Carbon Tax Isn't Killing Jobs ... In Australia

Australia's PM says limiting carbon is bad for the economy. The best counterargument is ... Australia.
How is this good for the environment -- or the economy?

The most pointed moment of President Barack Obama's meeting tomorrow with Australian Prime Minister Tony Abbott will probably be when the two discuss climate change: Obama has just proposed new rules on carbon emissions from power plants, while Abbott is ending the $23-a-ton carbon tax imposed two years ago by his predecessor.

"We should do what we reasonably can to limit emissions and avoid climate change, man-made climate change, but we shouldn't clobber the economy," Abbott said Monday during a stop in Ottawa. "That's why I've always been against a carbon tax or an emissions trading scheme, because it harms our economy without necessarily helping the environment."

But Australia's carbon tax experiment doesn't back up those warnings. Although the country's macroeconomic indicators have flagged since the tax took effect, that had little to do with the tax, economists say. Meanwhile, the tax succeeded at reducing emissions. What Abbott paints as a cautionary tale may instead be a model for the U.S. and others to follow.

At first glance, Abbott's argument of economic harm seems to match the data. Australia's gross domestic product grew by 3.6 percent in 2012, the year the tax was introduced. The next year, that slowed to 2.4 percent -- a big drop, but still well above the 1.3 percent average among Organization for Economic Cooperation and Development countries:


Australia's unemployment rate also started rising about the time the carbon tax was introduced, after falling for 11 of the previous 12 quarters. When the tax took effect in July 2012, unemployment was 5.1 percent; by the first quarter of this year, it was 5.9 percent, having risen for each quarter along the way:


But when I asked experts on Australia's economy whether the carbon tax caused the dip in the country's performance, they said the slowdown was the result of changes that predated the tax.

Foremost among them was high demand for Australian natural resources, which led to extensive investment to expand capacity, said Philip Hemmings, an OECD economist who follows Australia. "These are huge plants that are just coming up to completion now," he said. The result is a slowdown in investment, and with it a drop in GDP growth and a rise in unemployment.

Frank Jotzo, director of the Center for Climate Economics and Policy at Australian National University, agreed that the tax wasn't a factor in Australia's performance, citing instead the "waning resource boom" and other changes. "The effect of the carbon price is simply not observable in the macroeconomic data."

John Quiggin, an economics professor at the University of Queensland and fellow at the Australian Research Council, noted that "the government doesn't even attempt to pretend that there will be a positive net impact from the removal of the tax." He cited Abbott's budget, released last month, whose economic outlook said:

Resources investment is still expected to detract significantly from growth through until at least 2015-16. ... Real GDP is forecast to continue growing below trend at 2½ per cent in 2014‑15. ... The unemployment rate is forecast to continue to edge higher, settling around 6¼ per cent.

If the tax's critics have an argument to make, it's on two points: inflation and electricity prices. But even that argument is wobbly.

The tax was "marginally inflationary," according to Mahinda Siriwardana, an economics professor at the University of New England Business School. Sure enough, inflation increased in 2013 after falling the year before, moving in the opposite direction of the OECD average:


But it's hard to attribute even that modest increase to the tax, Siriwardana said in an e-mail. OECD projections for this year and next bear that out: With the tax's repeal, Australia's inflation will remain above the OECD average.

Electricity rates increased, too, but "the contribution of the carbon tax to this price was small," Siriwardana said. "Power companies upgraded the infrastructure (poles and wires) significantly and that mainly contributed to the electricity price increase in the last two years."

Of course, none of this addresses what's arguably the more important question: Did the carbon tax succeed at reducing emissions? The answer seems to be yes. In the first nine months of last year, electricity emissions were 0.3 percent lower than in the same period the year before -- led by a 5.5 percent drop in emissions from the electricity sector, the country's largest source of carbon:


In other words, Australia's carbon tax appears to have accelerated a trend that was already under way, as the chart above, from Australia's Department of the Environment, shows. And it did so without significantly adding to the economic headwinds Australia already faced.

So when Tony Abbott says that limiting carbon is bad for the economy, be skeptical. What he really means is that opposing a carbon tax makes for better politics than supporting one. Well, fair dinkum.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.