Evaluating the effect of market-related policies in reducing the rebound effect of energy consumption

This thesis explores the effect of a carbon tax policy on a nation’s economy. The first study is a systematic literature review of the rebound effect literature. Classifying studies of energy rebound effect into “Macroeconomic” and “Microeconomic” studies, then subdividing each group into five subsections, the review establishes that technological development should be accompanied by a market-based policy to generate behavioral change and ultimately reduce carbon emissions and the most cost-effective market-based policy is a carbon tax. Despite the findings of predominant literature about the effectiveness of a carbon tax in reducing carbon emissions, concerns about the economic effects of the policy have resulted in political resistance to its implementation specifically in resource-rich countries like Australia. The second study in this thesis addresses this concern by taking a natural experiment approach to investigate the effect of a carbon tax and associated revenue recycling policy in Norway, a resource-rich country that has imposed a carbon tax since 1991. Using the difference-in-difference approach and taking Norway as the carbon tax adopter country and Australia as a control country, this study finds that Norway’s GDP has increased by 16.88 percent compared to Australia’s over the post-treatment period, equating to a 0.49 percent annual growth. The growth in GDP is related to the way the carbon tax revenue is redirected back into the economy.

Having established the positive effect of a carbon tax policy on Norway, the third study adopts the novel difference-in-difference approach with multiple time periods to evaluate the effect of a carbon tax on a panel consisting of 11 carbon tax adopter members of the OECD and seven non-adopter countries. By grouping into nine groups the carbon tax adopter countries based on the year in which each first implemented the policy, this study confirms the impact of the policy on four groups (group 2008, group 2010, group 2012, and group 2015) is statistically significant and positive while the impact of the carbon tax implementation on five groups (group 1990, group 1991, group 1992, group 2013, and group 2014) is insignificant. Reviewing the revenue recycling approach in each group reveals that the positive effect is a result of the way in which the accumulated tax revenue is redirected into the economy. This study highlights the importance of carbon tax design, including tax level, uniformity of the tax rate among industries and coverage, as well as the influence of a suitable revenue recycling approach in obtaining positive environmental and economic benefits.

Drawing on the findings of the first three studies, in the final study of this thesis designs a carbon tax policy for Australia. Constructing a Social Accounting Matrix based on Australia’s 2019 ̶ 2020 Supply-Use table and applying a dynamic recursive Computable General Equilibrium (CGE) model, this research evaluates the effect of two carbon tax scenarios on economic variables, specifically variations in prices and GDP compared to a business-as-usual scenario. In both scenarios, the tax starts at A$23/tCO2 and rises subsequently till 2030 to reach A$53/tCO2 in the first policy scenario and A$70/tCO2 in the second policy scenario and stays at that level till 2035. The tax is imposed based on the carbon content of fossil fuels and all industries pay a uniform tax rate, with no exemptions.

This study confirms the imposition of a carbon tax leads to a rise in the price of fossil fuels, the producers’ price and finally inflation, while real consumption declines. Yet in both policy scenarios total carbon emissions decline by more than 30 percent compared to the business-as-usual scenario. To eliminate the negative impact of the carbon tax on the economy, three revenue recycling policies are examined. Adopting any of the revenue recycling approaches offsets the negative effect of the carbon tax on GDP and leads to a positive economic impact.Among the three revenue recycling approaches, reducing income taxes to compensate for the negative effect of the policy on real consumption, as well as investing in research and development, provides the highest economic benefit for Australia. Comparing the first policy scenario accompanied by a revenue recycling approach with a business-as-usual scenario, Australia’s carbon emissions decline by 31 percent in 2035 while its GDP rises by 0.217 percent. In the second policy scenario, total carbon emissions decline by 35 percent while GDP increases by 0.286 percent. This result confirms that a carbon tax accompanied by a revenue recycling policy increases Australia’s GDP.