Australia – combining fuel tax cuts with cap and trade

The design of Australia’s cap-and-trade scheme is emerging. It is likely to include petrol and among the details is a “cent for cent” fuel tax cut to balance the costs for motorists:

If motorists pay 5c extra a litre for petrol as a result of the scheme, fuel taxes will also be cut by 5c under the measure that will be reviewed in 2013.

If retail petrol prices don’t reflect carbon costs consumption won’t respond. This is not necessarily an environmental issue (unless you think the car culture is a problem beyond its current emissions) because the cap will ensure cuts are made elsewhere instead. The inflation that the tax cut purports to address will simply be pushed to other parts of the economy. To be fair: the tax cut is designed to sweeten the pill rather than make economic sense economic so perhaps this criticism is a bit crass.

As a micro-aside, the question I’d ask is how are they going to make fuel taxes so dynamic that they can respond to moves in the carbon costs embedded in petrol?

As a macro-aside, we should step back and look at how far Australia – recently a maligned Kyoto-dodger – is now blueprinting a scheme that by its own estimates will increase the average price of goods by 1% within a year of implementation.

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