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Friday, March 4, 2011

Pricing Carbon

Some politicians and journalists are spreading confusion about the Government's Carbon Pricing Mechanism. In her appearance on QANDA the Prime Minister was asked the following question:

AUDIENCE MEMBER: Prime Minister, isn’t the whole point of having a carbon tax to affect the prices that consumers pay? If there’s no change in consumer behaviour, you’re not going to achieve what you’re trying to achieve to reduce carbon pollution. So if it’s compensating households, aren’t you simply undermining the effect that your tax is going to have and ultimately make no change?

She gave a brief but clear explanation:

JULIA GILLARD: That’s a very perceptive question and I think a lot of people are thinking about his, about how does it work? If I’m getting compensation, what’s actually changing? Let me just explain that. The carbon price affects the big polluters. Yes, they will cause some price impacts for consumers. That’s true. We will then assist consumers and I can understand why people then intuitively go, well, how does all of this work? Isn’t, you know, sort of money going in and money going out? What’s the effect? Well, the effect is that in the shops when you come to buy things, products that are made with relatively less carbon pollution will be cheaper than products that are made with more carbon pollution. So you’re standing there with your household assistance in your hand. You could still keep buying the high carbon pollution products if you want to or what you’re far more likely to do is to buy the cheaper, lower carbon pollution products. That means that the people who make those things will get the consumer signal, gee, we will sell more, we will make more money if we make lower pollution products. That drives the innovation. So I want you to have that household assistance in your hand but I also want you to see price effects which make cleaner, greener things cheaper than high pollution commodities. That’s why it works.

In parliament she gave a longer and more politically charged answer:

Let me explain in detail our mechanism for pricing carbon. The first proposition is an incredibly simple one. At the moment carbon pollution can be released into the atmosphere for free. There is no disincentive for doing that. We will put a price on carbon, a price on every unit of carbon pollution. It will be paid for by businesses and as a result, because our business community is smart and adaptable and innovative, they will work out ways of pursuing their business and generating less carbon pollution. They will work out ways of making sure they pay less of a price when carbon is priced. Then they will enter into contracts, they will make investments on the basis of understanding the rules and understanding that carbon will be priced. And as they go about making those transitions, innovating, making the new investments of the future, we will work with those businesses in transition to a clean economy.

Having priced carbon and seen that innovation, yes, there will be pricing impacts; that is absolutely right. That is the whole point: to make goods that are generated with more carbon pollution relatively more expensive than goods that are generated with less carbon pollution. But because we are a Labor government this will be done in a fair way. We will assist households as we transition with this new carbon price. What that means is that people will walk into a shop with money in their pocket, the government having provided them with assistance. They will see the price signals on the shelves in front of them—things with less pollution, less expensive; things with more pollution, more expensive—and they too will adapt and change. They will choose the lower pollution products, which is exactly what we want them to do. Between the business investment and innovation, between households who have been assisted in a fair way by a Labor government responding to price signals, we will see a transition to a cleaner economy, to a clean energy economy, to a low-pollution economy.

What does that mean? Put very simply, it means jobs. It means that our economy will keep pace with a transition that is happening around the world. Our economy will keep pace and we will have the jobs of the future. What is the alternative? The alternative is to keep emitting carbon pollution. It is to see Australia left behind the tide of history with a high-pollution economy. It is exporting jobs to the rest of the world—jobs that Australian kids could have to build a future on. It is leaving households to deal with escalating electricity prices, which are going up because of a lack of investment certainty, and without household assistance in their pockets. And, of course, if we follow the Leader of the Opposition’s plan, it is also about ripping $30 billion off taxpayers. The efficient way to transform our economy is to price carbon and that is what we will do.

Source here

Gillard is to be congratulated in noting that there would be price rises. As she explains, a large amount of the money raised will go to people to compensate for the price increases. It is important to notice though that people will still choose the cheaper, low carbon, alternatives.

Although this was a clear explanation from Julia Gillard, the prize for the best speach on pricing carbon in the Australian Parliament still goes to Malcolm Turnbull, which can be found at this post.

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