Carbon tax—what can Australia learn from the experiences of other countries?

This year our planet experienced the hottest June on record. 

This raises the inevitable question: how can the world limit further world temperature increases? For countries like Australia—categorised as vulnerable toward climate change by United Nations Climate Change Program—the question is even more crucial. 

The first step in combatting global warming is to stop emitting carbon and using fossil fuel. 

To this end, many countries have been focused on developing renewable energies and transitioning to low carbon technologies. But, creating incentives for companies to cut their fossil fuel consumption and invest in new technologies is not easy. Economists say a carbon tax on fossil fuel consuming companies can motivate the transition to a low carbon technology at industry level.  

Australia applied a carbon tax policy for a short period of time in 2012 to 2014. However, there are 27 developed countries currently implementing this policy. Among them are the Scandinavian nations—considered as vulnerable as Australia toward climate change—who adopted this policy more than three decades ago. 

In order to learn from their experience, I looked through their policy design from when it was implemented. The key to their success? Learning from mistakes and revising the policy based on new findings each year.

While many countries impose the tax on specific industries, over time they learnt that applying the policy across all sectors provides an incentive to reduce emissions, and that also no specific sector should be exempt from paying a carbon tax. In addition, to gain public support for the policy and have enough time to react to unknown consequences of the extra tax in the economy, the tax rate should be raised gradually over time.

Note that, to offset the additional tax increasing the rate of inflation, the government should redirect all the tax revenue back into the economy to support consumption. After which, a share of the accumulated tax revenue should be invested either in Research and Development projects, or be given to the industries as a low-cost loan to cover their costs during the transition to a low carbon technology. 

Norway has applied this policy for more than three decades, and now sits among the few countries in the world where their electricity sector is completely free of fossil fuels. This country also has the largest electric vehicle fleet in Europe.

The carbon tax policy design offers a double benefit. Countries that apply the carbon tax will reduce their emissions and continue to experience economic growth.