A carbon tax will devastate Australian manufacturing

Gerard Jackson
Monday 28 March 2011

Mark Dreyfus, Federal Labor Member for Isaacs, is another lying Labor Politician who cannot get his story straight. A recent article of his (Shades of Goebbels in ‘truth campaign’, The Age, March 11, 2011) was riddled with so many lies and distortions in defence of the Government’s destructive carbon tax that it would take a very long article to refute them all. I’ll therefore focus on the one lie the refutation of which explains why the carbon tax would savage the standard of living.

Dreyfus stated that it was “outlandish” and “wild” to claim that a carbon tax “‘will change your way of life”. (There is no difference between a carbon price and a carbon tax in principle.) This is patently absurd. To argue that a heavy tax on energy — which is what a carbon tax is — will not affect the structure of relative prices and hence the pattern of production is absolutely ludicrous. His own Government published a report admitting that “[p]lacing a limit and a price on emissions will change the things we produce, the way we produce them, and the things we buy.” (Carbon Reduction Pollution Scheme Green Paper, July 2008, p. 13.)

He knows damn well that the real aim of the tax is to change our “way of life”. He is just too cowardly to admit it. In fact, this very paper inadvertently spilt the beans on the true nature and real costs of a carbon tax. What critics miss is that what we have here is a direct tax on capital, a tax that would devastate manufacturing1. Not venture funds or savings but capital goods, the material means of production.

There are two fundamental differences between a carbon tax and a uniform sales tax, no matter what the latter is called. The first difference is that the former is levied at the point of production while a sales tax is levied — to all intents and purposes — at the point of consumption. This leads to our second point. Because a sales tax is imposed at the point at which consumers buy goods and services it treats all producers equally. However, the carbon tax discriminates — as intended — between producers. Hence a coal-fired powered station would pay a heavy tax while a hydroelectric power plant would pay next to nothing. The same thing applies to energy intensive industries. And this is why the carbon tax (or price if you will) is a direct tax on capital.

Now the paper admits that energy intensive industries will be hit, meaning that they would “experience significant losses in asset value[s]” (p. 50). No matter how hard they try to underplay this fact they cannot ignore its existence, which leads them to admit that these industries would have to be given “priority” (p. 294). The authors make the appalling error of arguing that the ability of a firm or an industry

to pass carbon costs through to consumers will also depend on the nature of the capital that the industry employs (p.344).

The argument of whether a tax can be shifted forward or not has absolutely nothing to do with the nature of the capital goods the firm is using. Alan Moran, of the Institute of Public Affairs basically makes the same error when he argues that “[b]usi­nesses must pass on any additional imposts to their own customers…”2 The Austrians are adamant on this point: taxes cannot be shifted forward. As any economist ought to know, the price of any good is determined by the existing stock and the demand schedule for its services. Clearly the demand curve would be unaffected by a tax on the good. As firms work to set their prices at the point of maximum net revenue, it logically follows that any price in excess of that point will reduce net revenue.

(Admittedly this argument does not assume that the demand curve facing the firm is the same as the demand curve facing the industry. Having made this point it needs to be stressed that it does not affect the argument. In addition, we should note that what really matters is who pays the tax in the long term, not who pays it immediately.)

Critics reply that prices rise because the tax has reduced the supply. This, however, does not amount to shifting the tax. It is, in fact, the result of the tax moving the firm’s supply curve to the left. For genuine shifting to happen output has to be maintained but at a higher price for the good, which means that the demand curve would have to move in response to the tax. But why should it? We therefore conclude that the carbon tax is shifted backwards on to the factors of production, meaning that unemployment rises, capital is abandoned and investment drops. The government’s paper indirectly admitted this when it said that industries will require assistance as will those rendered unemployed by the tax (p. 358). Garnaut also stated that the carbon tax would cause a “large-scale loss of livelihood as a result of [its] implementation”.

But this isn’t even half the story. Revealing just how bad their economics is the authors declared there is nothing to worry about in the long run because the Australian economy is now highly “flexible” (p. 280). There you have it — full employment will be restored along with real wages. But what determines the height of real wages is not flexibility but the capital labour ratio. How in heavens name do these people think real wages and hence the standard of living can be maintained if the government savagely reduces the capital stock?

This is not an exaggeration. About 85 per cent of the country’s electricity comes from coal-fired power stations: close them down and the economy collapses. But long before these power plants shut down the disappearance of ‘energy intensive’ industries and those firms indirectly connected with them would depress the economy. And this is probably before brownouts and blackouts become the order of the day. Now no matter how flexible a labour force is, if the capital stock shrinks (the capital structure shortens in Austrian jargon) real wages must fall.

Not a problem. The brilliant economists who wrote this paper have the solution. There will be “[c]apital investment in innovative new low emissions processes” (p. 26). That’s right, folks, solar and wind will save us. According to Alan Moran this isn’t going to happen “unless… some imminent technology breakthroughs occur.” Along with all the other critics, Moran has missed the vital point that “technology breakthroughs” in this area are impossible. As I have explained in other articles, these so-called alternative energy sources face insurmountable natural and economic obstacles that make it completely impossible for them to replace centralised electricity power plants. (Why the Institute of Public Affairs refuses to acknowledge this fact leaves me completely mystified.)

Note: Readers have asked about Greg Combet’s3 claim that China has a $14 a tonne tax on Co2. Allow me to get personal. Combet is a truly slimy sack of manure who used the workers as stepping stone to political power. When he was Secretary of the ACTU (Australian Council of Trade Unions) this ruthless opportunist falsely accused market economists of wanting a policy of “cutting minimum wages and conditions of employment” (The Australian Financial Review, 10 July, 1998). We now have the same brazen liar pushing a green policy that will savage the real wages of Australians. He is a self-seeking narcissist who only cares only about himself. Australians will never be safe so long as low-lifes like Combet infest politics.

As for his $14 a tonne carbon tax:

1. It comes from a study sponsored by the Climate Institute, an organisation of fanatical greens.

2. Vivid Economics was hired to do the study. It was carried out by Cameron Hepburn, an ‘environmentalist economist’ who partnered the lying green fanatic Nicholas Stern.

3. The Climate Institute would never have hired Vivid Economics if did not know results in advance.

4. Funding for the study came from the Labor Government. Yep, we paid for it.

5. Even if the study is honest — and I very much doubt it — it doesn’t prove their case. What matters is that the greens intention to keep on raising the carbon tax until it eventually puts centralised power stations out of business. Their alternative, which the Climate Institute, Hepburn, Stern and the rest of the shabby gang promote, would result in abject poverty for the mass of people.


1Bluescope Steel chairman Graham Kraehe is one businessman who understands what a carbon tax would do to manufacturing. It’s a pity that the IPA is not as blunt.

2Alan Moran also fell into the trap of conceding to the view that a carbon tax would make nuclear energy cheaper by raising the price of coal. This is ridiculous. The real cost of anything is what you have to give up to obtain it. Raising the cost coal doesn’t cheapen anything, nuclear power. This is sloppy thinking. He should have stressed the fact that a carbon tax reduces the standard of living. And this is exactly what it is meant to do. So why in heavens name won’t the Institute of Public Affairs go public on this?

3 Irrespective of what the lying Combet asserts, Co2 is a nutrient and not a pollutant. In fact, it is vital to life on this planet.

Garnaut and Gillard’s carbon tax plan is an impending disaster

Green economic policies would devastate living standards

Why Gillard and Combet’s carbon tax will be a disaster

We will pay a heavy price for Julia Gillard’s technology fantasy

Gerard Jackson is Brookesnews’ economics editor


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