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Carbon Pricing that Builds Consensus and Reduces Australia's Emissions: Managing Uncertainties Using a Rising Fixed Price Evolving to Emissions Trading

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  • Frank Jotzo

    ()
    (Crawford School of Public Policy, The Australian National University)

Abstract

This paper identifies principles for carbon pricing that could attract a broad based and durable societal consensus in Australia. It applies these principles to a phased carbon pricing architecture as put forward by Australia's Multi-Party Committee on Climate Change, namely a government determined (fixed) carbon price transitioning to emissions trading. Linking to international carbon markets decouples AustraliaÕs domestic carbon price from its national emissions target, allowing significant net national emissions reductions with manageable transitional impacts. A fixed price in the near term can end costly delays to carbon pricing while dealing with uncertainties about AustraliaÕs target and international markets. A strategy is outlined to manage international uncertainties and to accommodate the multiple goals of domestic constituencies, while achieving efficiency and effectiveness. First, ensure the medium term carbon price is high enough to for emissions to begin to trend down in the next few years, recognising that investment decisions are shaped by current expectations about future prices. Second, set the initial price at a level that gives confidence that short run impacts will be manageable, given other transitional assistance. Third, ensure that wider policy settings do not compromise incentives for reducing emissions, and make the scheme robust in the face of competing claims for carbon revenue and lobbying efforts. For Australian carbon pricing policy, these principles suggest the carbon price may need to rise rapidly over the course of the decade, to double or more compared to starting prices that are currently in the Australian discussion. Payments of carbon pricing revenue to industry may need to be limited to create more room for income tax cuts, possibly by means of an overall cap and accelerated phase-out of industry assistance. Forestry and agricultural offsets can be supported through the scheme, but at the cost of fiscal revenue.

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File URL: http://ccep.anu.edu.au/data/2011/pdf/wpapers/CCEP1104Jotzo.pdf
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Bibliographic Info

Paper provided by Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University in its series CCEP Working Papers with number 1104.

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Date of creation: Mar 2011
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Handle: RePEc:een:ccepwp:1104

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How low can you go? A model for setting and increasing a carbon price
    by Frank Jotzo, Director, Centre for Climate Economics and Policy at Australian National University in The Conversation on 2011-06-03 04:31:41
  2. Crawford School Working Papers in April 2012
    by David Stern in Stochastic Trend on 2012-05-03 11:44:00
  3. CCEP Working Papers in May 2011
    by David Stern in Stochastic Trend on 2011-06-03 00:07:00
  4. CCEP Working Papers in April 2011
    by David Stern in Stochastic Trend on 2011-05-02 08:25:00
  5. Two New CCEP Papers
    by David Stern in Stochastic Trend on 2011-03-27 11:50:00
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Cited by:
  1. Frank Jotzo, 2013. "Emissions Trading in China: Principles, Design Options and Lessons from International Practice," CCEP Working Papers 1303, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.

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