Update Paper 6: Carbon pricing and reducing Australia's emissions

Released 17 March 2011

Summary of key points

It is in Australia's national interest to encourage the international community to take strong mitigation action.

The Copenhagen and Cancun agreement on holding temperature increase to below 2°C above pre-industrial levels meets that objective.
The form of current international agreement does not yet support deep international trade in emissions entitlements. In the interest of lowering the costs for the world, and itself, Australia should work to secure opportunities for trade in genuine abatement through bilateral, regional and multilateral forums.

As in 2008, Australia should be ready to calibrate its emissions reductions proportionately to a global effort directed at less than the 2°C (or 450 parts per million concentrations of carbon dioxide equivalent) objective.
The Australian Government and the Opposition have each committed themselves to reducing Australia's emissions by 2020 by at least 5 per cent (relative to 2000 levels), unconditionally, in the absence of any global agreement on emissions reductions. The target will need to be revised upwards over time in line with international action.
It is in Australia's national interest to play its part through domestic policies which minimise the costs to Australians.

Economy-wide pricing of carbon is the centre piece of any policy designed to reduce emissions at the lowest possible costs.

The difference between the costs, and potential environmental outcomes, of market-based measures (carbon pricing) and regulatory interventions is large.
The effect of a carbon price on the economy remains modest, and the impact on most industries small compared to other cost rises and fluctuations.

On balance, taking into account the history of policy discussion in Australia and internationally, and the desire for deep trade in entitlements, an emissions trading scheme, initially with a fixed (and rising) price, is the best instrument for long-term emissions reductions.

This model provides the benefits of credibility and steadiness in its early years, as industry and institutions build confidence and capability, with later trade in abatement allowing emissions reductions to take place where they are cheapest. It also provides substantial revenue.
The starting price should be between A$20 and A$30 per tonne of carbon dioxide equivalent, rising at 4 per cent (real) per annum.
The price would float (without caps or floors) in mid-2015 unless the independent regulator judges that there are insufficient international trade opportunities to secure liquidity and stability.

Assistance should be provided to emissions intensive, trade exposed industries to the extent that they are disadvantaged in sales prices by other countries not having comparable carbon constraints, with

an interim approach for three years based on a modified version of the former Carbon Pollution Reduction Scheme;
followed by a shift, in 2015, to a principled approach to assistance administered by the independent regulator receiving independent expert advice. Australia should seek to extend this approach through the international community.

Wise use of revenue from a carbon price can reduce the cost to the economy, and promote productivity above what it otherwise would be.

The largest element of revenue (around half initially rising to the large majority) should be applied to productivity-raising reform of the personal income tax system, focussing on low and middle levels of incomes. This will generate positive effects on income distribution as well as national productivity.
Short- to medium-term support for innovation in low-emissions technologies, to address market failures and lower the costs of transition to a low-emissions economy

The scheme should be administered by an independent authority, taking important decisions on advice from independent expert bodies.