State governments act foolishly on climate change

The NSW Government’s deal with BlueScope Steel undermines Australia’s ability to come up with a carbon tax which significantly cuts into CO2 emissions. Premier Iemma’s deal exempts BlueScope from any future carbon tax for 25 years.

According to the Greens the Premier has been conned by the promise of creating 6000 jobs at Port Kembla. Moreover, other firms will use the BlueScope deal as a precedent to pick up similar favoured treatment.

BlueScope is the largest greenhouse gas emitter on the S&P/ASX100 sharemarket index. The scale of their non-greenhouse gas emissions can be seen at their website.

Indeed the AFR today (subscription requires) suggests the NSW Government will consider exempting some of the country’s largest firms from any emissions tax in exchange for obtaining major investments. As in the BlueScope case, the State Government will be left with a huge and growing liability for the tax because it will compensate the firm for the tax.

The tax would give BlueScope a comparative advantage if other firms in their industry were subject to a tax. Also giving out exemptions from a tax in advance reduces the future ability of governments to control CO2 emissions. It increases the scale of the tax that would need to be imposed on non-exempt firms to meet given emission targets. It is poor policy.

The claim by NSW Environment - Climate Change Minister Koperberg that firms need a lead time to prepare for a tax implies, if anything, an initial case for being moderate in taxing all firms not for exempting the privileged few – it is a case for gradually scaling up the size of the tax. The claim that a carbon tax is something unexpected is ludicrous since this tax has been discussed for over a decade. Koperberg originally seemed to be an attractive appointment but now seems to be a hypocrite.

The Victorian Government has apparently discussed similar offers with Alcoa for a proposed $600 million expansion of the Portland aluminium smelter. One can imagine in the future a competition between the states for awarding greenhouse gas emitters to their states – a competition where the winner’s prize would, as usual, be paid by the state’s taxpayers.