Abstract
Australia has significantly raised its climate change mitigation ambition, upgrading its 2030 NDC under the Paris agreement and codifying the NDC, as well as the net zero by 2050 target, into law. Achieving its abatement goals will require significant policy effort. A broad-based carbon price is the most efficient and effective way to achieve emission reductions. However, if implementing a high enough economy-wide carbon price to meet the NDC is politically challenging, strong sectoral policies and regulations can play a key role in meeting emission goals.
Climate Mitigation Policies in Australia1
Australia has significantly raised its climate change mitigation ambition, upgrading its 2030 NDC under the Paris agreement and codifying the NDC, as well as the net zero by 2050 target, into law. Achieving its abatement goals will require significant policy effort. A broad-based carbon price is the most efficient and effective way to achieve emission reductions. However, if implementing a high enough economy-wide carbon price to meet the NDC is politically challenging, strong sectoral policies and regulations can play a key role in meeting emission goals.
A. Introduction
1. Australia, like the rest of the world, faces significant challenges from climate change. Rising temperatures and more frequent natural disasters, such as the recent bush fires and floods in Australia, are likely to impose significant human and economic costs (IPCC, 2022). Limiting the damage from climate change and attaining the Paris Agreement’s temperature goals will require significant global effort, with estimates suggesting that greenhouse gas (GHG) emissions will need to be cut by 25 to 50 percent below 2019 levels by 2030 (Black and others, 2022). Australia will need to play its part, and in this context, Australia’s upgraded mitigation targets are welcome.
2. Achieving Australia’s mitigation targets will require strong policy action. Using the IMF and World Bank’s Climate Policy Assessment Tool (CPAT), this paper assesses the impact of first-best mitigation policy on Australian emissions and economic activity. The paper finds that a broad carbon tax of US$75 can deliver significant abatement across sectors, reducing emissions in 2030 by about 16 percent relative to a business-as-usual scenario. The economic impact of a carbon tax is expected to be limited: the impact on GDP will depend crucially on how revenues are used, while the net welfare effect of carbon taxes, after considering other benefits (lower congestion, climate benefits etc.), will likely be positive. In the absence of an economy-wide carbon price, strong sectoral policies will be needed to achieve abatement goals.
3. The rest of the paper is structured as follows. Section B provides an overview of recent emission trends in Australia. Section C compares Australia’s NDC to its own long-term target and to the NDC of other G20 countries. Section D discusses the impact of a carbon tax on emissions and economic activity. Section E to H discuss other sector policies, and Section I concludes.
B. Recent Trends in Green House Gas (GHG) Emissions
4. Total GHG emissions have declined in Australia, though with significant heterogeneity across sectors. Estimated emissions in 2021 were 489 MtCO2e, about 24 percent lower than peak emissions recorded in 2006. The LULUCF sector has seen a significant decline in emissions from 90 MtCO2e in 2005 to -39 MtCO2e in 2021, with total non-LULUCF emissions broadly unchanged over the same period.2 Within non-LULUCF emissions, a decline in electricity, waste and agricultural emissions was offset by an increase in emissions in transport and other sectors. As of 2021, 33 percent of emissions come from the electricity sector, 21 percent from stationary energy, 19 percent from transport, and about 16 percent from agriculture.
5. Emissions intensity in Australia has declined but remains one of the highest among advanced economies. Australia was the 15th largest GHG emitter in 2019, accounting for about 1.2 percent of global emissions. Emissions intensity in per-capita and per-GDP terms remains one of the highest in the OECD, though per-capita emissions have fallen by more than the OECD average.
Emissions Have Declined, Driven by Lower LULUCF Emissions
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: DCCEEW.Note: LULUCF refers to land use, land use change, and forestry.Emissions Have Declined, Driven by Lower LULUCF Emissions
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: DCCEEW.Note: LULUCF refers to land use, land use change, and forestry.Emissions Have Declined, Driven by Lower LULUCF Emissions
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: DCCEEW.Note: LULUCF refers to land use, land use change, and forestry.
Lower Electricity and Agricultural Emissions Have Been Offset by Increases Elsewhere
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: DCCEEW.Lower Electricity and Agricultural Emissions Have Been Offset by Increases Elsewhere
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: DCCEEW.Lower Electricity and Agricultural Emissions Have Been Offset by Increases Elsewhere
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: DCCEEW.
