An Examination of the Economic Consequences of CHG Mitigation Policies in Australia: A CGE Modelling Approach

Abstract

Using the MONASH-Green model, an environmentally extended version from the MONASH model, and a database containing detailed energy sectors, this study evaluates the effects of an Emissions Trading Scheme (ETS) on the Australian economy and the emissions levels. The study focuses on the ETS since the current climate change policy in Australia, the Direct Action Plan, consists of many drawbacks and any future Australian government is unlikely to introduce a carbon tax again. Such an ETS also contains many advantages over the two previous policies of Australian Governments. Subject to the 2020 and 2030 emissions targets, the author assumed the emissions targets each year from 2015 to 2030, hence the emissions caps under the ETS are designed in order to meet such annual emissions targets so that Australia will achieve their 2020 and 2030 emissions targets. The scheme covers all industrial sectors and all emissions reported under the Kyoto Protocol. Of these, the sectors initially buy emissions permits equivalent to their emissions caps from the Federal Government. The enhancements of the modelling also allow the author to observe the permits trading between sectors, that is they have surplus/deficit permits because their emissions levels are lower/higher than their emissions caps. There are two scenarios analysed in this study. Scenario 1 is the baseline forecasts, that is the 'business-as-usual' with the absence of the ETS. Scenario 2 presents the deviations of the economy when the ETS is implemented. The simulation results indicate that the permit price increases from A$4.1 in 2015 through A$13.1 in 2020 to A$41.3 in 2030 in order to enable Australia to achieve the 2020 and 2030 emissions targets. The operation of an ETS in Australia causes the economy to contract progressively over the lifetime of the ETS. Deviations in real GDP are -0.85% in 2020 and -1.6% in 2030. Real private consumption reduces by -0.75% in 2020 and -1.6% in 2030 relative to the baseline. Employment level reduces in the short-term but fairly maintains such a deviation from the baseline in the long run. Under such an ETS, Australia’s exports and imports decrease by 1.35% and 1.4% in 2020 and 2.77% and 2.94% in 2030. Such macroeconomic outcomes suggest that the emissions targets are achievable at acceptable costs to the Australian economy. At sectoral levels, prices of most energy commodities, except coal, increases considerably. Australia largely depends on the burning of fossil fuels to generate electricity hence increases in fossil fuel prices and production cost due to carbon pricing will significantly increase the cost of electricity. In addition, output activities of the energy sectors are significantly affected. The brown coal mining sector will experience a great contraction over the lifetime of the ETS, as it is the highest emissions-intensive energy commodity hence sectors tend to substitute other energy commodities, particularly black coal for brown coal. The fossil fuels fired electricity generation sectors will also experience considerable losses under the ETS. Outputs of the renewable electricity generation sectors, however, will increase significantly. It is also found that employment at sectoral level will fluctuate in line with variations in their outputs.