A carbon tax would help substantially in tackling two of the major problems facing Australia today: climate change and paying for the government services that we want.
Given the misrepresentations in response to the recent budget’s tax changes, it seems unlikely that the Albanese Government will readily embrace further tax reform. Nevertheless, a carbon tax is the best way to respond to two of the major policy problems facing Australia: climate change and the need to cut carbon emissions; and our inability to properly fund the government services that we are demanding.
Climate change
Unfortunately, Angus Taylor and his parliamentary colleagues have reversed the Coalition’s previous commitment to net zero by 2050. But that policy reversal tells us more about them and their pursuit of populism, while the evidence is irrefutable that we must all reduce carbon emissions.
The most recent data show that carbon emissions in Australia are at last starting to fall and were 2 per cent lower in 2025. The biggest source of carbon emissions has been electricity production and understandably the government is congratulating itself that in the last six months half of Australia’s electricity was generated using renewable energy, but transport carbon emissions also fell a little as people are switching to electric cars.
According to the Climate Council, “on average in 2024-25, the wholesale price for power from renewables was $74/MWH – compared to $136/MWH for power from coal or gas”. So, given this cost difference, we can be reasonably confident that market forces will lead us to achieving close to net zero carbon emissions from electricity generation. Why the opposition want to switch back to coal defies common sense as well as simple economics.
Nevertheless, to accelerate the development of renewable energy, the Labor government has introduced a Capacity Investment Scheme to underwrite the risks of investing in new renewable energy generation and storage. This scheme has a target of 40GW of new renewable energy capacity and storage, but so far it has only commenced construction or commissioned less than 3GW of that capacity.
Most importantly, however, even back in 2019, electricity only accounted for 32 per cent of Australia’s carbon emissions, and that proportion would be lower today. Other major sources of carbon emissions are transport (18.1 per cent), industry and household direct consumption of fuels, like gas, (18.6 per cent), agriculture (12.3 per cent), gases vented from fossil fuel extraction and transport (10.7 per cent), and industrial processes (6.2 per cent).
However, the Government’s only significant mechanism for reducing these emissions is the Safeguard Mechanism, and that only covers 30 per cent of Australia’s emissions. This is because the system only applies to large facilities emitting over 100,000 tonnes of CO2 per year, and as of November 2024, just 219 facilities fell under this policy.
Furthermore, the emissions reduction targets are more generous than in other countries, being based on a gradual reduction in each facility’s own historic emissions. In addition, there are also numerous allegations of cheating under this policy as companies can purchase dubious offsets, rather than directly reducing their emissions.
Most recently, a few days ago, a cache of documents leaked to the ABC and the Guardian newspaper indicate that the world’s biggest miner, BHP, has halted or delayed projects to cut vast amounts of emissions. For example, BHP has dumped an iron ore processing plant that could have prevented 1.7 million tonnes of emissions a year, the equivalent of taking more than 350,000 cars off the road. BHP has also postponed indefinitely its plans to replace its fleet of diesel trucks with electric trucks, although its mining competitor, Fortescue, is going ahead, suggesting that BHP could equally afford to do so.
At the same time, BHP paid less than $9 million last financial year for its excess emissions under the Safeguard Mechanism, while it received $622 million in fuel tax credits for use of its diesel.
What this recent evidence tells us is that realistically we cannot rely on present policies to achieve the goal of net zero carbon emissions by 2050. Instead, if we are serious about reducing the perils of climate change we need to change our policies.
The present policies have too limited a coverage, and the inadequate incentives do not compel companies to change their technologies in favour of lower emissions. In contrast, a carbon tax would have as wide a coverage as needed and could be set at the level needed to achieve the emissions targets.
Of course, the government will worry about the criticism of another new tax, but there are counter arguments.
First, John Howard is more venerated by the Coalition than any other Liberal leader, and in the 2007 election Howard promised to introduce an emissions trading scheme which had the same objective of reducing carbon emissions as a carbon tax.
The only difference between these two alternative policies is that with a tax the government determines the price and lets the market determine the production response. While with an emissions trading scheme, the government determines the amount of carbon production allowed and lets the market determine the price. Generally, the former approach, where the government sets the tax, is less risky economically than setting the quantum of production as it is easier to adjust the price to achieve the target without too much disruption.
Second, the main objection to a carbon tax is the impact of rising prices on households and other businesses. However, it would be possible to use some of the revenue raised by the carbon tax to compensate small businesses and households for their additional costs, while still achieving the objective of lower carbon emissions.
For example, the Superpower Institute, led by two eminent economists, Ross Garnaut and Rod Sims, has proposed a tax on carbon embedded in fossil fuels, which if applied to around 140 extraction sites operated by fewer than 60 companies would cover more than 80 per cent of Australian emissions. That is well above the 30 per cent covered by the Safeguard Mechanism and the 34 per cent covered by policies for the electricity sector.
The Superpower Institute is proposing that their tax would begin at $17 per tonne of CO2 equivalent and rise over the next seven years until it meets the EU carbon price, after which it would follow the EU price. In addition, this tax would be accompanied by a European-style Carbon Border Adjustment Mechanism applied to energy-intensive imports so that domestic producers are not disadvantaged.
Modelling by the Superpower Institute shows that this carbon tax would accelerate the reduction in emissions, delivering about 100 million tonnes of additional abatement after 10 years, and more than double the reductions expected under present policies.
Budget repair
The latest Treasury forecasts show budget deficits of 1 per cent of GDP for the next three years and deficits continuing beyond that. These deficits put upward pressure on interest rates and thus make life more difficult for young homeowners and would-be homeowners. Good policy would therefore return to a balanced budget or even a small surplus whenever the economy is operating at full capacity.
In addition, many government programs have been chronically underfunded for a decade or more. For example, real per student funding of universities is substantially less than it used to be, forcing them to rely heavily on overseas students to cross-subsidise their Australian students. Funding for the CSIRO and R&D is also lower in real terms, and equitable school funding to achieve the Gonski resource targets will not be achieved until 2034 (if we’re lucky). Hospital waiting times are too long, partly because aged care is still inadequate, and home care packages are often delayed for more than a year. Public housing is well short of historic norms. While it is generally agreed that we will need to spend more on defence in future.
In sum, government revenue has been inadequate, and it is not surprising that our service provision is poor, given that government revenue is lower in Australia than almost all other countries in the OECD.
While no-one wants to pay more taxes, and the Opposition likes to refer to the “tax burden”, the fact is that taxes are the way we pay for services that we want and are often necessary. After all, we all expect that if we want more at the supermarket then we have to pay for it, and taxation is no different.
But it would be difficult to raise income taxes, and an increase in the GST does not help the Commonwealth budget directly as all GST revenue is passed to the states and territories.
Instead, the obvious place to start to raise more revenue is to reconsider the tax concessions, and that is what the government did in its most recent budget.
While those reforms to capital gains tax, negative gearing and the taxation of trusts will raise more revenue, that extra revenue is more than offset by the cost of the new Working Australians Tax Offset and the $1000 instant tax deduction. The net result is that recent policy decisions actually reduce total revenue for the next couple of years.
Thus, apart from wanting to reduce carbon emissions, there is a pressing case for raising more revenue by introducing a carbon tax. And modelling by the Superpower Institute shows that even after netting out compensation payments to small businesses and households for their additional costs, the Institute’s proposed carbon tax would raise an average of $18.5 billion in net additional revenue.
This is a very substantial sum and is a further reason why we cannot afford to ignore the benefits of introducing a carbon tax.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.