Why does the Gillard government try to deny that the purpose of the carbon tax is to drive up prices?

On 1 July when the carbon tax comes into operation, will we see extensive price rises throughout the economy? The Gillard Government seems keen to give the impression that we won’t see much in the way of price rises at all. For one thing, they say that the ACCC will be on the case, looking out for price increases which cannot be justified.

Here is what Treasurer Wayne Swan said in Parliament recently in response to a question from one of my colleagues: “First of all, I make the point that those sorts of claims and pricing decisions will be subject to scrutiny from the ACCC”. Hansard 21 June 2012.

Or there was this statement from Mark Dreyfus, Parliamentary Secretary for Climate Change: “The Leader of the Opposition should know full well that if businesses make false claims they run the risk of breaching the competition law and could expose themselves to a $1.1 million fine”. Hansard June 26 2012.

There is a fundamental logical flaw in these claims from the government. The government is denying that the carbon tax will cause price increases - when price increases are specifically what the carbon tax is designed to cause. The carbon tax is a policy instrument designed to reduce emissions of carbon dioxide and equivalent gases. It works by increasing the relative price of goods and services which are relatively carbon intensive to produce.

The policy intention is to use this price signal to shift consumption and economic activity away from carbon intensive activities and towards activities which involve lower emissions of carbon dioxide and other greenhouse gases. So it is quite bizarre that the government is busy trying to deny that its carbon tax will have the impact that by its very design the carbon tax is intended to have. The government through its actions has conceded the point that the carbon tax will drive up prices. Why else would it have introduced a massive compensation package (over $8 billion a year)?

The package is needed precisely because Australian consumers will face higher prices due to the carbon tax. But so wary is the government now of acknowledging this reality that it is advertising the payments that consumers will receive with no reference to the carbon tax driven price increases which make the package necessary. It is all very well to talk about the ACCC preventing price increases. But its power to do so is limited to cases where a business claims that a price increase is due to the carbon tax when it is not.

That is not the real issue here at all. The real issue is that there will be plenty of price increases which are due to the carbon tax – because that is specifically what the carbon tax is designed to do. As well as claiming that the ACCC will prevent price increases due to the carbon tax, the government is consistently making another, equally misleading, claim: that the carbon tax will not be paid by most businesses, only by a select few “large polluters.” Here is what Mark Dreyfus recently said on this point: “The fact is that small business will not even pay the carbon price. A range of large polluters is going to be paying the carbon price and the list of those polluters was finalised on 15 June.

There may yet be some other businesses that, by the development of their businesses, become liable to pay the carbon price but the list as it stands is around 294 entities, firms and councils”. Hansard 26 June 2012. One of the most basic propositions of tax policy, drummed into first year economic students, is that there a difference between the legal and the economic incidence of a tax. It may be true that the legal incidence of the tax will fall upon several hundred companies and organisations. But the economic incidence of the tax will cascade throughout the economy. The regulated retail price of electricity in New South Wales, for example, is to rise by up to 20.6 per cent in July 2012 (for EnergyAustralia customers), with the regulator specifically highlighting the carbon tax as a key contributor to this price increase.

In short, we have a government introducing a tax which is specifically intended to increase the relative price of goods and services which are produced using a carbon intensive production process; which is paying compensation to Australians in the hope of partly offsetting the impact of those price increases; which refuses to admit the intended purpose of this tax; which is misleadingly seeking to give the impression that the ACCC will crack down on price increases caused by the carbon tax; and which is misleadingly claiming that the impact of the tax will fall only on a few hundred companies and organisations when in fact it will cascade throughout the economy.