Per-Capita Emissions Remain Among the Highest in the OECD
(tCO2e person)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: OECD.Per-Capita Emissions Remain Among the Highest in the OECD
(tCO2e person)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: OECD.Per-Capita Emissions Remain Among the Highest in the OECD
(tCO2e person)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: OECD.
Per-Capita Emissions Have Declined More than the OECD Average
(Percent change, 2005 to 2020)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: OECD.Per-Capita Emissions Have Declined More than the OECD Average
(Percent change, 2005 to 2020)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: OECD.Per-Capita Emissions Have Declined More than the OECD Average
(Percent change, 2005 to 2020)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: OECD.C. Australia’s Emissions Target Under the Paris Agreement
6. Australia has upgraded its NDC under the Paris Agreement and created a framework for accountability to meet mitigation targets. In June 2022, Australia submitted a more ambitious 2030 mitigation target to the UNFCC, committing to a 43 percent reduction in emissions from 2005 levels (compared to the earlier target of a 26–28 percent reduction). In addition, the Climate Change Act 2022 was recently passed, which codifies the 2030 target as well as the 2050 net zero goal into law. The Act also creates a framework for accountability and future action to meet these targets by (i) requiring an annual ministerial statement to Parliament outlining progress towards the target, and (ii) empowering the Climate Change Authority, an independent statutory agency, to advise the Minister on the climate change statement and future emission targets. The first ministerial statement to Parliament was delivered in December 2022.
7. The new NDC is broadly in line with the goal to reach net zero by 2050 and within the range of ambition of other G-20 advanced economies (AEs). Australia’s short-term emissions target are now well aligned with the longer-term goal to achieve net zero by 2050. A linear path to net zero by 2050 would imply emissions of 337 MtCOe in 2030, only about 20 MtCO2e lower than the new NDC. By contrast, the old NDC was about 114 MtCO2e higher than the emissions implied by a linear path to net zero. Comparing the ambition of NDCs across countries is challenging due to differences in base years and emissions coverage. However, two metrics—the percent reduction in emissions between 2005 and 2030 and the percent reduction in emissions in 2030 compared to business-as-usual (BAU) projections—suggest that while the old NDC required Australia to reduce emissions by significantly less compared to peers, the new NDC is within the range of commitments by other G20 AEs. In particular, the targeted emissions reduction compared to 2030 BAU is towards the lower end of G20 AEs, while the decline in total emissions compared to 2005 implied by the NDC is broadly in line with the AE average.
Australia’s Path to Net-zero Compared to Australia
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF staff calculations.Australia’s Path to Net-zero Compared to Australia
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF staff calculations.Australia’s Path to Net-zero Compared to Australia
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF staff calculations.
Comparing Australia’s NDC to Other G20 AEs
(Emissions reduction implied by NDC, percent)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF staff calculations.Comparing Australia’s NDC to Other G20 AEs
(Emissions reduction implied by NDC, percent)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF staff calculations.Comparing Australia’s NDC to Other G20 AEs
(Emissions reduction implied by NDC, percent)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF staff calculations.D. Policies to Reduce Emissions: The Role of a Carbon Price
8. Achieving Australia’s emissions target will require significant policy effort. Calculations using the IMF and the World Bank’s Climate Policy Assessment Tool (CPAT) indicate that a business-as-usual (BAU) or baseline scenario, which assumes no new policies or tightening of existing policies, would see emissions in Australia stay flat between 2020 and 2030, with some reduction in power sector emissions offset by increases elsewhere, especially transport and industry.3 Achieving the NDC will require reducing emissions by about 28 percent relative to BAU, thus requiring significant policy effort.
In a Business-as-usual Scenario, Emissions Will Remain High.
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.In a Business-as-usual Scenario, Emissions Will Remain High.
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.In a Business-as-usual Scenario, Emissions Will Remain High.
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.
