Degree Name

Doctor of Philosophy


School of Accounting, Economics and Finance


Purpose – This thesis investigates the environmental and economic effects of emissions pricing policies in Australia. By considering emissions as a by-product, that is, as a function of production, it can be seen that emissions follow output fluctuations. Ignoring the correlation between economic fluctuations and emissions may increase the risk of encountering undesired changes in emissions over a period of time. This issue has motivated the current research to investigate the impacts of emissions reduction policies on emissions fluctuations during business cycles. This thesis specifies four emissions reduction scenarios, in line with programs which have been designed and/or implemented in Australia: first, a business-as-usual or no policy scenario; second, a fixed emissions tax scenario resembling a carbon tax program; third, a variable emissions tax system as a proxy for an emissions trading scheme and fourth, an abatement subsidy scenario such as the Australian government’s current Emissions Reduction Fund.

Methodology – This thesis applies a dynamic stochastic general equilibrium (DSGE) model to investigate the impacts of real shocks, such as total factor productivity (TFP) shocks, on the Australian economy under the abovementioned emissions reduction scenarios. To this end the current research benefits from, and extends upon, a real business cycle (RBC) model developed by Heutel (2012). The model developed in this thesis, however, is different from his in three ways: the scenarios tested, parameterisation and analysis technique. After developing and solving the model, a calibration method is used for parameterisation to obtain and evaluate the empirical results. To this end, parameters from previous RBC studies for the Australian economy, and from the environmental literature, including literature on the Regional Integrated model of Climate and the Economy (RICE), are used. Only one parameter of the model, emissions from the rest of the world, which has not been estimated in previous studies, is estimated in this thesis using Australian databases including the Australian National Accounts and Australia’s National Greenhouse Accounts.

Findings – The results show that a variable emissions tax or subsidy should be set to be pro-cyclical to business cycles so as to be able to provide motivation for firms to make abatement efforts. The results also show that when using a fixed emissions tax system, when the marginal cost of emissions does not change over time, the system loses its power to motivate firms to make abatement efforts. The results also indicate that under a variable tax or an abatement subsidy policy, emissions are less affected by business cycles and thus, they can enable the government to stabilise emissions. Additionally, the cumulative impact of various emissions reduction policies over the entire adjustment period reveals that a fixed tax program has the lowest cumulative effect on emissions and output. This implies that the policy choice depends on the regulator’s perspective and priorities. If the regulator’s priority is emissions reduction during a boom period, a subsidy or a variable emissions tax is the appropriate solution, while if the regulator’s main concern is to minimise the impact on output, a fixed emissions tax is preferable.

Research Contributions – This thesis provides the first analysis of Australian environmental policy in the presence of TFP shocks. It does so by applying a DSGE model. This thesis also contributes to the environmental DSGE literature by extending Heutel (2012) in three ways: the scenarios tested, parameterisation and analysis technique. This is the first study in the environmental DSGE literature to compare a fixed versus a variable emissions tax scenario. In addition, this thesis finds that the approach Heutel (2012) used to parameterise one of his exogenous variables, emissions from the rest of the world, would make it endogenous in such a way that any changes in domestic emissions would result in a change in emissions from the rest of the world. To avoid this distortion the current research applies another approach by calculating emissions from the rest of the world under a business-as-usual scenario and using that value in emissions reduction scenarios. In addition, this thesis conducts a policy analysis in a dynamic context by calculating the cumulative effects of a TFP shock on variables under different emissions pricing programs. This technique can capture the effects of emissions reduction programs, not only on the steady state values of key variables, but also on the response paths of variables to shocks and thus, it can express the total effects of the shock under an emissions reduction program. Finally, this thesis contributes to policy analysis by providing unique insights into the costs and benefits of Australian emissions pricing programs by investigating the outcomes of such programs in boom and recession periods.