The Economic Implications for Australia of Carbon Tariffs

A carbon tariff is a tax on foreign imports levied based on greenhouse-gas content. Such tariffs are designed to level the playing field for domestic import-competing industries whose costs have risen due to a domestic CO2-price. It is argued that carbon tariffs are necessary to avoid "carbon leakage" -- local production shutting down and moving to countries without strong climate policies. The question addressed in this paper, is what effect might carbon tariffs have on the Australian economy. Using the Victoria University Regional Model (VURM), we evaluate the potential effects arising from carbon tariffs imposed in three regions: the EU, the G7 countries plus Korea, and China. The tariff rates are calculated with carbon prices of: $US70 (= 60 euro) for the EU, and $US39 for the other two regions. Key findings are as follows. 1. Carbon tariffs have little effect on employment in the long-run. However, the negative impact on Australia's terms of trade arising from reductions in world demand increases the real cost of capital, leading to small reductions in capital and hence real GDP. 2. Less real GDP means less real Gross National Income (GNI), a measure of economic welfare).The contractions in real GNI, though small are a little larger than in real GDP because a lower terms of trade means less purchasing power from a given level of real income. 3. Only two industries are projected to experience output and employment losses in each of the three scenarios: Coal mining and the closely related Mining services for whom the coal industry is a major customer. Indeed, the effects on coal production dominate most of the industry outcomes and are key to explaining what happens at the state level. As shown in Table 6, output and employment in those states where coal is over-represented, NSW and QLD, fall. Output and employment in states where coal is much less important rise, reflecting the positive impacts of real devaluation on non-tariffed products. We conclude that at the national level, the carbon tariffs examined are unlikely to have a significant impact. They will, however, have noticeable impacts at the industrial and state levels. Those impacts -- due, in the main, to a reduction in output and employment in the coal sector - will occur in any case for Australia to shift towards a zero emissions economy. The concern is not that these reductions happen, but that they happen in a way which is outside of Australia's control. This loss of sovereignty over what happens to our coal industry might result in non-optimal adjustment with adverse impacts on welfare, regions and workers directly affected.