The Impact of a Carbon Tax on the Australian Economy: Results from a CGE Model*

The Australian government has announced to price carbon at an initial price of $23 per tonne. Despite detailed modelling undertaken by the Commonwealth Treasury, there is widespread speculation about the possible economic impact of a carbon tax in Australia. In this paper we build a computable general equilibrium (CGE) model incorporating many new features to deal with the issue of emissions and model the impact of carbon taxes. The analysis undertaken by simulating the impact of a carbon tax of $23 a tonne reveals some interesting outcomes. For example, in the short run, Australia’s real GDP may decline by 0.68 percent, consumer prices may rise by 0.75 percent, and the price of electricity may increase by about 26 percent as a result of the tax. Nevertheless it allows Australia to make a substantial cut in its CO2 emissions. The simulation results imply an emission reduction of about 12 percent in its first year of operation. The tax burden is unequally distributed among different household groups with low-income households carrying a relatively higher burden. __________________________________________ *The authors would like to acknowledge funding from the Australian Research Council under Discovery project DP0986306.