Australia's international role

As previously noted, Australia is a large producer and exporter of fossil fuels and fossil fuel intensive commodities, notably primary metals, which depend on the use of coal and coal-fired electricity. For example, less than 10 per cent of Australian aluminium smelting capacity relies on hydro-electricity. The imposition of a carbon tax would have a drastic effect on the cost of energy used in the production of these commodities, and hence on the cost structures of producers.

Australia is an efficient, low cost producer of these commodities. It is expected that continued and growing output of these commodities will be very important for the country's economic future. Hence, policy makers are concerned that a carbon tax imposed only in Australia would damage possibly severely - the competitive position of Australian producers in world markets. That is why the Australian government qualified its adoption of the Toronto target as an 'interim' planning target with reference to net adverse economic impacts and trade competitiveness. The potential effects of a multilateral carbon tax are less clear, however. For example, such a tax would probably suppress international demand for thermal coal, but, as a result of fuel substitution, might increase demand for LNG. For primary metal exports, the effect of a multilateral carbon tax depends on both the demand for metal and the effect of the tax on competing producers.

To examine this question, the Industry Commission (IC) developed a model which focused on Australia's place in the global economy. Again, a carbon tax was the chosen policy instrument to achieve emission reductions. The IC concluded that a global carbon tax of the size estimated to be required to achieve a 40 per cent reduction in emissions by 2005 (estimated to be somewhat less than the abatement corresponding to the Toronto target) would reduce Australian GDP by between 1 and 3 per cent. The range depends on assumptions about substitution elasticities. The effect on GDP is thus roughly the same as that generated by applying a similar sized carbon tax to Australia only. However, the modelling results suggest that many other countries might suffer somewhat smaller GOP reductions than Australia.

The effects of such a carbon tax on individual industry sectors in Australia was highlighted in a study released in early 1992 (London Economics 1992). This study concluded that both the steel and aluminium industries would be driven into irreversible unprofitability and forced to shut down by a carbon tax, whether imposed unilaterally by Australia, by OECD countries or globally. A number of the assumptions used in this study appear dubious, notably those relating to international demand, and alternative, competing international suppliers of aluminium. However, the broad thrust of the conclusion is not unexpected, given the choice of a carbon tax as the policy instrument for achieving emission abatement.