Australia would be raising $70 billion a year from the carbon price if it wasn’t dismantled, Ross Garnaut says

Australia would be raising $70 billion a year from the carbon price if it wasn’t dismantled, Ross Garnaut says
  • PublishedSeptember 18, 2023

Australia’s government would be collecting $70 billion a year in revenue if the emissions trading scheme was still in place, economist Ross Garnaut says.

The problems at Qantas, and the explosion in executive remuneration this century, reflect a much more general problem in our economy, he adds.

And Australians have been “in denial” about increasing oligopoly in the economy.

But all of these things are connected, and we have an opportunity to pursue “transformational economic reform” by tackling them all at once, he argues.

Are our leaders willing to do so?

What could we do with $70 billion a year?

Professor Ross Garnaut, a Professorial Research Fellow in Economics at the University of Melbourne, is one of Australia’s most respected economists.

And he’s been increasingly warning about the consequences of growing market concentration in our economy.

Earlier this month, he made another set of warnings when he delivered the keynote speech at the 2023 Henry George Commemorative Dinner in Melbourne.

Here’s a summary of what he said.

He began his speech by saying Australia’s government would now be collecting $70 billion a year in revenue if the emissions trading scheme (ETS) hadn’t been dismantled.

The trading scheme existed in Australia between 2012 and 2014, but it was ended by Tony Abbott’s Coalition government in mid-2014 before it was about to merge with the European ETS.

His calculation was based on today’s European carbon price and exchange rate, and this year’s expected Australian carbon volumes. 

“That’s not a tiny bit of money,” Professor Garnaut said.

“We could pay for the nuclear submarines with five or six years of the carbon price. One year would pay for more than two years of Medicare.

“We could cut every personal tax rate by 30 per cent from the highest to the lowest.

“Some members of the Australian Parliament support raising the GST rate to pay for cuts in income tax rates. Re-introducing the European-linked carbon price would give all of the presumed benefits of a higher GST and efficiently reduce carbon emissions as a bonus,” he said.

He said we wouldn’t raise $70 billion a year from a carbon price forever, because the Albanese government wanted Australia to have net zero emissions by 2050, so the carbon price revenue would phase out over a generation.

But in the meantime, “it would pay for a lot of tax reform”.

And we really needed to reform the tax system, he said, to fix a worrying and growing problem in the economy.

Telltale signs: Qantas, super profits, and rising executive remuneration 

And this was the problem he highlighted.

He said Australia was increasingly dominated by powerful firms that were extracting “economic rents” from our economy and society.

“Australians have been in denial about the increasing oligopoly and the rise of rents,” he said.

“The problem is much greater in Australia than the US, and has probably deteriorated more in recent times.”

He said the results could be seen everywhere.

“The Qantas story that’s become news over the last few weeks is one manifestation of a much more general problem,” he said.

“Increased concentration of banking business is a large problem. Four big banks all putting up their interest rates or putting them down on adjacent days by the same amount. No effective competition. They know how to work together.

“The increased concentration of banking has its parallels in many sectors.”

He said there had been an unprecedented increase in the share of national income going to profits this century, and it reflected the growing role of “economic rent” in Australia’s economy.

“It began in the first decade of the century, and has gone much further and faster since then,” he said.

“The only explanation for such divergence between the rate of return on competitive riskless capital and actual business rates of return as reflected in the profit share of GDP is a rise in rent,” he said.

The tails of Qantas planes showing the flying kangaroo pass each other at Sydney Airport.
Qantas issued its first-ever apology to workers last week after the High Court found the airline acted illegally when it sacked 1,700 ground crew staff members in 2020.(ABC News: John Gunn)

He said the explosion in executive remuneration this century was also a by-product of rising economic rents.

“The increase in the profit share and the fall in the wage share is actually bigger than the statistician makes it look,” he told the audience.

“When Qantas paid CEO Alan Joyce tens of millions of dollars in recent times, that would mostly be classified in the wages and not profit share.

