Carbon price would be less painful than strong dollar

The Australian dollar is still rising

Australia’s economy has felt a bigger impact from the recent surge of the Australian dollar than it would have from the introduction of a carbon price, according to a report released today.

The research by leading consultants Access Economics, compares the economic impact of the rising value of the Australian dollar with a price on carbon. 

Exchange rate movements can be compared to the introduction of a carbon price because they both have impacts across an economy and force firms nationwide to adapt to the new conditions.

An appreciating currency makes Australia exports more expensive while making imports less expensive, resulting in a shift from Australian producers to overseas producers, with the accompanying reduction in output.

A price on carbon, by raising input costs such as electricity, also reduces the international competitiveness of Australian producers, thus reducing output.

The Access Economics report considered two scenarios – the introduction of a carbon price and an equivalent increase in the value of the Australian dollar relative to the rest of the world.

The report concluded a 20 per cent increase in Australia’s exchange rate – the amount that the Australian dollar has risen against the US dollar since 2007 – is estimated to produce the equivalent reduction in real GDP of an $85 per tonne carbon price.

Clean Energy Council Chief Executive Matthew Warren said the research showed a carbon price is not going to wreck the Australian economy.

“We have just lived through an exchange rate shock nearly twice as big as an aggressive Carbon Pollution Reduction Scheme. There is some sectoral pain but it’s otherwise business as usual,” he said.

“Australians want action on climate change and cheaper clean energy. A cap and trade system remains the most efficient way to constrain greenhouse emissions and remove the regulatory uncertainty needed to stimulate new cleaner energy investment.”