Lower Power Sector Emissions Are Offset by Increases Elsewhere under BAU Scenario
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.Lower Power Sector Emissions Are Offset by Increases Elsewhere under BAU Scenario
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.Lower Power Sector Emissions Are Offset by Increases Elsewhere under BAU Scenario
(MtCO2e)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.9. A broad-based carbon price is considered to be first best policy in reducing emissions. Having a clear price signal as a key feature of the policy framework has several advantages, including: (i) it can help achieve emissions reduction in a cost-effective manner by promoting across-the-board behavioral responses to reduce emissions, including by redirecting investment towards clean technologies; and (ii) if implemented through a carbon tax or an auction-based emissions trading system, a carbon price can raise significant revenues, generating resources to fund infrastructure investments needed for the energy transition, lower existing taxes, and mitigate the impact on those adversely impacted by the transition. And while a carbon price can generate some economic costs, it can also foster significant domestic environmental co-benefits (e.g. reductions in local air pollution and reduced transport congestion).
10. A carbon price of US$75 can deliver significant emissions reduction across sectors, with limited economic costs. An illustrative scenario is considered using the CPAT, where an economy-wide carbon tax of US$30 is introduced in 2023, with the tax rate increasing linearly to US$75 by 2030, consistent with the international carbon price floor proposed in Parry, Black, and Roaf (2021) to meet the 2 degree Celsius temperature goal set in the Paris Agreement. The scenario assumes that no other policy measures are implemented.
Emissions reduction: A broad-based carbon tax of US$75 is expected to reduce emissions by 16 percent relative to BAU. Given the broad nature of the tax, emissions will decline across all sectors, with the largest fall seen in power generation.
Economic impact: A carbon tax can raise significant fiscal revenue of about 1 percent of GDP per year by 2030. There is significant uncertainty regarding the impact of carbon taxes on GDP with the sign and magnitude likely depending crucially on how the revenue is recycled.4 Estimates suggest that using the revenue to fund public investment, which has a large multiplier, can raise average GDP growth through 2030 by about 0.1 percentage point per year. Instead, if revenues are used to reduce labor taxes or for transfers to households, then the net effect on GDP growth can be slightly negative at about -0.2 percentage point due to smaller multipliers. Relative to BAU in 2030, a carbon tax will also raise the price of coal and other fossil fuels significantly, while the price of electricity is expected to increase by about 11 percent.5 Taking into account input-output linkages, the knock-on effect of higher fuel and electricity prices on prices charged by other sectors is likely to be small (less than 1 percent), especially for large sectors like services. However, some sectors which use fossil fuels intensively, such as aviation, may see price increases of up to 7 percent, with somewhat more moderate increases in energy-intensive trade-exposed sectors like steel and other metal products.
Other co-benefits and net welfare effects: A carbon tax is expected to have other co-benefits, including reduced transport congestion and benefits from better air quality. Expressed as a percent of GDP, the average welfare benefits from these sources through 2030 are expected to be 0.2 percent, two-thirds of the direct economic efficiency cost of a carbon tax (about -0.3 percent). Adding domestic climate co-benefits raises the net welfare benefit of a carbon tax by about 0.6 percent of GDP in 2030.6
Impact of a Carbon Tax on Emissions and Economic Activity
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.Impact of a Carbon Tax on Emissions and Economic Activity
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.Impact of a Carbon Tax on Emissions and Economic Activity
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: IMF-WB CPAT.11. As global fossil fuel prices decline from their recent highs, countries may have an opportunity to gradually increase carbon prices without impacting energy prices relative to recent levels. The recent price surge in coal and LNG prices has so far had little impact on emissions due to short-term supply constraints on renewables. In fact, the larger increase in the price of gas relative to coal in some jurisdictions has led to the perverse incentive to increase coal share in electricity generation. While fossil fuel prices are expected to decline in the medium-term, if higher prices were to persist it would encourage a faster switch to renewables by increasing the price differential between fossil fuels and renewable sources of energy. Gradually increasing the carbon price as global fossil fuel prices decline can help lock in better incentives to switch to renewables. Furthermore, a carbon price would impact more emissions-intensive coal more than LNG, correcting the perverse incentive to switch to coal seen in recent months.
