In its efforts to tackle the problem of climate change, the Australian government will introduce a carbon tax starting July 1, 2012. Australia’s goal is to reduce the country’s total emissions of greenhouse gases (GHGs) to 5 percent below 1990 levels by 2020; to achieve this goal, the country is starting with a carbon tax, but officials then plan to shift to a market-based emissions trading scheme in 2015. The 5 percent reduction is a voluntary target in lieu of a binding international agreement on reducing carbon emissions.

Australia has the highest per capita carbon footprint in the world because of its reliance on coal-fired electricity stations, which are responsible for 40 percent of the nation’s emissions. The carbon tax is a move towards counteracting Australia’s lag in switching to renewable energy, making carbon-neutral investments, and establishing climate change best practices.

Overview of the Carbon Tax

• The carbon tax will be launched with a fixed price of A$ 23 per tonne of CO2-e (CO2 equivalent). (A$ 1 = US$ 1.05 = € 0.81)
• Five hundred of Australia’s highest polluting companies, which is half the number originally planned, will pay a flat charge of A $23 per tonne of CO2-e produced; the charge will be increased annually by 2.5 percent above the rate of inflation. The reason for including only 500 companies revolves around the decision to exclude fuel from the carbon tax. In total, 0.02 percent of Australia’s 3 million businesses will be taxed.
• Over the three years before the launch of the emissions trading scheme, A$ 9 billion in revenue generated from the carbon tax will be utilized to compensate and support jobs in hard-hit industries.
• The Australian government has promised that 90 percent of households will be compensated in some way, with 70 percent fully compensated either through tax cuts or through increases to family payments. The government estimates that 4 million households will be better off, 6 million will be no worse off, and 8 million will be partially compensated for price rises. The average household will pay an extra A$ 9.90 per week.
• A$ 14 billion from the carbon tax will be invested in clean energy technologies and sources. This amount includes A$ 1 billion to improve energy efficiency, A$ 10 billion towards clean energy technology, and A$ 3 billion towards renewable energy.

Impact of the Carbon Tax

An estimated 159 million tonnes of carbon pollution will be removed from Australia’s atmosphere if the stated measures of the carbon tax and the subsequent emissions trading scheme are effectively and efficiently carried out. Australia’s total emissions for 2010 were 577 million tonnes, giving an expected result of 418 million tonnes in 2020.

Like any tax, the carbon tax will have an impact on the entire Australian economy, affecting its gross domestic product, industrial policies and structure, and foreign trade. Schemes revolving around carbon reduction will increase the price of energy, at least in the short term.

The introduction of a carbon tax is progressive for the greater good of the environment; it is, however, regressive in that the burden arising from the tax would have a major impact on low-income households. However, the carbon tax should motivate investment in clean energy sources as they become cheaper relative to the sources that are taxed. The tax will also encourage the 500 major polluters to look at their emissions not as a contingent liability but as an actual liability, making them rethink their business strategy with the burden of the carbon tax factored in.

The main industries affected in Australia by the carbon tax are in sectors that generate electricity, especially organizations that are heavy fossil fuel users. Fuel will not be subject to the carbon tax for the first 2 years but will then draw the tax for heavy vehicle diesel and big businesses.

Because of the extremely high emissions by brown and black coal generators, these two sources of electricity and energy will increase in price and decrease in demand with implementation of the carbon tax. This effect should create an increase in electricity generation by renewable sources, gas, and oil. Also, the initial compensation given to polluters will slowly decrease, further making them shift towards more clean energy sources. A finance fund in the amount of A$ 10 billion is also earmarked to provide loans for renewable energy.

The government has set a target of generating 20 percent of Australia’s power from renewable energy sources by 2020.

Limitations of the Carbon Tax

One of the most significant disadvantages of the carbon tax in Australia is in the name itself. The general public often sees any increase in taxes, including the introduction of a carbon tax, as a negative stance, and the Australian government has certainly struggled to get support from the general public for this legislation. A second limitation of the carbon tax is that agriculture is not subject to the tax. Agriculture, in particular livestock farming, accounts for 18 percent of global GHG emissions. The third limitation is in the policies associated with the carbon tax. If the government reimburses much of the revenue from the carbon tax to the major polluters, then the incentive to decrease emissions will dissipate. On the other hand, if the carbon tax is astronomical, then it pushes companies and industries to shift operations to other countries that have few or no pollution costs.

Conclusion

The Australian government, using a political process, has adopted a direct market-based approach to reducing emissions through a carbon tax and future ETS, which will have an impact on the economy through the relative price of goods and services. The high emitters will price the additional costs from the carbon tax into their products, creating an opportunity for companies to develop carbon-free or low-carbon goods and services that avoid the tax and are cheaper than carbon-intensive alternatives.

The change in relative prices will lead Australian industries to shift away from high-carbon products towards energy-efficient processes and low-carbon inputs. The change in prices will also put pressure on consumers to reduce their individual footprints by decreasing their use of carbon-intensive products and altering their consumption patterns. Thus, the carbon tax will have a monetary and behavioral effect on the economy’s resource allocation and distribution, income distribution, and economic growth.

With China recently announcing a possible carbon tax from 2015 priced at A$ 1.55 per tonne of CO2-e, one would think that Australia has overpriced its carbon policy in an attempt to stand out from the rest of the pack. However, the positive messages from China’s recent announcement, the United States’ and India’s participation and action in the Durban Platform, and the carbon tax in Australia are signals to the world that environmental and social degradation are now being more closely monitored than ever before. The pragmatic approach taken by continents such as Australia and Europe sets an example for other countries to start working on market-based mechanisms to tackle the problem of climate change.

About the Author

Kaushik Sridhar is a sustainability associate at Net Balance Management Group in Sydney, Australia. He helps companies integrate environmental, social, and other sustainability issues with business strategy. An MBA and PhD graduate from the Macquarie Graduate School of Management, Mr. Sridhar has published eighteen papers in international peer-reviewed journals in the areas of sustainability, corporate social responsibility, carbon trading, and strategic management. He has presented papers at the IFSAM conference in Paris (2010), the APROS conference in Auckland (2011), and the 4^th INTERNATIONAL HR CONFERENCE in Bangkok (2012). Mr. Sridhar also has a blog on sustainability, which he updates regularly: http://kaushik-sustainability.blogspot.com/

Image: Australian Flag by Creative Daw, Philippines.

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