Totting up carbon tax is anything but a piece of cake

Bookmark and Share Economics & Deregulation, Governance & Service Provision, Energy and Climate Change | Tim Wilson
The Australian 18th April, 2011

When asked on ABC1's Q & A about the carbon tax we'll pay on a birthday cake Assistant Treasurer Bill Shorten joked he didn't know how many candles there would be on it before blundering through a non answer.

For the government it was a moment, no doubt, uncomfortably reminiscent of former Liberal opposition leader John Hewson's famously botched attempt to explain the effect of the GST on a birthday cake in an interview with Mike Willesee in 1993 on A Current Affair.

But calculating the carbon tax on a birthday cake is no mean feat. Here's the recipe.

First establish whether individual ingredients come from a company required to report its emissions under the National Greenhouse and Energy Reporting Scheme, which will then be used to issue carbon tax bills.

Despite what you may have heard, "big polluters" aren't just electricity generators and mining companies, but include most food and beverage manufacturers, as well as supermarkets.

Each is required to report their emissions from "scope one" activities involving the direct consumption of fuels, such as driving a car or burning gas, and "scope two" activities, primarily emissions from electricity consumption.

And since one company's scope one emissions are someone else's scope two emissions, their value is discounted to avoid double counting on each company's NGERS balance sheet.

Step two is to calculate the carbon tax the company will pay based on its reported emissions and how it will be distributed through the prices on each good consumers buy.

All the ingredients for our birthday cake -- 225g of White Wings plain flour, 125ml of Crisco vegetable oil, 85g of Cadbury cocoa powder, 250ml of Pauls milk, 350g of CSR caster sugar -- will include the direct cost of a carbon tax because they're manufactured by a big polluter.

As will the 220g of Plaistowe cooking chocolate and 200ml of Pura double cream for the icing.

And assuming the cake is being made in my kitchen in Melbourne's South Yarra, there'll be a carbon tax directly on the 250ml of water from big polluter South East Water I need to boil as well.

But the 1 1/2 teaspoons of McKenzie's baking powder and bicarbonate of soda, two teaspoons of Queen vanilla extract and two Pace Farm eggs don't come from NGERS reporting companies and won't be taxed directly.

Nor will the Australian-owned Alpen pack of 24 assorted birthday candles manufactured in China.

All the locally produced ingredients, however, will include an indirect price increase through carbon tax electricity price rises.

They'll also include the carbon tax that flows through from "scope three" emissions, which includes all non-electricity scope two emissions whose cost will be passed through to every good and service in the economy and for which the government won't be compensating households.

For our birthday cake, scope three emission costs will be added to ingredients through the carbon tax paid by wholesale distributor Linfox and retailers Coles, Woolworths or ALDI; as well as any other carbon tax costs to other companies who help get the ingredients into my pantry.

But it's important to note that scope three emissions don't attract a direct carbon tax bill as they're not required to be reported under NGERS.

Scope three emissions costs only flow through when they are passed on from another company's scope one or two emissions.

Step three is to calculate the carbon tax associated with actually producing the cake.

In this case I won't include the proportionate scope three emissions carbon tax cost from the production of the electric mixer, oven, mixing bowls and dishwasher for cleaning, since they were bought before a carbon tax and were probably made overseas anyway.

However, I will need to include the carbon tax cost from the electricity company's scope one emissions, which are my scope two emissions, for the electricity used to power the mixer, oven and dishwasher, as well as more of the South East Water consumed.

Step four is to light the carbon tax-free imported Alpen candles and directly release the only greenhouse gas in the whole recipe while my friends and I sing Happy Birthday.

Ironically, the candle's direct emissions don't attract a carbon tax because my humble kitchen doesn't meet the NGERS reporting threshold of emitting more than 25 kilo tonnes of greenhouse gases annually.

Step five is to eat the cake while calculating the total carbon tax cost. But until the government sets the tax rate per tonne of carbon dioxide equivalent gases the cost is impossible to calculate.

The cost would then need to be recalculated each year because the Multi-Party Climate Change Committee agreed the tax would be "increasing annually at a pre-determined rate", even during the fixed price phase.

So the carbon tax contribution on a birthday cake increases between a child's first and second birthday. Indeed, perhaps we could have a carbon tax birthday party each year on the day the tax goes up.

Because the tax increases on a compound basis, by their tenth birthday the carbon tax contribution will be about 50 per cent higher. By their 21st it will have doubled.

I also haven't calculated my share of J. J. Richards and Sons' carbon tax bill for disposing of the uneaten cake. Unlikely to be needed anyway.

Nor have I calculated the cost to business of complying with the 1000-odd pages of legislation and regulations required to operate the tax. Industries are already complaining about the burden to the Productivity Commission's annual regulatory review.

Indeed, compliance will be where Julia Gillard and Climate Change Minister Greg Combet's mystical green jobs are already being created.

At the end of Willesee's interview, he asked Hewson, "If the answer to [the GST] on a birthday cake is so complex, you do have a problem . . . don't you?"

Hewson replied, "Well, people don't know how much tax they currently pay."

Australians, however, do know they aren't paying a carbon tax yet, and with this recipe Gillard, Combet or Shorten are unlikely to try to explain it.