PROJECTS

Effect of Carbon Tax on Small and Medium Enterprises in Australia

The problem

The Australian government proposed a tax on carbon dioxide emissions as a precursor to an emissions trading scheme. However, its major trading partners and competitors did not price carbon. While the Government thought that only large emitters—which would be taxed directly—would be affected by the tax, small and medium enterprises (SMEs) would have faced indirect effects.

How we helped

Castalia estimated the indirect effects of the proposed carbon tax on manufacturing SMEs for the Australian Chamber of Commerce and Industry. We constructed a financial model for a representative firm in each sector. Financial modeling was done after surveying a sample of companies in the chemical and metals sectors that either export their products or compete with imports. Due to international trade, prices for the output of these businesses would remain unchanged after the tax. However, their costs would go up. We assessed the effects of the carbon tax on the costs of inputs, and the effects of higher costs on the SMEs where they could not be passed to consumers. We concluded that the carbon tax would reduce the profitability of trade-exposed SMEs by up to a third, with the consequential effects on investment and employment.

Impact

The Australian Chamber of Commerce and Industry used our findings to strengthen their argument that the proposed carbon tax would affect trade-exposed SMEs and would simply result in leakage of emissions from Australia to other countries. This evidence added to the broad opposition from across all sectors of the economy. The government eventually decided not to proceed with the carbon tax.