Australia’s aims to reduce carbon emissions by 26% to 28% by 2030 compared with 2005 emission levels, and carbon pricing can be an effective market-based instrument for reducing these emissions.
This study examines the impact of varying carbon price levels on carbon emissions through the channels of wholesale electricity prices using standard time-series econometric techniques. A scenario design is undertaken with a low and high carbon tax, and the study tests and confirms the existence of a long-run equilibrium relationship among economic output, the wholesale electricity price, and emissions under the high carbon tax scenario.
The results reveal that a 1% hike in the wholesale electricity price under a high carbon price scenario reduces carbon emissions by 0.57%. The study, therefore, recommends that Australia should implement a carbon price of as high as A$80 per ton of emissions to bring about effective reductions in carbon emissions. This carbon price would abate pollution at the expense of a marginal contraction in economic output.