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Australia’s carbon pricing strategies in a global context

This paper (here) written with Rob Waschik looks at the impacts of unilateral carbon pricing moves by Australia on Australian industry accounting for the effects of carbon leakages and international competitiveness losses.   It was presented at the recent 40th Australian Conference of Economists 10-14 July, 2011 in Canberra. There are strong potential theoretical reasons for exempting import-competing and export industries from carbon taxes but – with the exception of the alumina sector – much weaker reasons once the empirical evidence is examined. The main effect of offering exemptions is not generally to address competitiveness concerns but to raise the required carbon charges necessary to hit desired emission control targets.

Abstract:  The impact of international carbon control measures – and the absence of such measures – on Australian carbon pricing policies are analyzed both at a theoretical and empirical level.  While theory and interest group advocacy suggest a potential case for destination accounting of carbon emissions and border tax adjustments and/or export exemptions, this case is sometimes exaggerated. For example, in the ferrous metals sector, empirical analysis suggests that gains from such refinements are low since carbon leakages and adverse competitiveness effects are small. In other sectors – such as non-ferrous metals – the effects are more pronounced. Exaggerating the competitiveness costs of carbon pricing runs the risk of policy overreaction and unintended protectionism, dramatically increasing the costs of Australian carbon pricing policies. Providing free and tradable emission quotas to exporters and import competing sectors is a ‘second best’ policy but one with practicality in sectors where adverse competitiveness effects do need to be addressed.

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