Proposed Australian Carbon Tax Diversion a Warning to U.S. Proponents

Published June 2, 2014

What happens to carbon tax revenues after proponents pledge to use the revenues to support global warming programs and other narrowly targeted actions? Australian carbon tax supporters are beginning to provide an answer.

Responding to a shortfall in the federal budget, the architect of Australia’s carbon tax proposes diverting the revenue into the federal government’s general funds. Economist Ross Garnaut, who devised the carbon tax at the behest of former Prime Minister Julia Gillard and the Labor Party, said the Liberal Party and its recently elected Prime Minister Tony Abbott should forego plans to repeal the carbon tax. Gillard advocates diverting carbon tax revenues from emissions reduction programs and other targeted purposes to the general budget, which would fill a $16 billion hole in the budget.

“Retention of carbon pricing would more or less precisely fill the gap from Senate rejection of some budget measures,” Garnaut told an audience at the University of Melbourne.

“To put it another way, Australia can stay within the boundaries of fiscal responsibility defined by the government in this year’s budget by retaining carbon pricing, rather than the array of changes that are at risk in the Senate,” Garnaut explained.

Garnaut’s newly announced support for using carbon tax revenues for general budgetary purposes is raising red flags in the United States, where a small number of self-described conservatives claim to support a “revenue neutral” carbon tax regime. U.S. proponents of a revenue-neutral carbon tax promise they will support using the revenues only for carbon emission reduction programs and reducing taxes elsewhere in the economy. These promises are losing credibility in light of the events unfolding in Australia.

The Australian experience with a carbon tax also shows the economic pain of a carbon tax extends far beyond the collection of tax revenues. When the carbon tax induces electricity providers to switch to more expensive power sources, consumers pay higher electricity prices for which no carbon tax is collected. With no carbon tax collected, there is no compensating cut in taxes elsewhere in the economy. The result may be revenue-neutral for government, but it is not cost-neutral for electricity consumers.

D. Brady Nelson ([email protected]) is an economist, writer, and speaker who hails from Brisbane, Australia and Milwaukee, Wisconsin and currently resides in Washington DC. He is a regulation expert with The Heartland Institute.