By Mark Davis
When people in Canberra talk about a ''double D'' it usually means just one thing: a double dissolution. In the summer of 2010, Kevin Rudd was being urged by some of his colleagues to call a double dissolution election to break the parliamentary deadlock over Labor's planned emissions trading scheme.
He ended up eschewing this crash-through or crash approach and Labor instead crab-walked away from putting a price on carbon, entering a world of political pain over climate change that is still unfurling today.
Rudd's decision is all (somewhat turbid) water under the bridge for the Labor government. But with the government now completing a new carbon pricing regime, a different sort of double D should be considered.
This is the prospect that a carbon tax can yield a ''double dividend'' - delivering environmental benefits from lower greenhouse gas emissions while also improving economic efficiency by reshaping the tax system.
A carbon price would raise billions of dollars a year from the country's large industrial emitters: electricity generators, miners, oil and gas producers, steel, aluminium and cement-makers and airlines.
They will pass on the cost in higher prices for their customers - the biggest impact on the ordinary consumer will be higher electricity and gas charges - which will create incentives to reduce emissions of carbon dioxide.
Reductions in emissions will deliver environmental benefits and, if these benefits are higher than the costs of the tax, society will be better off - just as taxes on other social ''bads'' such as tobacco improve overall welfare.
This is the first dividend from a carbon price. But the possibility of a second dividend arises when the government decides what to do with the revenue raised by a carbon tax or emissions trading system.
The Climate Change Minister, Greg Combet, said this week the government would use more than half of the revenue from its carbon tax to assist householders, expected to be through tax cuts and increases in family payments, pensions and benefits.
Such revenue-recycling could create additional economic benefits if it improved the efficiency of the overall tax system. The concept should be familiar enough to Tony Abbott - it was one of the main rationales for the Howard government's goods and services tax.
Taxes raise revenue at a cost to economic efficiency.
Income tax drives a wedge between the wage paid by an employer and the take-home pay of a worker. This creates disincentives to work which will reduce labour supply and, in turn, economic output.
Sales taxes increase the prices of consumer goods, crimping demand for these products and reducing output.
Taxes at different rates on different goods will distort the choices consumers make about the mix of items to put in their shopping baskets, again at a cost to the economy.
The GST replaced several different wholesale sales tax rates with a tax struck at a single rate on a broad range of goods and services. Householders were compensated for the impact on prices through income tax cuts.
The GST is widely accepted to be a more efficient way of raising revenue than the taxes it replaced. That's why Peter Costello argued that it was a significant reform which would boost the economy's performance.
Environmental taxes may deliver a similar economic dividend.
If the revenue from a carbon tax was used, for example, to cut income tax it would increase incentives to work, boosting the economy. This is known as the ''revenue-recycling'' effect.
But the carbon tax's impact on prices will exacerbate existing distortions. This ''tax interaction effect'' imposes costs and there is an economic debate over whether these will outweigh the revenue-recycling effect, cancelling out any double dividend.
One of the few studies to examine the issue in Australia, by Iain Fraser and Robert Waschik, found there would be a strong double dividend from a tax on energy production to reduce emissions as long as the revenue was devoted to cutting taxes on consumption.
The research literature suggests this kind of ''win-win'' is more likely when an environmental tax is imposed on producers using non-renewable natural resources, when the existing tax system has considerable distortions and if the new tax is more efficient than the taxes it reduces.
Modelling by KPMG Econtech for the Henry tax review last year calculated the distortionary costs or ''excess burdens'' of 19 federal, state and local taxes, that is, the costs they impose over and above the amount of revenue raised.
The GST is one of the most efficient (or, more precisely, least inefficient) taxes. It has a marginal excess burden of eight, which means it harms the economy by 8¢ for every extra dollar it raises.
In contrast, Australia's personal income tax costs 24¢ for each dollar, company tax costs 40¢, payroll tax 41¢, and state mining royalties 70¢.
These numbers allow us to assess the effects of cutting one tax at the expense of raising another.
No reliable estimates of the excess burden of a carbon tax in Australia have been produced. In New Zealand, however, a $25 a tonne carbon tax would cost 15¢ for each dollar raised, according to Melbourne University's John Creedy and Catherine Sleeman.
So recycling carbon tax revenue by cutting less efficient taxes has the potential to deliver a second dividend beyond environmental gains. But this would be more likely if the revenue was used to cut company or payroll tax or to make personal tax cuts and welfare reforms designed to get more people into the workforce.
Political economy is likely to dictate that the compensation goes across the board rather than in a targeted fashion. That's unfortunate - because it could see the economic double D go the same way as Kevin Rudd's political double D.