Economic Effects of the Carbon Pollution Reduction Scheme on the Australian Tourism Industry: A Dynamic CGE Analysis

This paper presents preliminary results from a study of the potential effects of introduction by the Australian government of its proposed Carbon Pollution Reduction Scheme (CPRS) on the Australian economy and in particular the tourism sector in Australia. The CPRS is intended to introduce a cap and trade mechanism for reducing Greenhouse Gas emissions in Australia to commence in 2010. The paper begins with a brief presentation of major estimates of tourism’s contribution to the Australian economy based on Tourism Satellite Account (TSA) analysis and provides estimates of the Carbon Footprint of the Australian tourism industry based on this TSA data. The key features of the proposed CPRS are also presented. Finally, the paper discusses preliminary results from a set of simulations that are carried out using a dynamic multisectoral, multi-regional CGE model to assess the likely effects of the CPRS on the Australian economy, with a particular focus on tourism industry. The simulation results indicate that with the CPRS in place, real GDP would fall because, firstly, the emissions price under the CPRS acts as a tax and thus becomes a distortion which reduces economic efficiency and secondly, the emissions price reduces the incentive for producers to use variable factors of production - labour and capital. The majority of industries would experience small contractions in output relative to baseline. The tourism sector experiences a slight contraction in line with the general shrinkage of the economy as a whole.