Clean energy policy: Taxing carbon and the illusion of the equity objective

Abstract

The Australian government has passed legislation, the Clean Energy Future Policy, establishing a carbon-emission pricing scheme. While the scheme is represented as the most efficient and cost effective means of reducing emissions, the government has also committed to ensuring equity in burden sharing, particularly through the use of household compensation methods and by minimising the disadvantages faced by energy-intensive trade-exposed industries thereby committing to these industries' continued developments. Treasury modelling used to determine the required level of household compensation has remained relatively uncontested. We question the conclusion of equity in burden sharing on the basis of this modelling. The modelling reflects fairly standard conventional economic theory in terms of market structures, the determination of prices and outputs, and the characterisation of factor markets. The behavioural assumptions overstate the consumer and producer substitution possibilities, failing to consider the possibility of technical reswitching, and ignore the impact that oligopolistic market structures would have on price increases and infrastructure investment. The full ramifications of compensation for overall government expenditure and therefore the capacity of the government to continue to fund a range of elements of the social wage, the potential for unemployment and transitioning workers to less carbon-intensive industries, are also overlooked.