Carbon Pricing and Uncertainty

There was a lot of discussion and confusion over the Carbon tax in the past week, indeed months, as the political debate has tooed and frooed. But with the Prime Minister having announced the package hopefully the outcome is now clearer for all to see.

We are not interested in the political debate that is not our goal or role, our thoughts were summarised in Saturday’s blog,  but we are interested in what the economic impact will be know that everyone knows the cost and or benefits to their business and family. The high level impact seems to be that the carbon tax will drive up the cost of living by $9.90 and around 90% of households will be compensated.

On face value you could probably argue that it should have a neutral impact.

But the problem is that the devil is in the detail and with the competing lobby groups putting their spin on things it is fairly easy to see how the uncertainty that existed before the announcement may not have been alleviated by the announcement. The reason we are acutely interested in this is that Keyne’s tells us that uncertainty is poison to an economy and we believe that the economic and global market uncertainty, coupled with an overhang of debt on household balance sheets is why the consumer economy has been weaker over the past year or so than the macro settings and the mining boom have suggested.

I live in the Hunter, my family lives in the Hunter and has done for 3 generations on my wife’s side, 4 now that we have kids. I have friends in the Hunter and some of them work in mining and mining related industries and even though the Hunter economy is as diverse as the rest of Australia mining is a significant other in terms of employment. So I am concerned about some of the claims that were made in light of the release yesterday of the new Carbon Tax.

I am concerned because of the hyperbole around some of these claims and I fear they will impact heavily on my fellow “Hunterians” (if that is a term) state of mind which, like households all over Australia, is more fragile than the macroeconomic settings suggest it should be.

In a press release Sunday the Minerals Council of Australia released a statement part of which said, the carbon tax was,

…imposing costs that none of our international competitors face, and cannot be justified in transitioning the Australian industry to a low carbon future. It will simply export investment, jobs, global market share and emissions offshore.

Ninety per cent of Australia’s minerals exports receive no safeguarding under this scheme. They will pay the full carbon price ahead of all their international competitors.

The decision to impose the carbon tax on emissions from coal mines is unique. In Europe, these emissions are exempted from their trading scheme.

I also heard the boss of the MCA on Newsradio Sunday afternoon saying some massive amount of jobs would be lost but I can’t find it in print anywhere. Indeed here is an article in the Australian this morning talking about 500 jobs being lost in time in the Hunter Valley due to the mining tax. Given we are essentially at full employment in our economy finding new jobs won’t be difficult – finding jobs you may want to do or are skilled for though is a different question altogether.

All of this just adds to the uncertainty being felt not just here in the Hunter but all over Australia – I look forward to some clarity of the real impact through time but I doubt it will be as terrible as first blush or worst case scenario lobbying are suggesting. Economies are complex adaptive systems and like Newcastle after the Steel Mills changes will and can be made – they are everyday. 

But for us as economists we are acutely interested in the impact of the ongoing uncertainty from a behavioural point of view and the impact that it might have on consumption going forward. We are more interested in the 1 million households that it is reported won’t get compensation as much the many other millions of households that will. What will the impact of these households be – we don’t know, but uncertainty for them has risen. Likewise with all the scaremongering about the impact on industries and potential job losses (I say that because we can’t know these things for certain but we know they will scare people) we will be watching the outcomes of releases such as the Westpac MI Consumer Sentiment over coming months to see where things have gone.

Uncertainty is the enemy of economic growth and while on the one hand now that we all know the construction of the carbon tax uncertainty should fall but we won’t know for a while yet and the outcome is still, how else can we say it, uncertain. Foxbusiness had a good quote from Australian National Retailers Association Chief Executive Margy Osmond which sums up things nicely,  

“Much of the uncertainty around the carbon price may now lessen, but the negativity of the ‘anti’ campaign will continue and that may be enough to convince Australians they need to keep saving their pennies,”

And that is the key to the outlook for the Australian economy as the debate rages.

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