12. A carbon price alone is unlikely to deliver enough emissions reduction to achieve Australia’s NDC, highlighting the need for complementary sectoral policies. The US$75 carbon price scenario delivers only about half the emissions reduction needed to meet Australia’s NDC. A significantly higher carbon price, like US$140 as has been committed by Canada, would reduce emissions by 24 percent relative to BAU, still falling short of the NDC (which requires a 28 percent reduction). While model projections for very high carbon prices become more speculative given uncertainty around behavioral responses as well as the cost-effectiveness of new technologies at these high prices, the CPAT suggests that a carbon price of about US$180 will be needed by 2030 to meet the NDC.7 If fossil fuel prices decline more than currently forecast, the carbon price required to meet the NDC will be even higher. As such high carbon prices will entail significantly higher energy costs and may not be politically feasible, strong sectoral policies may be needed to achieve Australia’s emission targets. In particular, sectoral feebates can elicit broad behavioral responses to reduce emissions without impacting average prices, while stepped up public investment in green infrastructure can further catalyze private investment and speed up the transition.
E. Power Sector
13. Despite recent progress, renewables remain a smaller share of electricity generation than in OECD peers. While electricity sector emissions have declined in recent years, the sector remains the biggest emitter of GHGs. Progress has been made in improving the fuel mix in electricity generation, with the share of coal declining from over 80 percent of generation in 2000 to about 51 percent in 2021, though it remains high compared to OECD peers. The share of renewable sources has increased from 9 percent to about 29 percent over the same period, exceeding the Commonwealth Renewable Energy Target set for 2020 (33,000 GWh). Australia has made particularly quick progress in deployment of solar technology, including small- and mid-scale solar installation, where capacity more than doubled between 2018 and 2020. However, the share of renewables in electricity generation remains below the OECD average.
Share of Renewables in Electricity Generation Has Increased
(Fuel mix in electricity sector, share)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: Our World in Data.Share of Renewables in Electricity Generation Has Increased
(Fuel mix in electricity sector, share)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: Our World in Data.Share of Renewables in Electricity Generation Has Increased
(Fuel mix in electricity sector, share)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: Our World in Data.
Share of Renewables in Electricity Generation Remains Low Compared to OECD Peers
(Percent, 2020)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: Our World in Data.Share of Renewables in Electricity Generation Remains Low Compared to OECD Peers
(Percent, 2020)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: Our World in Data.Share of Renewables in Electricity Generation Remains Low Compared to OECD Peers
(Percent, 2020)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Source: Our World in Data.14. Most Australian states and territories have strong renewable energy targets, and the Commonwealth government recently committed to increasing the national share of renewables in Australia’s electricity grids to 82 percent by 2030. Most state and territory governments have strong legislated or aspirational targets for renewables capacity, with various policy tools being deployed to achieve these targets including special renewable zones (e.g. NSW). Under the “Rewiring the Nation” plan, the Commonwealth government is expected to invest $20 billion towards modernizing the electricity grid, which is expected to unlock a further $55 billion in private co-financing. The baseline scenario in Australia’s Emissions Projections 2022, recently released by the government, projects a significant decline in electricity sector emissions from 172 MtCOe in 2020 to 79 MtCO2e in 2030, driven by strong uptake of renewables. An “additional measures” scenario, which takes into account additional policies under Rewiring the Nation and a national renewable electricity target of 82 percent by 2030, projects emissions from the electricity sector falling to 62 MtCO2e by 2030.
Summary Table of Renewable Energy Targets
Summary Table of Renewable Energy Targets
| State/Territory | Renewable Energy Target | Status |
|---|---|---|
| National | 82% renewable electricity target by 2030 | Confirmed in policy document |
| NSW | 12 GW of new capacity by 2030 under the electricity infrastructure investment safeguard | Legislated in 2020 |
| VIC | Renewable energy target of 65% by 2030 and 95% by 2035 | To be legislated |
| QLD | Renewable energy target of 70% by 2032 and 80% by 2035 | To be legislated |
| SA | More than 50% reduction in net emissions from 2005 levels by 2030; 100% net renewable energy generation by 2030 | Non-legislated. Announced and confirmed in policy document |
| WA | No target | |
| TAS | 100% by 2022, 200% of current needs by 2040 | Target maintained since 2015 |
| ACT | 100% by 2020 | Legislated for 2020 onwards. Target achieved in 2019. |
| NT | 50% by 2030 | Non-legislated. Announced during 2016 election campaign, confirmed in policy |
Summary Table of Renewable Energy Targets
| State/Territory | Renewable Energy Target | Status |
|---|---|---|
| National | 82% renewable electricity target by 2030 | Confirmed in policy document |
| NSW | 12 GW of new capacity by 2030 under the electricity infrastructure investment safeguard | Legislated in 2020 |
| VIC | Renewable energy target of 65% by 2030 and 95% by 2035 | To be legislated |
| QLD | Renewable energy target of 70% by 2032 and 80% by 2035 | To be legislated |
| SA | More than 50% reduction in net emissions from 2005 levels by 2030; 100% net renewable energy generation by 2030 | Non-legislated. Announced and confirmed in policy document |
| WA | No target | |
| TAS | 100% by 2022, 200% of current needs by 2040 | Target maintained since 2015 |
| ACT | 100% by 2020 | Legislated for 2020 onwards. Target achieved in 2019. |
| NT | 50% by 2030 | Non-legislated. Announced during 2016 election campaign, confirmed in policy |
15. Complementing existing policy plans in the power sector with a price signal in the form of a feebate can help reduce emissions in a cost-effective manner with minimal impact on average electricity prices. Under a feebate, electricity generators would be subject to a fee or a rebate depending on a carbon price and the generator’s average emissions intensity compared to a pivot point.
