Subsidies and regulations could seriously reduce the effectiveness of Australia’s forthcoming carbon price scheme, according to a piece in the latest Australian Economic Review.

 

In ‘Reducing Greenhouse Gas Emissions at the Lowest Cost’, the University of Melbourne’s Professor John Freebairn said a carbon price was a low-cost way of reducing pollution, but that non-carbon-pricing components such as household subsidies could defeat the purpose of a carbon price. 

 

“Businesses and households are given the incentives and rewards to explore over time new information and opportunities to cost-effectively reduce pollution,” said Professor Freebairn. 

 

Professor Peter Lloyd from the University of Melbourne discusses this further in his piece ‘Designing a carbon price policy’, where he explains that while compensating households is extremely generous, it increases the cost of a carbon pricing mechanism and is unnecessary.

 

“It is sometimes suggested that providing households with assistance would cancel the benefits of introducing a carbon price. It is said that, if we impose a carbon price that costs a household $100 and then provide that household with a tax cut worth $100 nothing has changed. These suggestions are wrong. The carbon price even with the tax cut alters the relative prices of more or less emission-intensive goods and services,” said Professor Lloyd.

 

The March edition of the Australian Economic Review is available from www.wileyonlinelibrary.com/journal/aere