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Australia's Carbon Tax Experiment Goes Up in Smoke

Stocks in this article: XOM BTU

NEW YORK (TheStreet) -- In what's being seen as a setback to anti-global warming legislation around the world, Australia on Wednesday repealed its much-debated carbon tax on emissions from industrial sources.

Repeal of the bill has been widely expected since Prime Minister Tony Abbott's election in 2013. Abbott ran on a platform that included lifting of the levy on the grounds that it hurt families and did nothing for the environment. 

Quoted in news reports Thursday out of Australia, Abbott said the repeal was a major political victory and families could expect to see lower power bills coming soon and average savings of $550 a year as a result.

Bill Shorten, leader of the Opposition, vowed to revive the tax and said "history will judge Tony Abbott harshly for refusing to believe that action is needed on climate change."

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Manmade carbon dioxide in the atmosphere and its secondary effects are raising the earth's temperature, causing havoc with weather systems, melting sea ice, raising sea levels and raising the threat of agricultural and health-related disasters. Putting a cost on carbon emissions for industry has been a key strategy to slow growth of CO2 levels and ultimately reverse the trend of pumping more and more of it into the atmosphere.

The World Bank sees efforts like Australia's carbon tax as an important part of the global effort to reduce greenhouse gas emissions. While Australia's carbon output is small compared to the rest of the world, on a per capita basis among the G20 nations it ranks slightly ahead of the U.S., second to No. 1 Saudi Arabia.

Since the 2009, Exxon (XOM) has been a leading proponent of a carbon tax in the U.S. In a statement on its Web site, the company said, "If policymakers do move to impose a cost on carbon, we believe that a carbon tax would be a more effective policy option to reduce greenhouse-gas emissions" providing the revenue was used to grow investment in cleaner energy.

Peabody (BTU), the world's largest coal producer with significant mining operations in Australia and China, stands opposed to government regulations like a carbon tax. In a statement on its Web site, the company noted that Australia's attempt at a tax raised energy prices "to double that of other nations" and added that such measures are "lessons, not models for energy policy."

Interviewed by TheStreet in May, Adele Morris of the Brookings Institution said the biggest problem with Australia's carbon tax was not the tax itself but the way it was implemented.

"Many industries would prefer a well-designed carbon tax to EPA regulations," Morris said, calling Australia's experience "an example of how not to do a carbon tax." Two important aspects of such a well-designed tax would be a gradual increase in cost and clear direction for the revenue raised.

The Australians started out their carbon tax at a fairly high level with the plan to eventually transition to a cap-and-trade system that would have lowered the carbon cost relative to the tax, Morris said. The beauty of a carbon tax is that it gives industries time to adjust the new standard, even retaining older, less efficient equipment until it becomes uneconomical. Starting the tax at a high level undercuts that effort.

"What you want to do is start gradually and ramp up the price signal over time and have a price trajectory that is credible and predictable and you also want to use the revenue in a way that promotes economic growth and protects poor households," Morris said.

"I think the U.S. can learn from that example and do a much better job," Morris said.

While movement in favor of a carbon tax has been strong in recent months, legislation creating such a tax is viewed as a political non-starter on Capitol Hill.

-- Written by Carlton Wilkinson in New York

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