Fees of generator
= C02 price
* (C02 emissions per kWh of generator – pivot point C02 emissions per KWh)
* electricity generation
If the pivot point is set based on recent industry average emission rates, the feebate will be broadly revenue neutral and will have a limited effect on average electricity prices. At the same time, by putting a price on marginal changes in emissions, the feebate incentivizes generators to exploit any behavioral response that lowers their emissions. Such a feebate can complement existing initiatives by providing a broad incentive to substitute away from fossil fuels and encourage investment in renewables, though design features of the feebate will need to be considered carefully to avoid undue volatility in the wholesale electricity markets.
16. Proactively addressing capacity constraints in the construction sector will be essential to ensure that the investment needed in the electricity grid can occur at the required pace. A 2022 Market Capacity Report published by Infrastructure Australia highlighted the low confidence of the construction industry to deliver on the announced infrastructure project pipeline. Significant infrastructure spending will be required to prepare the grid for the intermittency of renewables and to minimize the risk of disruptions in the electricity market of the type seen in recent months. As such, actively working towards addressing capacity constraints in the sector by reprioritizing investments and collaborating with industry should be a priority.
F. Industrial Emissions and the Safeguard Mechanism
17. Industrial emissions, especially for large emitters covered by the Safeguard Mechanism, have been increasing. The Safeguard Mechanism covers all facilities with annual emissions above 100,000 tonnes CO2e, including the largest emitters in mining, manufacturing, oil and gas, transport and waste disposal. The mechanism places a limit on GHG emissions intensity for each covered entity called a baseline, with any facility emitting above the baseline required to surrender Australian Carbon Credit Units (ACCUs) to meet its commitment under the mechanism. However, the baselines set under the scheme have largely been non-binding to date, resulting in covered emissions increasing from about 131 MtCO2e in 2016–17 to about 137 MtCO2e in 2020–21.
18. The government has launched a consultation to transform the Safeguard Mechanism into a binding baseline-and-credit system. The consultation will help guide the key design elements of the reformed Safeguard Mechanism, such as details on how the baseline will be set (e.g. absolute baselines vs. baselines on emissions intensity), the path of emissions reduction for covered entities, setting of baselines for new entrants, as well as details on how a crediting and trading scheme will work, including the issuance of Safeguard Mechanism Credits for those emitting below baseline. The consultation will also consider whether tailored treatment is needed for energy-intensive, trade-exposed (EITE) businesses.8 The authorities plan to implement the reforms to the mechanism by mid-2023.
19. If well implemented, the planned reforms to the Safeguard Mechanism can introduce a clear market signal and help drive down industrial emissions in an efficient manner. While final decline rates have not been set, the consultation paper expects indicative decline rates between 3.5 and 6 percent each year through 2030. Australia’s Emissions Projections 2022, recently released by the government, considers an “additional measures” scenario, where covered facilities contribute a proportional share to achieving Australia’s 2030 target, equivalent to abatement of 46 MtCO2e. In addition to the price signal generated by the baseline-and-credit scheme, the authorities envisage subsidized investments (through the National Reconstruction Fund and the Clean Energy Finance Corporation) to be a key driver of industrial decarbonization, and will also allow for the use of offsets. While CPAT does not model the Safeguard Mechanism facilities explicitly, its detailed sectoral breakdown can be used for a back-of-the-envelope calculation to estimate a carbon price that would be consistent with delivering a given amount of emission reductions.9 Assuming that about half of the 46 MtCO2e abatement is achieved directly through the price signal (with the remaining abatement achieved through other regulation, offsets, and subsidized investments), model results suggest that a carbon price of about US$70 per ton would deliver the required abatement. To the extent the elasticity of emissions to a carbon price is higher than assumed, the carbon price associated with delivering these abatement goals will be lower.
