Assessment of carbon tax as a policy option for reducing carbon-dioxide emissions in Australia

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This research has analysed the economy-wide impacts of carbon tax as a policy option to reduce the rate of growth of carbon-dioxide emissions from the electricity sector in Australia. These impacts are analysed for energy and non energy sectors of the economy. An energy-oriented Input–Output framework, with ‘flexible’ production functions, based on Translog and Cobb-Douglas formulations, is employed for the analysis of various impacts. Further, two alternative conceptions of carbon tax are considered in this research, namely, based on Polluter Pays Principle (PPP) and Shared Responsibility Principle (SRP). In the first instance, the impacts are analysed, for the period 2005–2020, for tax levels of $10 and $20 per tonne of CO2, in a situation of no a-priori limit on CO2 emissions. The analysis shows that CO2 emissions from the electricity sector, when carbon tax is based on PPP, would be 211 and 152 Mt, for tax levels of $10 and $20, respectively (as compared to 250 Mt in the Base Case scenario, that is, the business-as-usual-case). The net economic costs, corresponding with these tax levels, expressed in present value terms, would be $27 and $49 billion, respectively, over the period 2005-2020. These economic costs are equivalent to 0.43 and 0.78 per cent of the estimated GDP of Australia. Further, most of the economic burden, in this instance, would fall on the electricity sector, particularly coal-fired electricity generators – large consumers of direct fossil fuel. On the other hand, in the case of a carbon tax based on SRP, CO2 emissions would be 172 and 116 Mt, for tax levels of $10 and $20, respectively. The corresponding net economic costs would be $47 (0.74 per cent of GDP) and $84 (1.34 per cent of GDP) billion, respectively, with significant burden felt by the commercial sector – large consumers of indirect energy and materials whose production would contribute to CO2 emissions. Next, the impacts are analysed by placing an a-priori limit on CO2 emissions from the electricity sector – equivalent to 108 per cent of the 1990 level (that is, 138 Mt), by the year 2020. Two cases are analysed, namely, early action (carbon tax introduced in 2005) and deferred action (carbon tax introduced in 2010). In the case of early action, the analysis suggests, carbon tax of $25 and $15, based on PPP and SRP, respectively, would be required to achieve the above noted emissions target. The corresponding tax levels in the case of deferred action are $51 and $26, respectively. This research also shows that the net economic costs, in the case of early action, would be $32 billion (for PPP) and $18 billion (for SRP) higher than those in the case of deferred action. However, this research has demonstrated, that this inference is largely due to the selection of particular indicator (that is, present value) and the relatively short time frame (that is, 2005–2020) for analysis. By extending the time frame of the analysis to the year 2040, the case for an early introduction of carbon tax strengthens. Overall, the analysis in this research suggests that an immediate introduction of carbon tax, based on SRP, is the most attractive approach to reduce the rate of growth of CO2 emissions from the electricity sector and to simultaneously meet economic and social objectives. If the decision to introduce such a tax is deferred, it would be rather difficult to achieve not only environmental objectives but economic and social objectives as well.
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