Driving the Reef to destruction

An economic case for destroying the Reef?

The Great Barrier Reef is under threat – according to scientists, UNESCO and at least one ice cream company. Plans to dredge new ports, increase shipping and export more coal have a lot of people concerned, and rightly so – the Reef is arguably the largest living thing in the world and visible from space.

The Queensland and Federal Governments don’t think there’s anything to worry about. Sure, they’ve approved plans to dump three million tonnes of dredge spoil within the Great Barrier Reef Marine Park, but they’ve imposed strict conditions!  Will everyone just stop worrying already?!

We would, except that Queensland’s own Auditor General doesn’t think the state is able to manage such projects or enforce these conditions.

With so much controversy around the condition and management of the Reef, you’d think there must be some really solid economic reason to make us want to put one of our greatest natural assets at risk.

You might think so, but you’d be wrong.

The port and dredging projects around the Reef are related to the development of huge coal projects in the Galilee Basin, Central Queensland.

The mines have to be huge, because the profit margins on them are very low – they need to move big volumes if they’re going to make any money.

Financial analysts are concerned that low coal prices mean these mines aren’t financially viable, and no less an authority than Macquarie Bank has said that to develop the Galilee Basin, investors would need to “ignore conventional economics”.

So why are we pushing ahead with barely-viable coal mines which put the Great Barrier Reef at risk?

Firstly, because the Queensland Government is “in the coal business,” according to Premier Newman.

He’s right. Queensland Governments of both stripes have put $9.5 billion of taxpayers’ money into assisting the coal industry over the last six years, much of it on rail and port infrastructure that will lose most of its value without expansion of the industry.

Secondly, because the main companies involved, Indian conglomerates Adani and GVK, bought these projects at the peak of the coal boom. They paid too much for them and now can’t afford to walk away.

So there’s no great economic reason to dig up the Reef. It is unlikely anyone will make much money out of it –especially not the Queensland public as the government is going to waive royalties for these mines.

There isn’t much benefit and the Reef is going to pay the price for the bad investment decisions of Indian coal companies and the Queensland Government.

Renewable energy’s age of uncertainty

In a clear vote of no confidence in the Australian economy, Australia’s largest ever investment in solar energy was scrapped this week, blamed in part on a lack of certainty around the government’s commitment to the Renewable Energy Target (RET).

The RET isn’t a ‘green’ scheme, it’s a driver of jobs and investment with more people employed installing solar panels than work in coal-fired power stations.

Tony Abbott won government on the promise that he would lower electricity prices and increase business confidence. He also promised that he would preserve the RET. Abolishing the RET will not only lessen confidence among investors, but it will actually result in higher electricity prices. Even the economic modelling commissioned by climate sceptic Dick Warburton’s review says so.

Like most of the government’s problems, the pain that the RET is now causing them began back in opposition. Electricity prices more than doubled between 2007 and 2013, in large part because of the massive investment in ‘poles and wires’. This investment was based on forecasts for growth in electricity demand that were spectacularly wrong. At the time billions were being wasted on new distribution infrastructure, the amount of electricity purchased was actually falling.

Between 2008 and 2014, poles and wires accounted for more than 50 per cent of electricity price increases, while the carbon price accounted for 16 per cent. But not once did Tony Abbott or the Coalition pledge, in blood or anything else, to wind back the cost of poles and wires.

Of course opposition isn’t about facts, it’s about perception. Even though the carbon price wasn’t introduced until 2013, and even though most people received more in compensation than they spent on the carbon tax, Tony Abbott did an amazing job of making people blame climate policies for their ‘cost of living’ woes.

This week’s leak about scrapping the RET has probably saved it. The industry are now up in arms, as are local communities who want the investment. The government’s wish to scrap the RET is causing the investor uncertainty and higher electricity prices that they promised to fix. 

All they need to do to get investment and job creation rolling is to announce that they will honour their election promise and make no moves to abolish or reduce the RET.

