Reframing the Climate Debate

The Climate debate has proven to be a diabolical policy problem for politicians in Australia, a country with one of the highest carbon dioxide emissions per capita in the world having an economy heavily dependent on the export of coal and other carbon intensive commodities.

It was partly responsible for the sacking of a once popular PM by members of his own party during his first term. It was dragging down the popularity of the lady that replaced him. Even a coalition between the Greens, Labor and a few independents representing country-based electorates could not provide a consensus in the debate.

Then came the proposal of an economist to offset a carbon tax with an income tax cut. The idea is hardly new. Even the Prophet of an Inconvenient Truth advised the scrapping of payroll taxes in lieu of a carbon tax a few years ago. The idea was to lighten the burden of productive activity (labor) while increasing it for environmentally destructive ones (pollution).

The advocacy of this tax cut approach as part of an overall principle of making the polluter pay while compensating vulnerable members of the community has stemmed the bleeding of support as expressed in the poll numbers and restored this government's legitimacy at least for now.

The re-framing of the debate is something that has eluded previous proposals for a carbon pollution reduction scheme. The use of a tax to price carbon rather than a synthetic market (read: emissions trading scheme) is much simpler and straight-forward. It also avoids much of the costly transactions costs involved in setting a complex trading system.

The use of tax cuts to offset additional living costs on households to whom polluting energy firms would pass on any tax burden does away with the notion that the "little man" would be the hardest hit by the tax. It also reduces the disincentive to work without creating budget pressures.

Indeed the Opposition will wish that it had proposed the Carbon tax with the accompanying income tax cuts ahead of the government as what a conservative think tank had earlier done. Having been outflanked by Labor on this issue, it now has to reconcile its carbon abatement policies which opts to use government regulation rather than a market mechanism something that economic liberals are not known for. Being the party that invented "middle class welfare" it will now find it difficult to counteract the middle and lower income tax cuts now being considered.

R-e-S-P-e-c-T, Find out what it means to me!

What a difference a year makes. Around this time last year, the Australian Federal Government through Treasurer Wayne Swan was undergoing a change of heart from being fiscally conservative to spending like there was no tomorrow. Faced with the headwinds of a global financial storm, it decided to throw everything at it, from school buildings to pink batts in a bid to shore up the economy. I pointed out that this was consistent with Prospect Theory which states that as people are faced with write-downs in their expected earnings, they tend to become risk-seeking.

Conversely, by mid-year it was again heeding the voice of reason by scaling back some of the spending originally planned in response to better than expected deficit numbers. This is entirely in keeping with the extension of the theory that people become risk-averse as their earnings expectations improve.

But in this year's budget, faced with rising dissatisfaction among voters attributed to several policy backflips and rising interest rates, the government is playing a different game. Unveiling at the end of the Henry Tax Review, an exercise that began even prior to the Global Financial Crisis, a new tax on mining profits. Dubbed the Resource Super Profits Tax or RSPT.

Based on a paper published by economist Ross Garnaut back in 1975, the idea behind the Resource Super Profits Tax would be to postpone taxes on mining projects until after they recoup their investments and impose a higher rate when they finally make a return on their initial outlays. It is meant to be fairer than the royalties levied by state governments on the gross revenues of projects regardless of whether they have been profitable or not.

That is what the new policy was meant to do on paper. Since the government decided to impose the RSPT retroactively on existing mining projects, it predictably drew much criticism and resistance from large miners and state governments who claim that this big new tax threatens to disrupt investments already planned and the jobs related to them. The timing of the announcement coming as it did when markets seemed spooked by the Greek debt crisis did not help either.

The government of course in anticipation of such resistance decided to use the money to be raised through this tax on improving superannuation, savings, a fund for reducing greenhouse gases and paying off the national public debt sooner. This should wedge opponents of this bill between the mining companies on the one hand and the Australian public that stands to benefit from improved human capital, retirement and other savings on the other.

Which probably means that the theme of this budget might as well be inspired by Aretha Franklin's old classic Respect, or in text language, spelled as RSPT for short. Oh yes, those old standards never grow old do they?

(oo) What you want
(oo) Baby, I got
(oo) What you need
(oo) Do you know I got it?
(oo) All I'm askin'
(oo) Is for a little respect when you come home (just a little bit)
Hey baby (just a little bit) when you get home
(just a little bit) mister (just a little bit)

I ain't gonna do you wrong while you're gone
Ain't gonna do you wrong (oo) 'cause I don't wanna (oo)
All I'm askin' (oo)
Is for a little respect when you come home (just a little bit)
Baby (just a little bit) when you get home (just a little bit)
Yeah (just a little bit)

I'm about to give you all of my money
And all I'm askin' in return, honey
Is to give me my profits
When you get home (just a, just a, just a, just a)
Yeah baby (just a, just a, just a, just a)
When you get home (just a little bit)
Yeah (just a little bit)

------ instrumental break ------

Ooo, your kisses (oo)
Sweeter than honey (oo)
And guess what? (oo)
So is my money (oo)
All I want you to do (oo) for me
Is give it to me when you get home (re, re, re ,re)
Yeah baby (re, re, re ,re)
Whip it to me (respect, just a little bit)
When you get home, now (just a little bit)

R-E-S-P-E-C-T
Find out what it means to me
R-E-S-P-E-C-T
Take care, TCB

Oh (sock it to me, sock it to me,
sock it to me, sock it to me)
A little respect (sock it to me, sock it to me,
sock it to me, sock it to me)
Whoa, babe (just a little bit)
A little respect (just a little bit)
I get tired (just a little bit)
Keep on tryin' (just a little bit)
You're runnin' out of foolin' (just a little bit)
And I ain't lyin' (just a little bit)
(re, re, re, re) 'spect
When you come home (re, re, re ,re)
Or you might walk in (respect, just a little bit)
And find out I'm gone (just a little bit)
I got to have (just a little bit)
A little respect (just a little bit)