Carbon tax to hit profits and growth and inflation predicted

Source: The Daily Telegraph

Julia Gillard's carbon tax will create an instant inflation spike, slow the domestic economy's already tepid growth and make a dent in company earnings at a critical time in the nation's recovery from the global financial crisis.

As Labor yesterday received the crucial support of independent Andrew Wilkie to push the tax through parliament, economists said the tax would have widespread ramifications for the economy and investors.

The tax, which is likely to price carbon between $23 and $30 a tonne, will raise $11.5 billion in revenue for the government in the first year. It will take effect from July next year.


The details of the tax and the compensation to households and industry will be released tomorrow in Canberra and are likely to increase opposition to the move.


In a report released yesterday, Citi economists forecast that a carbon tax of $25 a tonne would create a one-off 0.8 per cent hit to headline inflation and could shave 0.5 per cent off the economy's growth. The potential growth blow comes as the Reserve Bank prepares to mark down its forecasts for economic growth this year to just 3 per cent, compared with its earlier call of 4.25 per cent. Citi chief economist Paul Brennan said the government needed to ensure that the carbon tax did not raise inflationary expectations, which could in turn feed through to a bigger than expected rise in the consumer price index.

"Future increases in the price on carbon would add further to the CPI, but if the adjustment in the price is gradual, as the government appears to be proposing, then the ongoing addition to inflation in future years would be at the margin," Mr Brennan said.


"Of more concern would be whether the carbon tax leads to a change in inflation psychology. It seems unlikely. "The government is proposing compensation for the price rises and if communicated correctly this should negate any ongoing concerns about a sustained increase in inflationary expectations."Mr Brennan said Australia's buoyant terms of trade could be under threat if the nation's major trading partne rs followed suit with similar carbon policies that would lead to a decreased appetite for Australian commodities.


"In the longer term if there is concerted global action to deal with climate change then Australia faces a serious competitive threat, in particular to coal exports," he said. "A high carbon price in major energy-consuming economies would amount to a lower terms of trade for Australia."


A Goldman Sachs analysis found that a $25-a-tonne carbon price, coupled with 90 per cent compensation for trade-exposed companies with high emissions, would reduce ASX 200 earnings per share growth by up to 0.5 per cent in the first year.


A carbon price of $25 a tonne might lead analysts to downgrade their average earnings per share forecasts by up to 5 per cent. Goldman Sachs executive director of equity strategy Hamish Tadgell said energy stocks were most exposed to the carbon tax, but the costs would vary across the sector.


"The ability of the integrated utilities to pass on carbon pricing to consumers will ultimately depend on the regulators in each state," as they set retail prices, Mr Tadgell said. Mr Tadgell said energy companies with emissions above the National Electricity Market average would be hit hardest by the tax. He said the majors, AGL Energy and Origin, had emissions in line with the electricity market average, and this should mitigate the impact of the carbon tax.

Author: Scott Murdoch.  Source:  The Australian  July 09, 2011 12:00AM