Australian fossil fuel tax could raise $100bn in first year alone, Rod Sims and Ross Garnaut say

A tax on fossil fuel production could help fund Australia’s transition to becoming a carbon-free energy giant, lower the cost of living and assist the world to cut greenhouse emissions, according to two veteran economists.

Ross Garnaut, a leading economist during the Hawke government, and Rod Sims, a former head of the competition watchdog, say a so-called carbon solution levy would raise $100bn in its first year alone if introduced in 2030-31 and set at Europe’s five-year average price of $90/tonne of carbon dioxide equivalent.

This tax combined with other steps – including deploying the levy to subsidise as much as half the cost of new carbon-free iron, aluminium or fuel production plants – would allow Australia to exploit its abundant renewable energy resources to revive an increasingly moribund economy, they will say.

“The global transition to net zero is Australia’s opportunity,” Garnaut, the founder of the Superpower Institute, will say in a speech to the National Press Club on Wednesday. “We can use it to raise productivity and living standards after the decade of stagnation.”

Taking a cue from the Albanese government’s reworking of the legislated stage-three tax cuts, Garnaut will say shifting politics could prompt politicians to alter course and rework policies such as reintroducing a carbon price scrapped a decade ago by the Abbott government.

“We know that the constraints from the climate wars make the implementation of the [carbon levy] impossible,” he will say. But it “is not as impossible as living with our failure to play our full part in the global effort to stop the bushfires and cyclones and denudation of our beaches getting worse. It is not as impossible as being unable to pay for our ageing population, and unable to pay for our submarines.”

Sims, chair of the Superpower Institute, will tell the National Press Club that some of these ideas “may be rejected immediately”. Still, it is important to keep “tilling the soil” to nurture them, noting that past changes such as cutting import tariffs were initially very unpopular.

“Basic economics means you must price the damage that fossil carbon imposes on us all,” Sims will say. “Not to do so is to make it essentially impossible for green products to compete with currently cheaper fossil fuel products.”

Garnaut is also optimistic that “strong bipartisan support for good policy on energy and climate in all the states” will provide a foundation for a national shift. “The dysfunction is in the commonwealth parliament,” he will say.

“In the zero-carbon economy, Australia is the economically natural location to produce a substantial proportion of the products currently made with large carbon emissions in Northeast Asia and Europe,” he will say in his speech. “So not only are we looking after the prosperity of Australians, we’re making it more likely that the world will succeed in dealing with the problem of climate change.”

Garnaut will dismiss the view that imposing a levy on the finances of the fossil industry creates “sovereign risk” for the investments.

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“Was it sovereign risk when the coal and gas industry and others funded the political campaigns that led to the abolition of carbon pricing?” Garnaut will say. “That was a huge change of arrangement that fundamentally changed the business prospects of a lot of investments made in expectation of legislated arrangements continuing.

“There’s been expectation of constraints on carbon dioxide emissions … for 23 years.

“Anyone who does not anticipate what is good or necessary policy coming in at some time hasn’t absorbed any of the reality around them.

“In the end political judgments will have to be made about whether restoration of rising income standards … and productivity growth and prosperity for the Australian people are more important than preserving the profitability of the oil and gas companies.”

Wednesday’s speech will also call on the federal government to revise its new capital investment scheme that would support 23 gigawatts of new solar and windfarms and 9GW of additional storage such as batteries.

The current auction proposal to lure investors by promising a minimum generation price could cost the budget heavily and “drift into central planning”, he will say. Instead, the commonwealth could underwrite 80% of the costs of a project and rake in 40% of the profits once the investor has got their money back.