Can we tax carbon AND keep living costs down?

Associate Professor David Byrne calls for a tax on man-made pollution and investment in renewable energy.

The federal budget speech presented an underwhelming response to climate change. The Treasurer emphasised a 7-billion-dollar surplus, tax cuts, infrastructure investment and all "without raising taxes".

Energy and climate mentions were restricted to new emergency response funding for regional Australia to manage drought and flood. According to Associate Professor David Byrne, Deputy Director of the Centre for Market Design this is far from enough.

“To the extent that this represents the Coalition’s climate change policy in the budget, this is merely a band aid to one of the most important problems facing the world in climate change,” says Associate Professor Byrne.

"The data shows Australia is, at this point, not tracking to meet its Paris Agreement commitment of a 26-28% reduction in emissions off of 2005 levels by 2030. We are projected to achieve a 7% reduction, and the budget on Tuesday night offered little in the way of policy guidance to suggest we can change course to meet this goal. We are not tracking to meet these targets “with a canter” as the Prime Minister often suggests."

Associate Professor David Byrne, Deputy Director of the Centre for Market Design, believes Australia can lead by example through sound emissions policy and, says if done correctly, it doesn’t have to increase our cost of living.

Putting a price on pollution

“The world is warming at a rate we haven’t seen in human history, and if we don’t do something various parts of the world, especially those near sea level, will become uninhabitable,” says Associate Professor Byrne.

Climate has always played a role in our economy, but, according to Associate Professor Byrne its effects are growing with the rate and intensity of natural disasters, such as fires, floods and cyclones, increasing.

“There is so much uncertainty when it comes to climate change,” he says.

“Natural disasters occur unexpectedly and can impact, for example, housing markets, agricultural markets, and financial markets. This means climate change creates real economic costs for Australians. For example, when the country’s banana crop was severely affected by floods in 2011, supply couldn’t meet demand and prices went up. You end up with $7 bananas.

“Pollution is a major contributor to climate change and if we want to rein it in we need to put a price on man-made pollution.

“The government can help with this by creating markets that reflect the cost of the pollution we cause.”

This means Australians will pay for the pollution they create from the vehicles they drive and products and services they consume. By pricing pollution, governments can provide households with financial incentives to find alternative (clean) options.

Often referred to as carbon pricing, this is the method favoured by most economists worldwide to reduce global warming emissions. But according to Associate Professor Byrne it doesn’t have to pose an additional financial burden for families, which has been a source of continued political debate over climate policy.


“By pricing pollution, we pay more for goods and services which generates revenue for governments. However, this can allow the government to concurrently cut other taxes such as income tax such that pricing pollution essentially becomes neutral in terms of families’ cost of living.”

Associate Professor Byrne further notes that a carbon pricing can help Australia to meet its emissions targets by 2030, and create strong incentives for the private sector to invest in clean energy technologies

Investment in such technologies which allow us to create power in new ways will be vital in achieving these targets.

“Wind and solar power are important alternatives and we need to start incentivising investment in new technologies towards such renewable energy sources.  Pricing pollution can increase energy-related costs in the short-term, but if we lead the way in creating renewable energy investment incentives, we can expect to pay less in the long-term and reap the environmental rewards. It costs almost nothing per kWh to generate wind and solar power once the big investments in solar panels and windmills are made.”

School students have been a driving force in bringing the global climate change conversation to our streets. As one savvy 12-year-old from Canberra says, “There is no planet B”.

Australia has an opportunity to deliver for our students and everyone else. By neutrally pricing carbon in a way that does not increase households’ cost of living, while creating investment incentives in clean technologies that, in our lifetimes, can substantially reduce energy costs and save the planet from climate-related disasters.

Next Steps

The Coalition on one side, proposed a $2 billion pre-budget investment in a Climate Solutions Package to fight climate change at this stage. But the evidence from the aggregate trends in national emissions suggests that such schemes where tax dollars are used to directly pay for emissions-reductions will not put us on a trajectory to meet our Paris targets.

Labor, in contrast, outlined an extensive climate policy plan that involved various big-ticket policy proposals, including implementing the Coalition’s National Energy Guarantee, an increased emissions reduction target of 45 per cent off of 2005 levels, credits for industry for reducing their carbon footprint (and penalising those who over-pollute relative to their baselines), support for electric vehicle production, and investment in the energy grid.

In short, Labor talked at length about climate policy while the government didn’t say much.

All of this sets-up climate policy as a central source of divide between the Coalition and Labor in the upcoming federal election.

For the voter, the divide between the parties when it comes to Coalition’s focus on tax surpluses and Labor’s focus on climate policy might come down to this: would you rather leave your children with a smaller federal debt or a worldwide climate crisis?