Australia's Carbon Pricing Strategies in a Global Context*

Abstract

The sectoral impacts of Australia's carbon pricing policies are analyzed in a setting where Australia acts unilaterally to address its carbon emissions and where there is no global market for traded carbon permits. While theory and interest group advocacy suggest a case for compensating Australian producers whose outputs become less competitive because Australia unilaterally prices carbon, this case is sometimes exaggerated. For example, in the ferrous metals sector, analysis suggests that gains from such refinements are low since carbon leakages and adverse competitiveness effects are small. In other sectors – such as non‐ferrous metals – the effects are more pronounced. Exaggerating the competitiveness costs of carbon pricing risks policy overreaction and unintended protectionism, thereby reducing the net benefits from Australian carbon pricing.