Cost of regulations and subsidies reduce effectiveness of carbon pricing

In ’Reducing Greenhouse Gas Emissions at the Lowest Cost’, the University of Melbourne’s Professor John Freebairn said a carbon price was a low-cost way of reducing pollution, but that non-carbon-pricing components such as household subsidies could defeat the purpose of a carbon price.

"Businesses and households are given the incentives and rewards to explore over time new information and opportunities to cost-effectively reduce pollution," said Professor Freebairn.

Professor Peter Lloyd from the University of Melbourne discusses this further in his piece ’Designing a carbon price policy’, where he explains that while compensating households is extremely generous, it increases the cost of a carbon pricing mechanism and is unnecessary.

"It is sometimes suggested that providing households with assistance would cancel the benefits of introducing a carbon price. It is said that, if we impose a carbon price that costs a household $100 and then provide that household with a tax cut worth $100 nothing has changed. These suggestions are wrong. The carbon price even with the tax cut alters the relative prices of more or less emission-intensive goods and services," said Professor Lloyd

Edited by Professor Ross Williams AM from the Melbourne Institute of Applied Economic and Social Research, the Australian Economic Review (AER) is the peak economic policy review journal in the country. This edition tackles some of the key issues with the carbon tax ahead of its take-up on 1 July, and includes discussions on carbon pricing, the negative impact of subsidies and market-based mechanisms in general.

Also featured is the annual roundup of the economy over the past year, with the Melbourne Institute’s Professor Guay Lim arguing that the biggest risk comes from the eventual decline in commodity prices, adding "it would not be too early to plan for the day when commodity prices fall, as it could be detrimental for the manufacturing industry".

Henry Ergas from the University of Wollongong also looked at the effectiveness of a carbon price policy and concluded that Australia should focus on adapting to climate change, arguing that market based mechanisms would be harmful to the Australian economy.

And in an article on school choice, Astghik Mavisakalyan from the Australian National University looked at private versus public school choices of natives and immigrants, and found private school attendance among Australian born students to be higher in areas with high immigrant populations.

The March edition is available from: www.wileyonlinelibrary.com/journal/aere