Why the US carbon 'tax' will leave us naked

Former science minister Barry Jones likes to boast that he was the first public voice in Australia to raise the alarm on climate change -- he gave a speech to parliament on the topic way back in 1984.

However, Jones admits that he was way ahead of his time. Not only did the newspapers ignore his warning, but his own party wondered what on earth he was talking about.

By 1989, he was invited by Margaret Thatcher to speak at a global forum on the topic in Britain, and did so, and by the early 1990s the ‘greenhouse effect’ was finally being picked up in the mainstream media. The times had caught up with Jones -- ironically, however, it was just at the moment when Labor’s internal politics relieved him of the science ministry in 1990.

Jones is not the only public figure who has gotten ahead of the game when it comes to mitigating anthropogenic climate change. More than three years ago, Bluescope’s Graham Kraehe also looked into the future and was roundly ignored. At that time Labor’s carbon pricing plans were dominating political debate, and industries such as Bluescopes’, which were ‘energy intensive trade exposed’ (EITEs), were complaining loudly about the ‘carbon tax’ they would have to pay.

Kraehe took a more global view of the effect carbon pricing would have on his business, and suggested Australia use ‘border tax adjustments’ to help EITEs compete against global competitors, and prevent ‘carbon leakage’, in which relatively clean steel mills such as his lost business to more polluting plants abroad -- resulting in more carbon emissions, not less. Business Spectator covered that proposal in some depth in 2011 (see: Labor’s return to protectionism, March 2011).

The short version is that if a steel mill operated in a country without a carbon price, each tonne it exported to Australia would be hit with a border tax adjustment (BTA) to level the playing field. Importantly, as the article mentioned above explains in full, it is not a ‘tariff’ or form of protectionism. Rather, it is a commonly used means of allowing countries with different levels of indirect taxes -- primarily value-added taxes -- to create fair trading conditions between nations.

Australia, for instance, ‘adjusts’ for countries that do not have a GST, by imposing a border tax adjustment when their good arrive in Australia (with the notable exception of the booming mail-order imports made by individuals).

So all Kraehe was suggesting was that we use a well established mechanism, robustly supported by World Trade Organisations rulings over the years, to keep our EITEs alive. Instead, Labor’s plan took the much more complicated road of issuing free permits to EITEs -- with three different levels of support, time limits on support, and special funds set up to help specific industries. Very complicated indeed.

My guess is that many will soon be wishing they had taken Kraehe’s suggestions more seriously. But they did not -- Labor tried to call BTAs ‘tariffs’ (which they are categorically not), and the Greens muttered their luke-warm support for the idea. But as with the Barry Jones history above, the times are catching up with Kraehe’s idea.

Specifically, on Monday (Tuesday in Australia) the world will get its first look at President Obama’s carbon pricing plans for the US. A central plank is expected to be a cap-and-trade scheme covering the nation’s electricity producers, which account for around 40 per cent of US emissions. The move is being effected through Obama’s powers to regulate via the federal Environmental Protection Authority after his administration’s plans for a nation-wide carbon trading scheme were comprehensively blocked by Republicans in 2010.

Early reports are that the new cap-and-trade scheme will reduce emissions in the power generation sector by 25 per cent and help the US hit carbon targets it signed up to at the Copenhagen conference in 2009. We shall see.

The point, from a global trade perspective, can be summed up with a simple question: If Obama imposes a carbon ‘tax’ on US firms, is it feasible to expect that US authorities will not attempt to levy a border tax adjustment on imported goods?

Economic journalism in Australia too often dwells on China as if it were our only customer. And while it has been our biggest customer during the decade long minerals boom, Australians are starting to wake up to the fact that we must develop competitive industries in other sectors.

When the auto manufacturing industry reached the point of no return last year, there was at least some coverage in the Australian media of the advanced manufacturing businesses that would help take up some of the skills base, and provide jobs, for the thousands of workers who expect to lose their jobs. We might not be able to compete on end-to-end auto manufacturing, but we are certainly able to compete on capital- and skills-intensive component manufacturing. Many SME suppliers already export to auto giants in Europe and the US.

So the question, if Obama’s reforms are as expected, is what Australian firms will have to pay in border tax adjustments to send, for instance, brake parts to Chrysler or General Motors.

Some question whether WTO precedent would allow the Americans to apply such a levy -- BTAs have been used for decades where taxes are applied to ‘products’, but not so clearly to the factors used to make those products.

However Joost Pauwelyn, an internationally respected professor of international law at the Graduate Institute of International and Development Studies in Geneva, strongly suggests in a recent paper that they will. He notes that in the 1980s, the US slapped a punitive tax on manufacturers of cholorfluorocarbons (CFCs) as part of an international effort to stop them damaging the ozone layer. It then applied BTAs to not only the import of CFCs, but on goods manufactured with the destructive gas. Remember the little foam boxes we used to buy hamburgers in?

On the same basis, Pauwelyn suggests that ‘carbon’ could be accounted for at the border in the same way.

Moreover, reports increasingly suggest that China and the US are working closely together on a more unified front at the Paris conference in November 2015 -- a re-run of the disastrous Copenhagen conference of 2009.

One irony in all this, as Pauwelyn’s paper explains, is that whether a nation has a ‘carbon tax’ or a ‘cap-and-trade’ system, it is fairly straightforward to argue in WTO arbitration, that the nation in question has a ‘tax’ -- and hence is entitled to levy a border tax adjustment.

What a shame that Australia is about to tear up its ‘tax’ and instead dish out subsidies from the public purse for high carbon emitters to clean up their act. There will be no way to claim that is a ‘tax’.

In a global future characterised by border tax adjustments from our major trading partners, we will be left unprotected. Naked, really.