Carbon Pricing

Carbon Pricing

Early Experience and Future Prospects

Edited by John Quiggin, David Adamson and Daniel Quiggin

In 2012, Australia took the major step of introducing a carbon price, involving the creation of a system of emissions permits initially issued at a fixed price. Carbon Pricing brings together experts instrumental in the development, and operation, of Australia’s carbon policy who have played a significant role in the broader debate over climate change policy. Together they have achieved an in-depth analysis of Australia’s policy stance on pricing carbon and its implications for the wider economy.

Chapter 4: The carbon tax and tax reform debate

John Freebairn

Subjects: economics and finance, environmental economics, environment, climate change, environmental economics, environmental politics and policy, valuation, politics and public policy, environmental politics and policy


In July 2012, the Australian government introduced a tax of AU$23 per metric ton of carbon dioxide equivalent (CO2-e) to internalize the pollution external cost of greenhouse gas emissions associated with the costs of adapting to climate change (Gillard et al., 2011). (Please note, all currency figures in this chapter are in Australian dollars.) In the first round the tax applies to about 350 large businesses that between them produce about 60 percent of Australian greenhouse gas emissions. Higher energy costs cascade through the supply chain to other businesses and households. However, the compensation to energy-intensive trade-exposed industries (EITE) further reduces the effective tax base as an important set of downstream business and household decisions are largely insulated from the higher energy costs. The carbon tax increases relative prices of some (but far from all) carbon-intensive products and production processes. In turn, the relative price changes induce decision changes that reduce pollution. Some examples of the decision changes induced include: for the energy generation industry to use less carbon-intensive methods to generate energy; for all businesses and households to use less energy-intensive production methods; for households to shift their consumption mix from carbon-intensive to carbon-extensive products; for businesses to invest in sequestration of greenhouse gases; and additional investment in research and development (R & D) to reduce the use of greenhouse gases in production and consumption. Over the next three years the carbon tax is to increase by 2.5 percent real each year.

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