Introduction

This report examines the impact of pricing instruments on CO2 emissions in Australia, focusing on the effects of a carbon tax and renewable energy incentives. It employs a synthetic control method to measure emissions reductions and the broader economic consequences of these policies. The research spans from 2009 to 2018, during which Australia implemented and repealed its carbon pricing mechanism.

Literature review

Carbon pricing is recognised as an efficient way to reduce greenhouse gas emissions. The literature, however, shows mixed results regarding the effectiveness of such policies. Some studies highlight modest reductions, while others suggest significant decreases in emissions. This report builds on past research, aiming to fill gaps, particularly in how pricing instruments interact with renewable energy policies in Australia.

Data and empirical strategy

The study uses data from various sources, including the Emissions Database for Global Atmospheric Research (EDGAR), the Maddison Database for GDP, and energy data from the Energy Information Administration (EIA). A synthetic control method is used to estimate the counterfactual scenario—what Australia’s emissions would have been without these policies—by comparing it with similar countries that did not implement such policies.

Results

The combined impact of Australia’s renewable energy incentives and the carbon tax led to a 7% reduction in CO2 emissions per capita between 2009 and 2018. During the period when the carbon tax was in place (2012–2014), emissions dropped significantly. However, the repeal of the carbon tax in 2014 and a reduction in renewable energy targets in 2015 resulted in a slowdown of emissions reductions. Despite these policy changes, emissions remained lower than the pre-implementation trajectory.

Quantitative evidence highlights a reduction of 1.37 metric tons of CO2 per capita per year during the treatment period. The analysis also finds that power sector emissions declined sharply due to decreased coal-fired generation and increased wind and solar capacity. However, there was no significant reduction in emissions from other sectors.

Mechanisms

The report indicates that most of the emission reductions came from the power sector, driven by a decline in coal generation and a rise in renewable energy production, particularly solar and wind. The carbon tax had a clear impact on reducing emissions from fossil fuels, but when the tax was repealed, the decline in emissions stalled.

Exports

The report also examines the issue of emissions leakage, where carbon pricing policies might push emissions to other countries through increased exports of fossil fuels. Australia’s coal production did not decrease during the policy period. In fact, exports of coal increased, potentially offsetting the domestic emissions reductions. The share of coal exports reached 73% during the policy period, compared to 61% in the decade prior.

Conclusions

Australia’s mix of renewable energy subsidies and a carbon tax was effective in reducing CO2 emissions, with a 7% reduction over the decade. Although the carbon tax was short-lived, the policies still had a persistent impact on lowering emissions. The study recommends that policymakers consider the long-term effects of such instruments, even if imperfect, as they can yield substantial benefits. However, the report warns of the potential for emissions leakage through increased coal exports, which can undermine domestic achievements in emission reductions.