Carbon pricing: does it work?

Australia introduced a carbon price for the heaviest polluters in July last year. It’s too early to draw conclusions, but the first figures are encouraging.

When carbon pricing was introduced, opponents argued that Australian industry would flee and unemployment would rise under the burden of the tax. Nothing of the sort has happened. What has happened instead is that in the first six months since the measure came into effect carbon emissions have dropped significantly. Government figures show emissions in the period from July to December 2012 were 8.6% lower than in the same period in 2011. This dramatic fall can not only be ascribed to carbon pricing, but it is a factor.

Fixed price

During the first three years of the scheme the cost of carbon is fixed. It is set at 23 Australian dollars (nearly €20) per tonne in the first year, rising to A$ 24.15 in the second year and A$ 25.40 in the third year.  After that a trading mechanism will be introduced, so the price will be determined by the market. From 2015 onwards linkage to the European emissions trading scheme also comes into effect. Australian carbon pricing only covers 300 of the worst polluting firms, including power generating companies. Much of the revenue is handed back to industry to ease the impact of the carbon price and keep up its competitiveness.


The government figures also reveal that the 8.6% fall in emissions is equivalent to 7.6 million tonnes of carbon. The aim of the carbon pricing scheme is to reduce emissions by 159 million tonnes a year compared to the year 2000 level, so there is still some way to go. But as early as October last year it was already clear emissions were down. This was partly due to reduced demand for electricity and an increase in solar and wind power generation. Together with the introduction of carbon pricing these factors pushed coal fired power stations out of the market. Some closed altogether and others phased down.

European permits

Australia has a Renewable Energy Target, which ensures renewables keep their share also when electricity demand is falling.  This undermines coal fired generation (which in 2010 still accounted for three-quarters of electricity production) while they are being hit by the carbon price as well. But it remains to be seen whether emissions will continue to fall when electricity demand picks up. At a later stage, the European carbon price will come into equation as well. From 2015 onwards, Australian companies will be allowed buy European carbon permits.  As European carbon permits are currently about four times cheaper than Australian carbon units, the European permits will push down the price of Australian units. Fixing the EU ETS might not only help reduce emissions in Europe, but at the other side of the world as well!

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