Potential impacts of the Emissions Reduction Fund on the Australian economy

Abstract

This paper examines the impacts of theEmissions Reduction Fund on the Australian economy. The GTAP-E model has been extended to allocate the subsidy directly to each eligible sector. The simulation of the subsidy policy has been supplemented by introducing an improvement of energy efficiency to non-agricultural sectors and of resource efficiency by using endowment factors in the agricultural sector. Results indicate that,with the current budget of A$2.55 billion, or US$1.86 billion (Scenario 1), Australia can only achieve theminimumcumulative emissions reduction target of 225 MtCO₂-e during 2015-20. Australia needs a budget of US$2.08 billion (Scenario 2) to achieve the maximumcumulative emissions reduction target of 279 MtCO₂-e. In both scenarios, the agricultural sector receives the highest payment from the Australian Federal Government under the subsidy programme, followed by the electricity generation sector. Under the scheme, Australia experiences only a mild contraction in the economy, with a reduction of real GDP by 0.37% and 0.55% in the two scenarios, respectively.