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Carbon tax for Australia

Australia will have a carbon tax of $23 per tonne from July 2012. Thereafter the price will be linked to prices in international carbon markets since Australian firms will be able to buy half their permits in these markets.  Setting a fixed tax rate now means that carbon prices in Australia are 2-3 times those currently prevailing in the EU which are around $8-$12 per tonne.  This is the defect of setting a fixed price although it does have the advantage of providing carbon price certainty during this initial period.  A key question is whether Australia’s EITES (emissions intensive trade exposed sector) will be harmed by such a charge.   Work I have done with Robert Waschik suggests the effects of a $27 per tonne charge on these industries will be small outside of the non-ferrous metals sector – there are significant effects on the aluminium sector.  The effects will be small everywhere once free tradable permits are provided to the non-ferrous metals sector.  The effects of a $23 per tonne charge will be negligible.

A few commentators are suggesting that the prospect of repealing the carbon charge regime by a future Coalition Government will nullify the effects of charging on investment decisions.  There will certainly be an impact but my observation is that throughout the economy many firms are already planning a move  away from dependence on carbon-based fuels.  The key sector is the non-internationally traded electricity sector which, primarily, needs to be motivated to switch towards using natural gas.Short-term the main impacts on this sector will be driven by the renewable energy targets, a reduction in electricity demands following a forecast 10% increase in prices and the decision of the federal government to fund the closure of two brown coal burning power stations. All these issues are largely independent of the current specific carbon price.

Australia has made a start. We will end up with between 5-15% carbon reductions over year 200 levels by 2020 – the 25% target seems unlikely – which puts us on a par with the EU (a 25% reduction over 2005 levels), Japan (25% over 1990 levels), the US and Canada (each 17% over 2005 levels).  Australia has some diplomatic clout at the Durban meetings on climate change.



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