Australia is about to put a price on carbon emissions. Legislation will be introduced to the Parliament around September 14, and after a failed earlier attempt, this time the policy is highly likely to become law, though the Liberal (conservative) party opposes it. The design of the scheme offers insights for how the U.S. might, one day, design its own carbon pricing policy.
The price will apply to most energy sector and industrial emissions and to part of the transport system, covering almost two-thirds of Australia’s greenhouse gas emissions. The scheme includes a large swap of income taxes for environmental taxes. Over half of the revenue from permits, estimated at around A$8 billion ($8.4 billion) per year at the start, is to be recycled to taxpayers, via an increase in the tax-free threshold for income tax, and to recipients of social security and pension payments.
Industries that are trade-exposed and emissions-intensive have secured generous assistance by way of free permits. More limited payments are to be made to the most carbon intensive electricity producers, and none to other industries that do not compete internationally.
The pricing policy is phased in using an innovative approach. From mid-2012 the government will sell permits at a predetermined price of A$23 per ton of carbon dioxide, rising to A$25 in 2015. This fixed price scheme acts like a tax, but uses the administrative infrastructure of a cap-and-trade scheme. In mid-2015, the price will be floated and full international trading allowed. However, for at least three years the price will be kept within a bound of a price ceiling set A$20 above the expected market price, and a price floor starting at A$15. The floor price is meant to support low-carbon investment by reducing downside price risk that stems from fragmented international markets. It will still allow international trading and access low-cost international emissions units.
An argument can be made in favor of a straight carbon tax. But Australia is likely to rely on international trading in order to make a contribution to global mitigation that is considered fair by others. Australia is a highly carbon-intensive, relatively fast-growing rich country, riding the resources boom with mining and gas extraction. The underlying emissions trend is one of continued growth, in contrast to the U.S., Europe and Japan.
Reducing Australia's net national emissions requires either a carbon tax at higher levels than elsewhere, or investment in mitigation in developing countries in addition to a more moderate domestic carbon price. The latter is clearly going to be more cost-effective, and favors an emissions trading scheme.
