Forsaking a carbon price: what good could it bring!

After a very long time, here is a new blog entry! I hope I can keep up writing at least once a month.

The imminent motivation for this blog article is the release of the first part of IPCC’s Sixth Assessment report: The Physical Science Basis, and the official response of the Australian Government to it. In it, Scott Morrison effectively forsakes the use of carbon pricing as a tool to reduce emissions. This is clearly playing into the public sentiment, with recent reports that Australians are keen for us to reach net zero by 2050, but majority opposes a carbon tax.
But, I find this completely ill posited and unfortunate. Why should we deprive ourselves from having a very valuable tool (some would argue the most valuable) in the toolbox needed to reduce carbon emissions? There is absolutely no rationale or justification for it!

It is well established in economics that having a price on carbon (either through a tax or a tradable permit system, there is really no other way) is one of the most cost-effective ways to achieve GHG emission reduction. Indeed, even physical scientists recommend a global carbon pricing mechanism as an essential condition for notable emissions reduction and limiting the increase in global average temperature.

It seems that the only reason for permanently forsaking ‘carbon pricing’ in Australia is because the gross politization of the ‘carbon tax’ in the period 2008-2013. Because some politicians at the time found it politically profitable to attack their rivals on the point of the ‘carbon tax’, and were successful in doing so, the public has been and remains so negatively sensitised against it that we are still prepared to accept reduction of emissions at higher than necessary cost to society, just to avoid the ‘carbon tax’. And without having a ‘carbon price’ – either through a tax or tradable permit scheme – at a disposal as a policy we are inevitably going to incur higher cost of reducing emissions compared to a scenario where we do have ‘carbon price’ as a policy option.

So, forsaking a ‘carbon price’ is completely irrational and can’t bring any good. It reminds me of the situation that we put ourselves in regarding COVID vaccines. Somehow we managed to talk ourselves out of using the Astra-Zeneca vaccine in the first seven months of 2021, despite it being used widely around the world! As we all witness now, this came to bite us hard. I wouldn’t be surprised if we have a similar outcome with combating climate change, given how we are talking ourselves out of using a ‘carbon price’ even though it is used throughout the world, and now even in China!

I think that it is time for the narrative in Australia to get away from the negativity about the ‘carbon tax’ and becoming more positive about a ‘carbon price’. We should acknowledge that a tax is just a tool (a rather useful one) to bring about that ‘carbon price’, and that a tax can and should be used in combination with other mechanisms, such as tradable permit scheme, to achieve improved outcomes.

Our recent paper suggests that a ‘first tax and then trade’ approach to pricing carbon, rather than going straight with a tradable permit scheme, is the most economically efficient. An initial, short-lived tax provides a signal to emitters about the adequacy of their investment in abatement technology. This creates greater overall efficiency and lower permit prices. It is also more politically palatable than a tax-only scheme.

At these times of lockdowns and general anxiety, the public does not want to hear much about taxes! That’s understandable. However, as many have already pointed out: COVID is a small challenge compared to climate change! If we are going to try to address this grand challenge to avoid even bigger future crises, we need all the tools that we can muster. Depriving ourselves of using a ‘carbon price’ won’t do us any favours!

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.

3 thoughts on “Forsaking a carbon price: what good could it bring!”

  1. Thanks Joyce, and really sorry for the late reply! I have been out of action for a while.
    I think that a carbon fee is a good idea and we should use it as a policy. The idea of the dividend model is really about ‘revenue recycling’. I guess one way to do it is to recycle all the revenue from the fee back to all citizens, but there are other ways, including to recycle back to those emitters that do most to reduce emissions, or invest in cleaner technologies, etc. Definitely something to consider, but keep in mind that there are multiple options for revenue recycling!

  2. Thank you for this clear statement about the political demise of carbon pricing in Aus.
    At Citizens Climate Lobby we are working to rehabilitate carbon pricing in general and advocating for the Australian Climate Dividend, carbon tax on fossil fuels that returns the revenue to households as a dividend or climate income, thus addressing the inefficiencies and distorting effects of fossil fuel subsidies.
    This analysis is helpful to us – thank you!

  3. Hello, great blog. It really is a shame that carbon pricing has been politicised so much that we can’t use it to help us get to net zero emissions by 2050. I am interested in knowing your view of a carbon fee and dividend model of carbon pricing. I volunteer with Citizens’ Climate Lobby Australia, which advocates for this. It is voter friendly, incentivises low carbon technologies and lowers carbon emissions. How does it compare with the approaches you have mentioned? We have some points which we use to highlight what we see as the advantages but it would be helpful for us to have some fresh insights into it too.

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