G. Transport Sector
20. Transport sector emissions remain high. Total transport emissions increased from 83 to 100 MtCO2e between 2005 and 2019, though have declined to 91 MtCO2e in 2021, in part due to pandemic-related disruptions to travel. Road transport is the largest contributor to emissions, accounting for about 85 percent of total transport sector emissions.
Transport Emissions
(Share of total emisisons; 2021)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Transport Emissions
(Share of total emisisons; 2021)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
Transport Emissions
(Share of total emisisons; 2021)
Citation: IMF Staff Country Reports 2023, 051; 10.5089/9798400230660.002.A002
21. The government is scaling up policy action to reduce transport emissions. Import tariffs on non-luxury electric cars were removed, and the government exempted eligible electric vehicles (EVs) from fringe benefits tax. The government has committed to a $500 million “Driving the Nation Fund,” which will support the installation of a national network of electric vehicle charging stations, hydrogen refueling highway infrastructure and other measures to support an accelerated and coordinated uptake of low emissions vehicles. The government is also in the process of developing a National Electric Vehicles Strategy, including consideration of vehicle fuel efficiency standards.
22. Adding price signals to the transport sector can help reduce emissions efficiently. Road transportation is especially difficult to decarbonize through carbon pricing alone due to the relatively modest impact carbon prices have on retail fuel prices and public resistance to higher fuel prices. Applying fuel efficiency standards to vehicles can help incentivize the take-up of EVs. Alternatively, feebate arrangements that subsidizes low emission vehicles and taxes higher emission vehicles (e.g., integrated into the vehicle registration tax system) can help promote the full range of behavioral responses to decarbonize the vehicle fleet, while avoiding a fiscal cost to the government and not raising average car prices. Feebate systems have been effective in boosting EV uptake in several countries, notably the Netherlands and New Zealand.
H. Other Sectors
23. Continued policy effort can help reduce agricultural emissions and ensure that LULUCF sector continues to act as a carbon sink. Emissions from agriculture have declined from about 85 MtCO2e in 2005 to 78 MtCO2e in 2021, while LULUCF emissions have been negative since 2016. Key policy tools that have helped to reduce emissions in the land and agriculture sectors are the tightening of regulation of land clearing by state governments, Emissions Reduction Fund/Climate Solutions Fund (ERF/CSF), a voluntary scheme under which participants can undertake eligible projects to cut emissions or sequester carbon and earn Australian Carbon Credit Units (ACCUs). Continued efforts to strengthen the scheme, including its governance framework, can help deliver agricultural abatement in the future. In this context, the Government has appointed an independent panel of experts to review the integrity of Australian Carbon Credit Units (ACCUs).
I. Conclusion
24. Achieving Australia’s enhanced climate goals will require a comprehensive mitigation strategy. Australia’s new NDC, as well as the recently passed Climate Change Bill that creates a framework for accountability to meet mitigation targets, are welcome developments. Achieving these goals will require strong policy effort. Implementing a broad-based carbon price is the first best policy for reducing emissions and has several advantages, including: (i) it can achieve emissions reduction in a cost-effective manner by promoting across-the-board behavioral responses to reduce emissions; (ii) if implemented through a carbon tax or an auction-based emissions trading system, a carbon price can raise significant revenues, generating resources to fund public investment and mitigate the impact on workers and regions adversely impacted by the transition; and (iii) it can minimize risks to Australian exports from carbon border adjustments. If broad-based carbon pricing is not feasible or cannot be implemented with a carbon price high enough to incentivize in full the necessary emissions reduction, strong sectoral and regulatory policies will be needed. These can include feebates at the sectoral level (power, transport, land use), potentially providing broad mitigation incentives with limited impact on average prices, and regulatory policies such as vehicle emissions standards. A step up in public investment in the electric grid and charging infrastructure can also help speed up the transition and catalyze private investment. Extensive consultation with stakeholders and the public through the transition can help build support for the needed policy actions to achieve mitigation goals.