“The Joyce arrangements are not unique, or even unusual today. They were unknown in the twentieth century.

“There has been an explosion of executive remuneration this century, starting in finance and other high-rent parts of the private sector and extending into the public sector including the universities.

“It has gone much further in Australia than in Europe or Japan. It was apparent in the US before Australia, but it seems to have caught up in Australia over the last decade, and may have gone further when the size of enterprise is taken into account.

“It is really the sharing of rent between owners and managers of businesses in rent-rich sectors,” he said.

So, what does Professor Garnaut mean by “economic rent”?

What is ‘economic rent’?

Generally, “economic rent” is the money collected by an owner of a resource which exceeds that which is economically necessary.

It differs from the normal meaning of the word “rent,” which refers to a payment you make for the temporary right to use a good, like renting a car.

In contrast, “economic rent” has to do with the abuse of one’s power and privilege in the marketplace.

For example, when an individual or business has exclusive ownership over an asset and they use that positional advantage to extract more money from people than they otherwise could if they faced proper competition, they’re extracting economic rent.

A few months ago, when he delivered the 2023 Bannerman Lecture, Professor Garnaut warned that an increasing proportion of Australia’s national income was now coming from rent‐heavy sectors.

He mentioned urban real estate, information technology, financial services, media, and large‐scale retailing, but especially mining.

“Profits of mining, with economic rent contributing a considerable proportion, were larger than the whole of the rest of the economy in the final quarter of last year,” he said.

He warned the growing problem of economic rent was now undermining our traditional methods of measuring how income was generated and distributed through the economy, and it was undermining our ability to understand the world around us.

A huge opportunity for ‘transformational economic reform’ in Australia

However, in his Henry George lecture this month, he said this also presented an opportunity for governments and policymakers.

He said if you added up all the opportunities for economic reform to reduce economic rents, or to tax them efficiently and equitably, you’d have a “transformational economic reform program” to increase productivity and equity.

He said such a reform project would be historically significant.

It would be comparable to the two other periods of major economic reform that Australia’s seen in the post-World-War-II era: the full employment framework introduced by the Labor governments of John Curtin and Ben Chifley, and the reduction of Australian protection in the 1980s and 1990s.

“Resource rent taxation. Tax on carbon externalities. Tax on land and housing rent, and urban infrastructure and planning and immigration adjustments to reduce urban land rents. Increased competition,” he said.

“Now is the time to focus on the rise of rents, policy to slow or reverse the increase, and taxation reform to secure for the public revenue part of the rents that cannot be removed by sound policy.”

The erasure of land rent in neoclassical economics

Which brings us to the final section.

How did we allow this problem of rising economic rents to occur?

Garnaut suspects it’s because important elements of economic theory took a wrong turn decades ago, particularly regarding how we think about land.

He said the problem could be partly traced to the influence of the American economist Paul Samuelson, who developed a neo-classical model that purported to represent the famous “Australian case” for trade protection that dominated official thinking in Australia in the early decades of our federation.

He said according to Samuelson’s model, in a country that had an abundance of capital and a shortage of labour, relative to the rest of the world, protection from trade would shift the distribution of income towards workers.

But Samuelson’s model was a “huge oversimplification”, leaving out a crucial feature of the Australian argument.

“There was no land in the Samuelson model, yet the core of the Australian case was that protection operated as an indirect tax on land,” Garnaut said.

“Samuelson omitted land from his simple and elegant model because the algebra didn’t work if you included a fixed factor of production.”

He said Samuelson was later joined at the Massachusetts Institute of Technology by a young economist called Robert Solow.

In the 1950s, Solow worked on a theory of growth based on the Samuelson-type neo-classical model — but still with no land — which later won him the Nobel Memorial Prize in Economic Sciences.

“It set economics on a wrong course,” Garnaut said.

Solow’s work developed what is now the standard way of measuring how capital and labour each contribute to growth in economic value in a given period.

However, Garnaut said a personal friend and colleague, the economist Max Corden, received a letter from Solow in 2017.


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