About those driving comments…

One of the budget measures presently held up in the senate is the proposal to index the fuel excise to the Consumer Price Index. The present excise rate is 38.143 cents for petrol and diesel. The Treasurer, Joe Hockey, tried to say that a tax on petrol would be progressive because the rich spend more on petrol than the poor, and then made his infamous statement about the poor not buying petrol because they either don’t drive very far or don’t own cars. To back up his claim he put out a press release showing that households in the bottom 20 per cent of income spent $16.36 a week compared to $53.87 a week for the top 20 per cent.

Of course the rich spend more than lower income groups overall, on almost everything. To get an understanding of price impacts on various groups, what we really need to do is compare the spending of different household groups compared with their income. Those figures are published in an ABS series Household Income and Income Distribution.

 

bottom

second

third

fourth

highest

Petrol $

16.36

27.60

38.55

47.00

53.87

Mean income $

360

780

1,323

2,032

3,942

Average spending as share of income  %

4.54

3.54

2.91

2.31

1.37

Richer households spend over three times the amount on petrol than the lowest income groups, but they also earn 11 times what the lowest income group earns.  When compared with income, the bottom group spends 4.54 per cent of its income on petrol, compared with only 1.37 per cent for the highest income group.

A progressive tax is one in which the percentage of tax paid increases with income, for example on average the middle 20 per cent of households by income pay 11 per cent in tax, while the top 20 per cent of households pay 19 per cent. By contrast a ‘neutral tax’ raises the same proportion of tax from everyone, while a ‘regressive tax’ is one that raises proportionately more from lower income groups. The table clearly shows that an increased tax on petrol would be strongly regressive.

On average, households spend more on all goods and services as their income rises except for one exception—the rich spend less on the category ‘tobacco and tobacco products’ than the average household. But within that exception there is a counter exception; ‘tobacco products nec’, or tobacco products ‘not elsewhere classified’. The rich may not spend much on cigarettes, but they still like a cigar.

What budget emergency?

It’s pretty clear to everyone now that what we’ve been saying all along is right. There’s no budget emergency and there never was. Australia does have a revenue problem, not a spending problem. Rather than cutting education, health care, and support for our most vulnerable to raise funds, Australia needs to increase its revenue base. More people are starting to agree with us on that, too.

The lack of available tax revenue to invest in the country has its roots in the tax cuts of the Howard/Costello Government and the bidding war started by Kevin Rudd during the 2007 election campaign. These tax cuts have continued to undermine Australia’s fiscal position.

On Wednesday at the National Press Club the former Treasurer, Mr. Wayne Swan, made the point that problems with the federal budget related to revenue shortfalls, not to spending. 

Paul Kelly wrote in The Australian on Saturday that we “face the need for substantial reform on both the spending and revenue sides of the budget”. This is a challenge to a government whose first budget was preoccupied by cuts to spending, cuts which Treasury advised would be deepest for those least able to afford it.

Kelly wrote that “Abbott and Hockey must …

initiate a new debate with fresh proposals, tough but fairer, as part of their budget restoration quest. That must involve revenue measures that hit the big end of town.”

Kelly then outlined a few home truths about Australia’s system of revenue and spending.

The truth is that Australia has pretty much the most progressive tax-transfer system in the OECD. It is widely recognised through means testing as the most targeted social security system; it is also recognised as having one of the most progressive tax systems in the OECD.

Kelly argues that this is the basis of Australia’s “social compact” and it represents the two sides of the budget coin – revenue and spending.

What Kelly didn’t say was that Australia is the fourth lowest taxing country of the 34 members of the OECD.

Can we junk once and for all the lie that Australia is a high taxing country so we can have a sensible debate about revenue?

TAI in the media

Australia Institute claims mine assessment flawed
Joe Hockey’s budget is beyond salvation
Power plant shelved as report shows cutting RET provides profits for big electricity companies

Major Qld coal port railway gets govt nod

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