References
Black, S., Chateau, J., Jaumotte, F., Parry, I. W., Schwerhoff, G., Thube, S. D., & Zhunussova, K. (2022). Getting on Track to Net Zero: Accelerating a Global Just Transition in This Decade. Staff Climate Notes, 2022(010).
IPCC, 2022: Climate Change 2022: Impacts, Adaptation, and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate. Cambridge University Press, Cambridge, UK and New York, NY, USA, 3056 pp., doi:10.1017/9781009325844.
Parry, I. (2021). Proposal for an international carbon price floor among large emitters. IMF Climate Notes, 2021(001).
Prepared by Siddharth Kothari (APD) and Karlygash Zhunussova (FAD). The chapter benefited from valuable comments from the Commonwealth Treasury of Australia; the Department of Climate Change, Energy, the Environment and Water (DCCEEW); and participants at a seminar at the Treasury.
As an Annex I Party of the UNFCCC, Australia submits detailed annual National Inventory reports to the UNFCCC, where domestic or territorial emissions are included i.e. emissions from the use of exported fossil fuel are not part of the national inventory. LULUCF emissions include all anthropogenic fires. Non-anthropogenic natural disturbances (including bushfires) and the subsequent recovery are modelled to average out over time. Australia also submits detailed supplementary data on LULUCF emissions under Article 7.1 of the Kyoto Protocol which shows that the decline in LULUCF emissions has been driven by lower deforestation emissions, as well as lower net emissions from forest, crop, and grazing land management.
The BAU scenario projects out emissions based on GDP growth rates, a trend in energy intensity of GDP, and a trend in CO2 intensity of energy production. Part of the increase in BAU emissions is driven by the post-pandemic recovery in economic activity. Power sector emissions decrease in the BAU due to projected increase in renewables driven by a reduction in costs and technological improvements in the power sector.
Besides the form of revenue recycling, GDP effects are sensitive to assumptions about how mitigation policy affects the allocation of investment across sectors and time, the future availability of low-carbon technologies and the rate at which learning-by-doing lowers their costs, all of which are difficult to pin down accurately. National-level studies based on CGE models often point to increases in GDP from carbon pricing. Ex-post empirical studies that decompose the effects of climate policies on GDP find either zero or small positive impacts of reforms implemented in Europe and North America.
Global (pre-tax) prices of crude oil, LNG, and coal are projected to fall by 30, 6, and 36 percent by 2030 respectively, implying that despite the introduction of a carbon price, energy prices will be lower in 2030 than the recent highs.
Efficiency costs reflect the annualized costs of adopting cleaner but more expensive technologies and the costs to households and firms from reduced energy use. Domestic environmental co-benefits reflect reductions in local air pollution from less combustion of fossil fuels—total co-benefits are the emission reduction times the co-benefit per ton of CO2 reduced. Assuming social cost of carbon at $75 per ton of CO2.
With higher income and price elasticities assumptions (since the elasticity of emissions to carbon taxes may be higher than price elasticities estimated from temporary changes in energy prices), the price needed to achieve the NDC decreases to $110 per ton of CO2.
The free allocation of emissions up to baseline partially protects the competitiveness of EITE sectors, but at higher levels of abatement the costs of switching to cleaner technologies can be significant, potentially harming competitiveness of EITI firms relative to countries with less stringent mitigation policies. However, the benefit of any special treatment for EITI sectors should be weighed against the additional costs imposed on other sectors if they need to bear a larger share of the abatement burden. On the other hand, Australian exports also face risks from carbon border adjustments implemented by other jurisdictions. While the European Union’s Carbon Border Adjustment Mechanism is the most advanced, it is likely to have a limited impact on Australia exports as currently designed. However, an expansion of CBAs to other jurisdictions and with wider coverage could have significant effects on Australian exports if Australian mitigation effort is lower than trading partners.
A rough mapping is done to align sectors covered by the Safeguards Mechanism. Sectors included are industry (including mining), aviation, rail, waste, food and forestry and services.
