How may a carbon tax transform Australian electricity industry? A CGE analysis

Abstract

The carbon tax policy proposed by Australian government has triggered deep concerns about the high electricity prices facing households and the sustainability of electricity industry. By employing a computable general equilibrium (CGE) model and an environmentally extended Social Accounting Matrix (SAM), this article simulates the effect of Australian carbon tax on the electricity industry. The modelling results show that the wholesale electricity prices indeed increase by about 90%, but the retailer prices only increase by 25%. The coal-fired electricity generators will reduce their output by 8% (for black-coal) to 18% (for brown-coal), but the profitability of the industry will drop dramatically. On the other hand, generators using oil, gas or renewable resources, will increase their output significantly and enjoy a handsome profit. Through the price, cost and profitability mechanisms, the carbon tax will transfer the Australian electricity generation to a low emission industry in the long term.

Keywords:

• carbon tax
• CGE modelling
• electricity
• stationary emission

JEL Classification:

• D58
• Q58
• Q52

Acknowledgement

The author would like to acknowledge the valuable discussions with two colleagues, Mahinda Siriwardana and Judith McNeil, who worked on this project.

Funding

The author would like to acknowledge the funding from the Australian Research Council under Discovery project DP0986306.