Examining the Origins and Content of Australia's Carbon Tax Policy

By Aedan Kernan, Greenwell Consulting
May 2012

The Australian Government is enacting a tax that is designed to reduce an environmental harm while the proceeds fund a social good.

In late 2011, the Australian Parliament approved a package of 18 bills that, among other things, create a tax on carbon emissions. The carbon tax will become law on July 1, 2012 and will be in effect for three years. Under the carbon tax, approximately 500 of Australia's largest industrial companies will pay AUS$23 per ton of carbon dioxide they emit. In July 2015, the government will replace the carbon tax with a cap-and-trade system. The goal is that the cap would reduce gradually to 2020, when emissions are expected to be 5% below the 2000 level.

illustration of industrialized area set against background of Australian map

As the cap decreases, companies can either reduce their emissions or purchase certificates from others to cover their excess emissions. However, there will be a floor price per ton of carbon emitted of AUS$15 and a ceiling price of AUS$20 per ton. The floor and ceiling prices will rise by 4% per year to 2020. The Australian government is talking to the European Union about linking their emissions trading schemes (ETS). (The design of the Australian emissions trading system is based on the European model.) A link between the two schemes would improve the Australian scheme's chances of success, says Jim Falk, Director of the Australian Centre for Science, Innovation and Society at the University of Melbourne. Falk notes, "The bigger the ETS, the more chances that efficiency will be found. That, after all, is the whole principle of an ETS: the market finds the most economically effective places to make carbon emission reductions."

Australia's 22 million people emit around 1.5% of the world's greenhouse gases, largely due to a power sector dominated by coal.

The government plans to use the tax revenues to expand the number of Australians who will be able to meet a tax-free earning threshold. Tax revenues will also be used to compensate electricity consumers whose bills increase, and to support renewable energy projects. It is anticipated that AUS$4.3 billion will be generated by the tax to spend on compensatory measures. It is a classic ‘Pigovian' tax where the tax system is used to discourage a potentially adverse effect unaccounted for in economic terms and to generate revenue for a social purpose. In this case, the social purpose is a reduction in the tax burden on the lowest earners.

Influencing Decision-Making

Australia's carbon tax is intended to influence investment decisions such that technologies that do not emit greenhouse gases are preferable to technologies that result in higher emissions, according Falk.

In many Australian cities, the cost of PV is below domestic tariff rates, and expansion of solar PV in the country through the carbon tax will help to continue this trend.

Table 1 shows the ratio of average cost of PV-generated electricity and the domestic tariff in several Australian cities. Taking a population-weighted average, the levelised cost of energy from PV in Australia averages two thirds of the domestic tariff.

Table 1. PV-generated electricity costs compared
to local domestic tariffs in Australia (US$)

City PV cost
(c/kWh)
Domestic
(Tariff)
Ratio
(Cost/Tariff)
Alice Springs $0.13 $0.29 40%
Adelaide $0.16 $0.33 47%
Darwin $0.14 $0.20 62%
Perth $0.15 $0.22 63%
Brisbane $0.17 $0.23 66%
Sydney $0.18 $0.24 66%
Hobart $0.22 $0.25 78%
Melbourne $0.20 $0.22 83%
Canberra $0.17 $0.17 87%
Population weighted average $0.18 $0.24 68%

Retail grid parity
Levelised energy cost of a 5kW system at $4000 per kW, 25 year system life, 5% real discount rate, 0.5%/year O&M, 0.7kW (AC) per nominal kW (DC) (to account for elevated temperature, soiling, partial shading, module degradation, power handling losses), RECs at $30 per MWh and a carbon price of $25 per tonne
Source: Centre for Sustainable Energy Systems
 Australian National University

Achieving Agreement on the Carbon Tax

Enacting the new tax involved complex negotiation. The decision to impose a three-year carbon tax before moving to a cap and trade system was the result of negotiations between the largest party in the government coalition – Labor – and their partners, the Greens and independents.

The $23 a ton figure has an economic logic but it is also the result of political negotiation. "There has been economic modelling by the Treasury to show [the $23 target] would make a significant difference towards Australia's carbon emissions. It would have some bite," says Falk. "At the same time there has been a complex process of consultations with the intense carbon-emitting industries, but also between the government parties. Many conflicting interests have had to be negotiated to get the legislation through the Parliament with some chance that it would be politically feasible and sustainable."

Those interested in emulating Australia's policies can reasonably expect similar negotiations and a settlement that addresses the needs and interests of multiple parties.