulated for the long term – this should be left to market forces.

In addition, the compliance and regulatory costs associated with the introduction of GST-like price exploitation legislation is likely to far outweigh any benefits, especially during the initial transition where cost implications will still be uncertain for many (particularly small) businesses.

Despite the exaggerated rhetoric over the ACCC’s powers in the relation to carbon tax and price-gouging, the approach proposed by the government is appropriate. Additional laws which regulate pricing during the transition to a carbon tax would cause considerable additional business uncertainty and impose compliance costs likely to far exceed the predicted benefits.

It is, however, appropriate to investigate false, misleading or unconscionable conduct surrounding the introduction of the carbon tax and additional funding for the ACCC to facilitate this should be welcomed.

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