A CGE assessment of the Australian carbon tax policy

In July 2012, the Australian government introduced a price on carbon at an initial price of $23 per tonne. Despite the detailed modelling undertaken by the Commonwealth Treasury, there has been continuing speculation about the economic impact of the carbon tax in Australia. In this paper we build a computable general equilibrium (CGE) model incorporating many new features to model the impact of carbon taxes and to deal with the issue of emissions. The analysis is undertaken by simulating the impact of a carbon tax of $23 a tonne and reveals some interesting outcomes. For example, in the short run, Australias real GDP declines by 0.68%, consumer prices rise by 0.75%, and the price of electricity increases by about 26% as a result of the tax. Nevertheless the tax allows Australia to make a substantial cut in its CO₂ emissions. The simulation results imply an emission reduction of about 12% in the first year of operation. In the absence of compensation, the tax burden is unequally distributed among household groups with low-income households carrying a relatively higher burden.