Question

The price of petrol in Europe is almost three times that in Australia, mainly because the European petrol tax is higher than the Australian petrol tax. How would an increase in the petrol tax in Australia to the European level change carbon emissions? Would this tax increase bring greater efficiency, or would it increase deadweight loss? In your response use a diagram/s if possible.

Answer 1

The Organisation for Economic Co-operation and Development (OECD) defines environmentally related taxes as any compulsory, unrequited payment to government, levied on tax-bases deemed to be of particular environmental relevance.

The relevant tax-bases include energy products, motor vehicles, waste, measured or estimated emissions, and natural resources.

The Garnaut Climate Change Review favoured the establishment of a broadly applied carbon tax in preference to a heavily compromised emissions trading scheme.

Further, it proposed the introduction of a carbon tax as an interim measure pending the establishment of an effective emissions trading scheme. The Australian Greens in particular support this approach.

Such taxes are extensively used in Europe, mainly in the transport and energy sectors. They are suitable for situations where direct emissions are difficult to monitor, or administrative simplicity is a highly desirable policy feature.

Emissions taxes should be set at a level equal to the external cost of the good or service provided.

Not only is this hard to calculate accurately, but there is the significant possibility that this cost might rapidly increase. The progression of expected climate change impacts is not linear; rather, impacts may become increasingly severe.

This means that the external cost of greenhouse gas emissions will increase. This rate of increase may well be at a faster rate than any tax can be adjusted to match.

ETR is an effective way of integrating economic, social and environmental costs into the price of goods and services while creating incentives for sustainable practices.

The CGEP research pivots around a few shared scenarios. Researchers modeled three different carbon taxes — starting at a per-ton rate of $14 (rising 3 percent a year), $50 (rising 2 percent a year), and $73 (rising 1.5 percent a year) respectively — with a range of fairly conservative assumptions about energy prices and technology development. The $50 tax served as the central case.

In all cases, the tax would be charged “upstream,” where carbon enters the economy, at the wellhead, mine shaft, or import terminal. The tax would ultimately cover more than 80 percent of the economy’s total greenhouse gas emissions.

The independent research firm Rhodium Group, which analyzed the energy and emission effects of a tax for CGEP, found that, sure enough, it will reduce greenhouse gas emissions.