Carbon Tax – What it Means for Investors

The carbon tax is not something that anyone wants. It is the Government’s preferred method for changing our behaviour. Time will tell whether it is successful.
The policy announced yesterday is complex. Below we detail some of the key points that we believe you should be aware of:

The objective

• Reduced emissions of 5% by 2020 and 20% by 2050 by incentivising big business to find creative ways to cut their emissions. Many commentators actually consider these targets quite modest. A 5% cut is the equivalent of removing 45 million cars off the road.

Implementation

• The tax itself is collected by polluters, but is felt by households through higher costs of living.

• The tax commences from 1 July 2012. The 500 biggest polluters will pay $23 for each tonne of carbon they emit. At present, they pay zero. Initially the tax was to apply to the 1,000 biggest polluters.

• The price will rise by 2.5% pa until the carbon tax becomes an emissions trading scheme on 1 July 2015. This change will mean that rather than the Government setting a price on pollution, the Government will mandate how much pollution our economy is allowed to create, and the market will subsequently determine a price for each tonne of carbon pollution (with a set minimum of $15 per tonne). Companies will be required to purchase ‘carbon credits’ for the pollution they emit.

•New Zealand commenced an emissions trading scheme in July 2010, with a carbon price of $8.75 per tonne. The difference is largely due to Australia’s emissions coming from coal fired power plants and industrial production, whereas in New Zealand most emissions come from agriculture.

• The tax will not cover agriculture or petrol for light on road vehicles. Farmers won’t have to pay it, but they will receive incentives for every tonne of carbon they save from entering the atmosphere.

• About $9.2 billion is being made available to ‘emissions intensive, trade exposed’ industries such as coal and steel to help them make changes without losing their competitive advantage.

• A $10 billion Clean Energy Finance Corporation to fund new clean energy technology has also been set up. This should create new jobs in the economy and potentially new industries.

• Companies that must pay the carbon tax will effectively pass the cost onto consumers via higher prices.

Cost to Consumers

• The tax is forecast to increase electricity prices by 10%, and gas prices by 9%, but a general increase in inflation of just 0.7%.
By contrast, the Howard government’s GST added an initial 3.1% to inflation 2000-01 and another 1.9% in 2001-02.

• The Reserve Bank (RBA) will factor the impact of the carbon tax on inflation when setting interest rates. Interest rates would only rise if the RBA felt that the carbon tax was raising inflationary expectations or changing wage setting behaviour.

• Average household costs are expected to increase by about $9.90 per week. Higher income earners effectively receive no compensation to cover the higher costs.

• Tax cuts will be provided to low and middle income earners by higher social security payments (+1.7%) and a tripling of the tax free threshold from $6,000 to $18,200 from 1 July 2012 and $19,400 from 1 July 2015. Nine out of 10 households will receive some assistance.• There will also be tax rate increases from 1 July 2012. The two lowest marginal income tax rates will rise from 15% to 19%, and from 30% to 32.5%, respectively.

Will it Work?

• There is bi-partisan support in Parliament that climate change is real. Whether the carbon tax works is dependent on whether it creates sufficient incentive to change behaviour and whether government can effectively foster innovation in clean technology. Time will tell.

• The overall impact on the global environment will be largely symbolic at first. However, Australia’s actions will send a signal to larger economies about what real action will need to occur in the future.

Impact on Investment Strategies

• The carbon tax will have a profound impact on our economy. There will be material price changes in many products, and long term structural change in the economy that will see traditional industries – like the dirtiest coal-fired power generation – shrink (and perhaps disappear) and others, like various forms of renewable energy, rise.

• The market has been anticipating the carbon tax for some time and most major aspects had been leaked in advance.

• There may be some damage to consumer and business confidence in the near term, now that the affected groups are able to pinpoint the precise impact on their budgets. On the flipside, removal of some of the policy uncertainty could mitigate against some of the negative impact, assuming government representatives do a decent job of selling it over the next few weeks.

• The biggest surprise was the increase in the tax free threshold to $18,200. This will free 1 million Australians from completing annual tax returns and picks up on the Henry Tax review recommendation to encourage the poor and young mothers to move from welfare to work.

• When allocating income from a family trust each year, the higher tax free threshold may create opportunities to stream income to particular beneficiaries. For example, self-funded retirees who receive a pension and have little taxable income could receive a distribution from the trust of up to $18,200 each year tax free.

• From 1 July 2012 when the 15% marginal tax rate increases to 19%, this will provide additional incentive for low income workers to contribute more of their salary directly into superannuation, where it will be taxed at 15%.

Return to Main Page

Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.