Wholesale electricity price, carbon emissions and economic output in Australia: the role of carbon pricing

A fundamental environmental concern that calls for urgent action is limiting carbon emissions globally and lessening the pernicious effects of climate change. Australia aims to cut carbon emissions by 26–28% from 2005 levels by 2030. Carbon pricing can be a powerful market-based economic tool for reducing carbon emissions and mitigating climate change. This chapter investigates the influence of different carbon price levels on carbon emissions by first adding different carbon price levels into electricity pricing and then using econometric techniques such as the Autoregressive Distributed Lag Model (ARDL) model and the Granger causality based on the vector error correction model (VECM) framework. This study carried out different scenario analyses using quarterly data from 2001:Q3 to 2019:Q1. The empirical results demonstrate a stable relationship between wholesale electricity pricing with full carbon price pass-through and carbon emissions over the long term, with a 1% increase in wholesale electricity price under a high carbon price scenario resulting in a 0.58% reduction in carbon emissions. The VECM-based Granger causality tests also reveal a relationship in the long term. Based on this, Australia could establish a carbon emissions mitigation scheme with a high tax rate on polluters like fossil-fuel-based electricity companies in order to reduce emissions and build a sustainable economy. This chapter’s finding suggests that the importance of introducing an emissions trading scheme in Australia must be explored without undermining the effectiveness of carbon taxes toward emissions reduction.