Consumer-based Carbon Reduction Incentives

Abstract

Australia's ability to meet its commitment to reduce greenhouse gases under the Kyoto convention will probably require at least some government intervention. Traditionally, approaches to reducing pollution in Australia have tended to focus on the adoption of emission standards. Theoretical criticism by environmental economists has, in part, resulted in a movement toward the adoption of market based mechanisms for pollution abatement; and flirtations with carbon taxes and tradeable permits to reduce greenhouse gas emissions. Each instrument is subject to significant weaknesses. Tradeable permits are administratively complex for both polluter and administrator and can lead to production bottlenecks where polluters cannot find requisite permits. A carbon tax is simpler to administer and offers much more flexibility, but can have regressive and inequitable economic impacts. Of these approaches, tradeable permits offer greater potential for achieving set emissions reductions, but tend to be restricted in application to large emitters such as industry. It is argued here that to be truly cost effective, incentives to reduce emissions need to be targeted as close as possible to the point of fuel consumption-and hence greenhouse emission: by both industry and the household consumer. This paper explores the benefits and limitations of adopting a mixed incentive scheme applied to the energy consumer to reduce greenhouse gas emissions. The proposed consumer carbon reduction incentive (CBCRI) incorporates elements of tradeable permits, carbon taxes and emission reduction subsidies.