Thoughts on the green paper - Part 1: petrol

The government’s green paper on emissions trading is now available. The government’s new phrase for its emissions trading scheme is “carbon pollution reduction scheme”.

The first thing that’s captured everyone’s attention – not surprisingly – is petrol. With all the hoo-ha about petrol prices recently, the government’s proposal is to include petrol in the ETS / CPRS but to reduce the petrol excise by an equivalent amount for at least the first 3 years of the scheme. This is not very different from leaving petrol out of the scheme. And this has the Greens and others up in arms.

There are two ways to look at this – from a practical perspective or from a principle perspective. Either way, my view is that cutting the petrol excise isn’t good but isn’t really all that bad either.

The practical implication of cutting excise and therefore neutralising the impact that the scheme has on the petrol price is that – to meet the target – the price of everything else in the scheme has to go up by more. Then again, the price of petrol has gone up so much recently that that’s done a lot of the work that the scheme will do anyway. But power bills will go up by more than they otherwise would to pay for the cut in petrol excise. Which of these would cause more pain? Who knows. The opposition, motorists and the media seem to be clamouring loudly for lower (or at least not higher) petrol prices but electricity prices haven’t gone up yet – presumably there’ll be some clamouring when that happens too.

Looking at the ‘principle’ of cutting the excise – well this really depends on whether the excise now is too low, too high, or just right (I don’t know which it is). Roughly speaking, the excise on petrol should be enough to cover the costs that it places on the community: motorists shouldn’t be expected to be subsidised by other taxpayers and so the excise should cover the cost of building roads, dealing with car accidents, dealing with air pollution, etc. There’s also GST on petrol as there is on everything else. Anything much more than that is seeing petrol as a revenue raising tool. Seeing as the ETS is going to raise plenty of revenue anyway, there’s a case for easing other taxes. So if excise currently goes beyond the social cost of petrol plus 10%, I reckon there’s a case for cutting it if you’re going to include petrol in the ETS. If the excise doesn’t go beyond that, then there’s no principled case for cutting it. I’d be interested in any comments as to which side of that line fuel excise currently falls.

One other comment I’d make is that I’m not sure about the idea of cutting it for 3 years then reviewing the situation. I’d prefer the government to say that they’re cutting it for 3 years only. Seeing we’re apparently talking about a cut of about 5c a litre and petrol prices fluctuate by that amount weekly, I don’t think people could complain too much if the government said “Petrol excise is going up by 5c in 2011: you’ve got 3 years to get ready”. That seems like a more than generous concession to me and better than just deferring the issue and the uncertainty around it by 3 years.

What do you think?