UPDATE: RBA's McKibbin Says Timing Of Mining Tax Proposal Was Risky

28th Jul 2010 06:40

(Adds comments on ETS) By Rebecca Thurlow Of DOW JONES NEWSWIRES SYDNEY (Dow Jones)--Reserve Bank of Australia board member Warwick McKibbin said Wednesday it is "stunning" that Australia's government would change the country's mining tax regime while there is a sovereign risk crisis in Europe. Ahead of a federal election on Aug. 21 in which the government's new mining tax and climate change are shaping up to be key issues, McKibbin also warned it could be costly if Australia chooses direct action such as detailed regulation to address climate change instead of a carbon trading scheme. Commenting on the major drivers of volatility in the Australian dollar, he said that along with commodity prices, sovereign risk is also a big driver. "I think this is where a clear policy framework...is absolutely essential. I mean the idea that you would announce a tax on the mining industry at the time that there is a sovereign risk crisis going on in Europe is stunning to me," McKibbin said at a conference hosted by The Economist magazine. "Clearly, sovereign risk is the key issue right now," he said. The Labor government unveiled plans on May 2 to introduce a 40% levy on all minerals and the scheme was later watered down after it was vigorously opposed by the industry and played a role in the downfall of former prime minister Kevin Rudd in a Labor party coup on June 24. The tax was softened by new prime minister Julia Gillard in a July 2 deal with the three biggest miners--BHP Billiton Ltd., Rio Tinto Ltd., and Xstrata PLC--lowering the headline rate to 30% and excluding all minerals except iron ore and coal. Smaller miners still have reservations about the deal cut with the big miners and resumed a campaign against it Monday. Asked to comment on the government's decision to put on hold its plans to introduce an emissions trading scheme, McKibbin warned that other, non-market ways to address the climate change issue could come at a hefty cost. "Instead of carbon trading in Australia, say we went into really detailed regulation and various direct action policies. What you do when you do that is you increase the cost of capital quite significantly..." he said. "That drives capital away from your economy. That then depreciates your exchange rate and also affects consumption and production. So that the policies that you put in that you think are actually politically attractive and don't do too much damage, actually do enormous damage in terms of rates of return." McKibbin said an economy-wide carbon price is clearly the least costly, most emission reduction policy that a country could follow. "(It is)...a much better strategy than any of these direct action policies that in this country and in other countries people think come as free lunches," he said. -By Rebecca Thurlow, Dow Jones Newswires; 61-2-8272-4679; [email protected] (Rachel Pannett in Canberra contributed to this article.) (END) Dow Jones Newswires July 28, 2010 01:40 ET (05:40 GMT)