Surprising Impact of Australia’s Brief Carbon Tax: Lessons in Climate Policy

The World Bank study, "The Effect of Pricing Instruments on CO2 Emissions: Empirical Evidence from Australia," reveals that Australia's mix of renewable energy incentives and a short-lived carbon tax led to a 7 percent reduction in CO2 emissions per capita from 2009 to 2018. The study highlights the potential of even temporary climate policies to yield significant environmental benefits but also underscores the importance of stable and predictable policies to ensure long-term success.

Short-Lived Tax, Long-Term Impact

Australia's ambitious climate policies in the early 2010s, including a significant push for renewable energy and a brief carbon tax, have shown that even temporary measures can yield substantial environmental benefits. A recent World Bank study titled "The Effect of Pricing Instruments on CO2 Emissions: Empirical Evidence from Australia" reveals that these policies resulted in a 7 percent reduction in CO2 emissions per capita between 2009 and 2018.

Despite the general skepticism in the literature about the effectiveness of Australia's climate policies, this study demonstrates that the combined efforts of renewable energy incentives and carbon pricing can lead to significant emissions reductions. However, the policies were not without their flaws and unintended consequences, highlighting the complexities of climate policy implementation.

Renewable Energy Push

In 2009, Australia dramatically increased its Renewable Energy Target (RET), requiring entities acquiring electricity in wholesale markets to purchase green certificates proportional to their market share or face financial penalties. This move aimed to boost the share of renewable energy in the national grid to 20 percent by 2020. The target, initially set at 2 percent by 2010, was ambitious and drove significant investments in renewable energy projects.

The study shows that the power sector was the primary driver of emissions reductions during this period. Coal-fired generation decreased significantly, while wind and solar capacities saw rapid growth. This shift not only reduced emissions but also reshaped Australia's energy landscape, demonstrating the potential of renewable energy incentives.

The Carbon Tax Experiment

In 2011, Australia introduced the Carbon Pricing Mechanism (CPM), a tax on carbon emissions that covered about 60 percent of the country's total emissions. The tax, set at a fixed price of AUD 23 to 25 per ton of CO2 equivalent, was in effect from 2012 to 2014. Although the tax was short-lived, its impact on emissions was notable. The study found that during the tax period, Australia's emissions per capita declined significantly.

The repeal of the carbon tax in 2014, however, led to a stall in the rapid decline of emissions. This shift underscores the importance of sustained climate policies for long-term environmental benefits. The study's findings suggest that the uncertainty and eventual repeal of the carbon tax may have led firms to delay investments in low-emission technologies, highlighting the need for stable and predictable climate policies.

Unintended Consequences

While the climate policies successfully reduced domestic emissions, they also had some unintended consequences. Australia's coal production did not decrease during the policy period; instead, coal exports may have accelerated. This phenomenon, known as emissions leakage, occurs when reduced domestic demand for emissions-intensive goods leads to increased production and exports to other markets.

The study indicates that despite the decrease in coal-fired electricity generation within Australia, overall coal production remained steady, and exports surged. This outcome suggests that Australia's climate policies did not effectively address the global nature of emissions, pointing to the need for more comprehensive international climate agreements.

Lessons for Future Policy

The findings from the World Bank study offer valuable lessons for future climate policy. First, even imperfect and politically constrained policies can lead to significant emissions reductions. Australia's experience demonstrates that renewable energy incentives and carbon pricing, even if temporary, can reshape the energy sector and reduce emissions.

However, the study also highlights the importance of stability and predictability in climate policies. The repeal of the carbon tax and the subsequent slowdown in emissions reduction illustrate the risks of policy reversals. Long-term commitments and international cooperation are crucial for achieving sustained environmental benefits.