Australian Economy Coughs Up Carbon Tax

July 1st, less than two months away, will mark the commencement of Labor Prime Minister Julia Gillard’s controversial carbon tax. While Australia accounts for only 1.5% of global carbon emissions, it is the largest per capita emitter.
Beginning in July 2012 and continuing until 2015, the discharge of a ton of carbon will cost A$23. The Climate Minister, Greg Combet, claims the government will keep the price at 23 per ton despite the price sinking in Europe to just €6 per ton in April 2012.

The carbon tax is celebrated by the Global Greenies as a Divine Act in their war against polluters, real or imagined. For the Australian government, there is a new source of funds, primarily taken from businesses who have few votes, and redistributed to the needy, less fortunate who have many votes. One proposal is for tax cuts, an average of $300 per year, for 90% of the workers.

Another noble venture for the anticipated billions coming from the dirty, polluting carbon is investment into clean and or renewable energy. The Canberra government has already allocated A$13B for such projects. If the Australian government is anything like the one Washington, the availability of 13B for environmentally clean start up ventures should attract millions in campaign donations. Joe Biden’s Solyndra friends may be looking for a new venture, and they do have experience in government subsidized energy ventures. It might be a good fit.

There is a possibility that PM Gillard will not be able to reap the fruits of one her legislative gems. (The other controversial law is her new tax on the mining industry.) She arrived in power, after a close election, getting the votes of three independents and the Greens, to achieve a one vote majority. The election is scheduled for late 2013 but the loss of one vote would speed the process. The current polls show she trails the Conservatives by a 53 to 47 margin.

Even among the Labor Party there is dissension about the carbon tax. The former NSW premier Kristina Keneally said Julia Gillard should dump the carbon tax in an effort to fix Labor’s electoral woes.

“Ms Keneally tweeted today: “If you want to keep a carbon price, find a way to sell it better, or make it easier on Australians, so a re-elected Labor Govt can carry on.”

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The Labor Party, with the new carbon tax, and the controversial mining tax is not the only advocate for policies likely to harm the Australian economy. Policies of the Reserve Bank of Australia, namely a high central bank money rate, and with it a very strong currency, have done damage.

Australia, as the major commodity supplier to China, has enjoyed soaring business activity as China made massive investments improving their infrastructure. The Chinese investment splurge, designed to offset the 2008 financial meltdown, enabled China and Australia to avoid a recession.

When it became evident the commodity boom was real, the Reserve Bank was quick to increase the central bank rate to the point where they became the highest in the developed world. This was a thing of beauty for the speculators, as the Aussie Dollar went from .60 to a record 1.10. Australia became the most favored destination for the carry trade and this furthered the Aussie’s advance.

In retrospect the policies of the Reserve Bank probably hurt the non mining sector. The excessively strong currency slowed the flow of tourist into Australia, and sent the Australian abroad for their holiday. Wine sales from Australia decreased. Toyota is no longer building cars in Australia for export to the Middle East. Production of the General Motors joint venture car, the Holden, with the government has slowed, since the strong currency makes imports cheaper, causing layoffs.

Fearing the global economic slowdown was going to visit Australia, the RBA did reduce the money rate by 50 basis points this week. A 25 bp reduction had been anticipated, so the additional 25bp probably represents increased angst on the part of the RBA.

The additional reduction jolted the market, chasing some of the recent longs from the market. The market is now beginning to anticipate further rate reduction prior to year end, possibly taking the rate down to 3%. We are inclined to favor a short position, with an initial objective of parity.