Australian Carbon Tax to Go - What Lessons Can Be Learned?

There are three things governments can do in order to address carbon emissions. Firstly, they can do nothing, which is the position the U.S. Federal government has taken, since the U.S. Congress has no appetite for pricing carbon. Secondly, governments can create a carbon marketplace, such as the European Emissions Trading Scheme (ETS), and California's cap and trade program; providing an opportunity for businesses to make money from carbon allowances and for market forces to set the price. Or thirdly, they can impose a carbon tax; the choice the Australian government opted for, and which has been causing quite a bit of disquiet within the business community over there in recent months.

Soon business leaders won't have to worry. Australia's new Prime Minister, Kevin Rudd, a former PM who returned to power in June by virtue of a leadership change within the incumbent Labor Party, has announced the government will end what has become the unpopular carbon tax and instead, bring forward an emissions trading scheme a year earlier than planned.

There are of course many pros and cons in the debate as to whether a carbon tax or an emissions trading scheme is the better way to control CO2 - and while the point of this piece is not to go into these, there is perhaps a lesson here for any countries out there trying to decide between them. Here is a very simplified perspective that may be drawn from Australia's experience.

Australia's carbon tax at 23.09 (AUD) per tonne, was introduced to curb emissions from a country that is one of the world's worst per-capita greenhouse gas emitters. The tax makes the biggest polluters pay, but that cost is passed on to small businesses and consumers by way of higher energy prices. This is why it has become so unpopular.

By comparison, businesses and consumers in Europe, while also having to pay more to accommodate the price of carbon under their cap and trade system are, however, less burdened than Australians. Given that Europe's price on carbon floats subject to market forces, in April the price per tonne of carbon effectively collapsed down to just 2.75 Euros - the equivalent, at the time of writing - of less than 4.00 Australian dollars per tonne. While this was generally considered to be way too low, EU countries were not prepared to prop up the price, largely because under their ongoing economic doldrums, there wasn't much will to raise costs. Europe's free falling carbon price even prompted The Economist to wonder if it might even spell the end of the ETS altogether.

Under such circumstances, however, with Europe's carbon price so low, Australia's flat tax very easily became a competitive disadvantage for its businesses operating within the global economy. The disparity in price between Australia and Europe - with Australia paying almost six times as much per tonne of carbon as Europeans - makes it easy to see why even if a sensible carbon tax rate were originally set, it can start to look unfair when carbon markets elsewhere in the world set the price much lower.

Furthermore, despite being designed as a disincentive for carbon emissions, carbon taxes still don't impose a carbon cap, so their ability to mitigate carbon is still not certain.

Australia's Rudd suggests that moving to an emissions trading scheme - which will be linked to the European carbon market - will save households 349 Australian dollars a year. So despite a carbon tax being a simple way to price carbon, and despite Europe's ETS being far from perfect, the lesson from Australia is that their carbon tax has proved to be unpalatable, uncompetitive and ultimately abandoned.

Image by Quinn Dombrowski