Lessons from the Australian Carbon Tax

Poor policy processes tend to lead to poor policy outcomes. Australia’s carbon tax experience provides a number of important lessons in how not to go about implementing sensible climate change policy, says Alex Robson, a senior lecture at Griffith University in Australia.

What the United States needs to learn from Australia:

– When policymakers are uncertain or ignorant about the position of marginal costs and benefit curves, no climate change policy will be perfect — all policies will create welfare losses.

– Do not ignore the effects and costs of “complementary” policies, which are likely to result in efficiency losses rather than efficiency gains, compounding any negative effects of a carbon tax or cap and trade scheme.

– Cumulative economic costs are likely to be substantial over the long term, with lower discount rates resulting in higher cumulative costs in present value terms.

– Fiscal impacts are likely to be uncertain, with both carbon taxes and cap and trade schemes adding to any existing revenue volatility.

– Carefully assess the possibility and costs of carbon leakage. The effect of a carbon tax on emissions-intensive, trade-exposed industries is similar to a tax on exports or a tax on import-competing industries. The net effect is a pure deadweight cost to the economy.

– The double dividend is elusive. As part of the compensation package for the carbon tax, the Australian government lowered some average income tax rates but actually increased marginal tax rates for around 2 million taxpayers. The increase in marginal tax rates is exactly the opposite policy of what a government would do if it was trying to capture a “double dividend” from environmental taxation.

– Establishing a robust, sustainable and credible carbon tax is politically difficult. Policy uncertainty and time inconsistency are the norm rather than the exception.

One of the theoretical justifications for introducing a carbon tax is that it provides a credible price signal and encourages future investment in alternative energy sources. With so much uncertainty surrounding current arrangements in Australia, it is doubtful whether the current price signal is very strong.

More From NCPA: