Economic Impacts of a Carbon Tax on the Australian Tourism Industry

Abstract

The article assesses the potential economic effects on the Australian tourism industry from the introduction of a carbon tax introduced July 1, 2012. The tax is projected to lead to changes in key macroeconomic variables, reducing growth in real GDP, real consumption, and employment. Most tourism industries in Australia will experience a small but significant contraction in output relative to projected baseline values over the period to 2020 in line with a reduction in growth for the economy as a whole. A slightly larger reduction in tourism employment, relative to that of other Australian industries, is projected for the period. The largest falls occur in the Accommodation; Air and water transport; and the Cafes, restaurants and food outlets industries. Since direction of impacts on the tourism industry can be expected to be similar for any pricing scheme to reduce carbon emissions, the analysis has implications for tourism policy globally.

Keywords

carbon tax economic impacts Australian tourism climate change computable general equilibrium model

Introduction

Scientific opinion suggests that climate change is a global challenge that requires a long-term global solution in order to avoid environmental, social, and economic dislocation (IPCC 2007a, 2007b). Greenhouse gases (GHGs) cause damage both within and also well outside the country in which they occur. Once emitted into the atmosphere, their impact is substantial and long-lasting, for both developed and developing economies. The adverse consequences of climate change, and the costs imposed for their amelioration, will last for generations and will require fundamental shifts in consumer and business behavior (UNWTO-UNEP 2008).

Tourism and climate change can be considered as “a two-way street,” with climate influencing tourism and tourism influencing climate (Patterson, Bastianoni, and Simpson 2006). That is to say, tourism industries are not just potential victims of climate change but also contributors to the climate change problem. Tourism firms contribute to emissions, either directly (e.g., through transport use of fuels) or indirectly (e.g., through a hotel’s use of electricity generated by fossil fuels). And since tourism demand extends over a large range of goods and services, firms outside of the tourism industry generate GHGs in producing goods and services used to meet tourist needs. A growing number of papers now address issues of climate change and tourism. One area of the literature deals with the impact of climate change on tourism and the impact of tourism on climate change (Nicholls 2004; Bigano, Hamilton, and Tol 2006; Berrittella et al. 2006; Amelung, Nicholls, and Viner 2007; UNWTO-UNEP 2008; Jop, DeLacy, and Mair 2010; Eugenio-Martin and Campos-Soria 2010; Jones and Phillips 2011). Another area of the literature has addressed the effects of climate change mitigation policies on tourism flows (Simpson et al. 2008). Within this area, a number of researchers have examined the effects on tourism flows and destination choice of carbon taxes on aviation (Mayor and Tol 2007, 2010; Hofer, Dresner, and Windle 2010). However, none of this research addresses the impact of climate change mitigation measures on the tourism sector as a whole, which is the concern of this paper.

Climate change mitigation aims to reduce the severity of the levels and impacts of GHGs. From a policy perspective, governments are interested in determining which policies are effective in reducing emissions at minimum costs. From the industry perspective, there is interest in how specific policies will impact on particular sectors or destinations. Similar to other industries, tourism will be affected by the various types of mitigation policies that are being formulated to address the carbon emissions associated with economic activity. Since tourism is an industry that depends substantially on the natural environment, stakeholders have a particular interest and concern in how the policies that are being developed to mitigate the impacts of climate change will impact on their operations and also in how successful such measures will be in mitigating damaging effects on that environment.

Australia’s carbon pollution represents 1.5% of global emissions of greenhouse gases, making it one of the top 20 polluting countries in the world. Australia produces more carbon pollution per person than any other developed country in the world (World Resources Institute 2010). The Government has committed to reduce carbon pollution by 5% from 2000 levels by 2020 irrespective of what other countries do, and by up to 15% or 25% depending on the scale of global action. The release of the report Securing a Clean Energy Future—the Australian Government’s Climate Change Plan (the Plan) represented a significant reform for the Australian economy (Commonwealth of Australia 2011). The Plan was designed to transition Australia to a low-carbon, clean energy economy through initiatives in four key areas—carbon pricing, renewable energy, energy efficiency, and land management. The plan’s centerpiece involved the pricing of carbon dioxide and other GHG emissions, covering almost the whole of the economy, with a target of reducing the country’s carbon emissions by at least 159 million tonnes annually by 2020. With some amendments, the legislation for introduction of the Plan was approved by the Australian Parliament in November 2011 with the provisions for the pricing of carbon coming into effect on July 1, 2012.

Many countries have put a price on carbon pollution to create economic incentives for industry to reduce pollution, though these are limited in their application. Thirty-one European countries have a price on carbon pollution through emissions trading schemes. The European Union is currently the only economic region in the world with a comprehensive regulatory system to address GHG emissions. The EU Emissions Trading Scheme (EU ETS) constitutes the largest multicountry, multisector carbon emission trading scheme in the world. The EU scheme includes energy and, from 2012, aviation. New Zealand is the first country to implement an economy-wide scheme, which commenced in 2010. Limited carbon taxes are also in place in the United Kingdom, India, Switzerland, Denmark, