The Distributional and Welfare Effects of the Emission Trading Scheme on Australian Households


The paper presents the effects of the emission trading scheme in Australia on price of goods and services, as well as on distributional income and welfare of household groups. I simulate the emission reduction target of 11% in 2009, designed to achieve the emission reduction target of 5% below 2000 level by 2020. The Computable General Equilibrium (CGE) model is employed with disaggregation of households into 20 household groups, and disaggregation of energy sectors. The data is collected from the Australian input-output tables, 2008-2009 and household data is obtained from the Household Expenditure Survey, 2009-2010.The simulation results indicate that the consumption price index mildly increases, by 0.309 percent, and real household expenditure slightly decreases, by 0.024 percent. This will affect the utility of all household groups to different degrees. All households experience income reduction, the magnitude of which varies from more than $2 million for the poorest, to $363 million for the richest. The welfare impact is calculated in terms of the Equivalent Variation and Compensation Variation. The results show that all household groups experience absolute welfare loss that is nearly $0.3 million for the poorest and $40 million for the richest. To offset the welfare loss effects of such an emissions trading scheme on households, we introduced four alternative ways of returning of 60 percent of permit auction revenue to household groups. As a result, an equal lump-sum transfer to all households has positive effects on income and welfare for all household groups.

Author Information
Trang Minh Tran, University of New England, Australia

Paper Information
Conference: ACSEE2015
Stream: Economic Sustainability: Environmental Challenges and Economic Growth

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