Associate Professor John Asafu-Adjaye ADDRESSING AUSTRALIA’S INCREASING CONTRIBUTION TO WORLD CO 2 EMISSIONS: CAN A CARBON TAX HELP?

Outline of Presentation Introduction Objectives of the study The role of carbon in the Australian economy Carbon policy simulations Modelling approach Some simulation results Conclusions and policy implications

Introduction Climate change is arguably one of the greatest threats facing the survival of the human species Global surface temperatures (including over land and sea) have increased by 0.8°C over the period 1901–2010 and about 0.5°C over the period 1979–2010 All of the 10 warmest years in the global temperature records up to 2011 have occurred since 1997, with 2005 and 2010 being the warmest two years in more than a century of global records The majority of scientists now believe that human activities, particularly burning of fossil fuels and deforestation, are among the prime causes of the changes observed in the 20 th century and are likely to contribute to further changes in the 21 st century (IPCC, 2013).

Introduction (cont’d) Unfortunately, international agreement to address this problem has yet to be successful. Although a global effort towards reducing greenhouse emissions is more preferable, in the face of limited success in this effort, several developed countries have unilaterally implemented some form of carbon-related policies (e.g., a carbon tax or the emission trading scheme, ETS) Examples include the UK, Finland, Italy, Germany, Denmark, Norway, Sweden, Switzerland, Ireland, New Zealand, and selected states in Canada (Alberta, Quebec, and British Columbia) and the US (Colorado, California, and Maryland). Australia is a small country, but it is one the largest per capita carbon emitters in the world

CO 2 emissions per capita for selected countries, Source: World Bank, World Development Indicators, online edition, 2015.

Introduction (cont’d) The Julia Gillard-led Labor government introduced an emission reduction policy on the 1 st of July The policy comprised a fixed carbon price in the first three years, to followed by a flexible (market determined) price emissions trading system (ETS) from 2015 onwards. Prime Minister Tony Abbott’s went into the last election with a promise to dump what he called the “great big carbon tax”. The carbon tax was repealed on July 17, 2014

Objectives of the study 1. To analyze the macroeconomic impacts (e.g., GDP, inflation, employment, imports and exports of various sectors) of the Gillard government’s carbon policy. 2. To re-assess the policy reassessed by incorporating technological innovation in the renewable energy sector as set out in the government's plans. 3. To analyze the impact of an alternative policy such as a fuel tax and compare it to the carbon tax. We also wanted to determine which of these strategies could help achieve Australia’s commitment, under the Copenhagen Accord, to achieve a target of 5% reduction of CO 2 -e (carbon dioxide equivalents or GHG emissions) from 2000 levels by 2020

The role of carbon in the Australian economy Source: DCCEE, 2011a

Carbon Policy Simulations Scenario 1 Based on the government's inflation-indexed emission reduction policy, the following prices ($/t CO2-e) were imposed: A$23 in 2012, A$24.15 in 2013, and A$25.40 in 2014, with the price being determined by the ETS from 2015 onwards. Scenario 2 Technological change in renewable energy electricity generation is modelled together with Scenario 1. Here we increase technological change by 1% p.a. from Scenario 3 Fuel tax as an alternative to the ETS. We applied the following percentage increases to the existing rates: 23.7% in 2012; 26.4% in 2013; and 29.7% in 2014; with the rates increasing by 2% per annum from 2015 onwards.

The Modelling Approach We used a model which accounts for all economic agents in the Australian economy – economy-wide model Consumers (one representative household) Producers (different industries and services in the economy) Government External sector (trade) Assumptions: Consumers choose goods and services to maximise their utility Producers maximise their profit (or minimise their cost) Government imposes taxes and collects tax revenues The model accounts for the interactions between the economic agents The model is dynamic enables us to trace the effects of the policies continuously over time

Simulation Results: Impacts on GDP & Employment

Simulation Results: Winners & Losers

Simulation Results: Impacts on inflation The immediate effect of the ETS is an increase in the product prices of emissions-intensive industries such as coal-fired electricity plants and transport Our results indicate that prices rise fastest relative to BAU during the fixed-price period of the tax, with the steepest rises occurring in the key mining states of Queensland and Western Australia. The price level rises by 0.3% on average relative to BAU for the period 2012–14. Prices tend to stabilize after four years

Simulation Results: Impacts on emissions The ETS lowers emissions in all states relative to BAU Emissions declines fastest in Tasmania Emissions decline in WA and QLD relatively slow Scenario 2 (with Tech innovation) produces more drastic emissions reductions Fuel tax (Scenario 3) reduces emissions leass than Scenarios 1 & 2 This suggests that the ETS is more effective than the fuel tax in reducing emissions

Conclusions and Policy Implications The ETS causes real GDP to decline at an average of 0.1% per annum relative to BAU. It also has an adverse impact on welfare proxied by real household consumption. This is due to a loss in employment and small rises in consumer prices. At the industry level, the GDP growth of energy-intensive industries such as coal, iron ore, steel and coal-powered electricity generation is severely affected by the policies. The winners from the ETS are electricity generators who use gas and renewable energy sources and the forestry sector. There is a need for Govt to give incentives to firms to invest in renewable energy sources such as wind or solar energy which our results have shown to be important

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