Computable General Equilibrium Modeling of Environmental Issues in Australia

A key distinguishing characteristic of computable general equilibrium (CGE) modeling in Australia is its orientation to providing inputs to the policy-formation process. Policy makers require detail. They want to be able to identify convincingly which industries, which occupations, which regions and which households would benefit or lose from policy changes, and when the benefits or losses might be expected to flow. In this chapter, we explain how the necessary level of detail can be provided, using as an example analysis that was undertaken by Centre of Policy Studies (CoPS) and Frontier Economics of the potential economic impacts of a carbon price on the Australian economy. The Australian carbon price framework is assumed to be part of a global emissions trading scheme (ETS). Over time, the global ETS becomes the dominant greenhouse abatement policy for all countries including Australia. It sets the price for carbon permits and allocates the number of permits available to each country. A number of key findings emerge from the CGE simulations of the effects of the ETS policy. (i) Domestic abatement falls well short of targeted abatement, requiring significant amounts of permits to be imported. (ii) Despite the requirement for deep cuts in emissions, the ETS reduces Australia’s GDP by only about 1.1% relative to the base case in 2030. The negative impact on real household consumption (the preferred measure of national welfare) is somewhat greater, reflecting the need to import permits. (iii) The national macroeconomic impacts of the ETS might be described as modest in the context of the policy task. However, this does not carry through to the industry and state/territory levels where some industries and regions prove particularly vulnerable in terms of potential lost employment. The need for detail is highlighted throughout the analysis. For example, a suitably detailed treatment of electricity supply is provided by linking CoPS’ CGE model with Frontier’s detailed bottom-up model of the stationary energy sector. Similarly, necessary detail on the effects of the global ETS on Australia’s international trading conditions is provided by linking with a multicountry model.