Market-Based Approaches to Achieve Australia’s Emissions Reduction Targets

With Australia recently legislating a 2030 emissions reduction target, market-based approaches (such as carbon pricing) should be considered as a policy approach to achieve these reductions at least cost to the economy. This paper begins by delving into the economic theory behind carbon pricing and why it is considered the least cost emissions reduction method, then synthesises the literature on the outcomes of carbon pricing implemented in other jurisdictions to inform a potential Australian policy. This paper then explores market-based approaches in the Australian context by analysing Australia’s previous attempt to implement carbon pricing. Empirical analysis in the paper demonstrates what level of emissions reductions can be expected for different levels of carbon tax, for instance, a carbon tax of AUD$112/tCO2 would reduce emissions by 41.18% from 2005 levels by 2030 (Australia's target is 43%). These findings inform policymakers determining the best policy mix to achieve emissions reduction targets, and what level of reductions should come from a carbon price compared to other policy measures. This paper also highlights the importance of accompanying carbon pricing with policies addressing the inequality effects to increase the longevity of the policy and to avoid mistakes of previous failed attempts to implement carbon pricing.