Is a Carbon Tax the Right Fit for Australia?

 

by Blaine Williams

Australia has relatively low overall levels of greenhouse gas emissions. However, due in part to its small population and large amounts of readily-available cheap energy, the country has the highest emissions per capita in the world. In a controversial move to combat these high levels of carbon emissions, the Australian government announced that it would be introducing a carbon emissions tax. Proponents of the tax cite lower emissions as a selling point, but those against the policy claim that economic contractions, spikes in unemployment, and higher fuel prices would make the policy less than worthwhile. Economists Xianming Meng, Mahinda Siriwardana, and Judith McNeill of the University of New England in Australia decided to measure what outcomes should be expected from said carbon tax, using a model other than those that had been presented by the government to support the policy.

For the sake of the study, the economy was represented by 35 sectors. Those related to energy were further broken down, and the rest were classified as “other”. Emissions were classified as either resulting from fuel combustion (stationary) or being related to the level of economic output (activity). The model used the proposed government policy of a $23/tonne tax on CO2 emissions, with agriculture, road transport industries, and households exempt from the tax. The model was run using two proposed versions of the policy–one in which there is a standalone carbon tax, and one in which the government compensates households by distributing the carbon tax revenue evenly among them.

The study showed that, with a standalone carbon tax, Australia would experience a positive environmental outcome while still increasing GDP through the creation of $6.1 billion in government revenue. Total carbon emissions in the model were reduced by 70 megatonnes, 12% of Australia’s total emissions from 2004 to 2005. The main source of this reduction came from stationary emissions; even though the amount of activity emissions was considerably larger, it decreased by almost nothing. The authors posit that this could be due to the fact that three of the largest contributors to activity emissions––agriculture, transport, and households––are exempt from the tax, and therefore do not have an incentive to cut their emissions. Furthermore, the price paid for carbon emissions is constant regardless of whether they are “stationary” or “activity”-based, so there is more of an incentive for producers of stationary emissions––which are associated with higher production costs than activity emissions––to cut their emissions. The researchers found that, if enacted, the proposed compensation plan would have very little impact on emission reduction compared to the standalone tax. Contrary to what many would assume, compensation did not increase the demand for carbon-heavy products and thus increase emissions. Although total emission reduction did decrease, it was by a very small amount, and the team argued this could be due to a shift in consumer consumption from high-emission goods to low-emission goods. In this compensation scenario, stationary emissions decreased, indicating lower production and consumption levels of emission-intensive products, but activity emissions increased, indicating higher household demand for goods. In the end, these two shifts were shown to almost exactly cancel out one another, so the difference in emissions reduction was effectively negligible. The collected data also established that the amount of tax revenue the carbon tax produces would be inversely related to the environmental effectiveness of the policy.

Despite the increase in nominal GDP that would be experienced as a result of the carbon tax revenue, the model showed employment levels dropping slightly in both scenarios. With only the tax, employment decreased from 0.6–1.7% across all occupations, with those closely related to typically emissions-intensive sectors–such as production and transport workers–experiencing the biggest dip. With the compensation policy, consumers were shown to move away from carbon-intensive goods, prompting expansion of low-carbon sectors and the contraction of high-carbon sectors. As a result of this shift, employment for emissions-intensive occupations decreased by a larger margin than without compensation, but by a smaller margin for all other occupations. In terms of employment within sectors, the tax was shown to have very different effects. Low-carbon sectors such as renewable energy exhibited up to a 64% increase in employment, while high-carbon sectors such as brown coal exhibited an employment decrease of up to 53%. These results did not change a significant amount with compensation. Despite these extreme reactions, the overall change in employment did not change much, as employees in the model were assumed to be able to move freely between sectors, which would mean that those who were let go from one sector would be absorbed by another. In the real world, the truth is less convenient: moving between sectors could be fairly difficult, causing structural unemployment that the authors maintain would require government intervention to overcome.

 

Meng, S., Siriwardana, M. & McNeill, J., 2015. The Environmental and Economic Impact of the Carbon Tax in Australia. International Journal of Social Science and Humanity 5, 514–519. DOI: 10.7763/IJSSH.2015.V5.510 http://www.ijssh.org/papers/510-B004.pdf

 

 

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