Australia’s Carbon-Pricing Payoff

CANBERRA – This month, Australia joins a growing number of countries to introduce a price on carbon emissions, at a level twice as high as Europe’s. For Australia – a land not only of endless sunny beaches, but also of endless supplies of fossil fuels – this is a remarkable development.

Australia is among the world’s highest per capita emitters of CO2, owing to its reliance on coal – the most carbon-intensive fuel. Coal is also a massive export earner, bringing in roughly $2,000 per citizen annually.

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Hardly a week passes without climate policy making headlines in Australia. It already has brought down two prime ministers and one opposition leader. Although bipartisan support for an emissions-trading scheme briefly appeared to be within reach, the deal fell apart, and the new opposition leader, Tony Abbott, has made a “pledge in blood” to repeal the legislation if he comes to power.

So what does this hotly contested scheme comprise? This month, Australia’s 400 largest polluters will begin paying a fixed tax of A$23 ($24) per carbon ton that they emit, covering more than 60% of the country’s emissions. The rate will increase by 2.5% annually until 2015, when it will move to a floating rate. Much of the increased cost will be carried over to consumers.

The price was negotiated in early 2011, roughly to match the European Union’s emissions-trading price, and with incentives for domestic emissions reductions in mind. But Europe’s price has crashed alongside its economy, to less than half this level.

Moreover, even at this level, the carbon price probably will not be enough to reverse Australia’s emissions trend. Massive expansion in gas extraction and in coal and mineral mining, together with rapid population growth (for a rich country), means that energy use and emissions are set to grow in the coming decades.

Upon the shift in 2015 to a permit-trading scheme, a price ceiling will be set at A$20 above market price. Provisions for a minimum of A$15 are also in preparation, in order to insulate Australia’s market from the fire-sale prices of A$5 or less for which emissions-reduction credits from developing countries can be bought. Without this price floor, Australia could cheaply fulfill its entire national reduction target by simply importing credits, thereby failing to encourage domestic investment in green technology.

Policymakers in countries where a carbon price is imminent – including China, South Korea, and Mexico – are interested in Australia’s model. Starting out with a fixed carbon price (or one within a defined range) assures incentives for business, while making it easy to anticipate resulting government revenue and effects on the cost of living.

Australia’s experience has also shown some of the challenges that accompany such a scheme – in particular, the distribution of costs and benefits. Emissions permits are valued at roughly $9 billion annually. Industry receives half, a share that business groups have fought fiercely to increase, and households receive the rest though income-tax cuts and higher welfare payments.

The income-tax cuts address the most widespread concern about the scheme: that electricity will become more expensive. Indeed, tax savings will outweigh cost-of-living increases for most low- and middle-income earners – the majority of the population – while a smaller number of higher income earners will bear most of the expense.

This was supposed to be the government’s trump card in garnering support for the plan. But, so far, the message has been lost. Rampant misinformation has convinced the majority of Australians that they will suffer. And, although most businesses expect a long-term carbon price, the lack of bipartisan support for this scheme leaves many dubious about whether it will survive the next election.

Taxing emissions while cutting the tax burden on the workforce will benefit the environment and, potentially, the economy. Yet carbon-tax reform has rarely been implemented, much less on this scale. If Australian citizens’ firsthand experience changes their minds, the carbon-pricing mechanism has a good chance of survival. If not, Australia’s carbon-tax scheme – one of the world’s best-designed examples – will be regrettably short-lived.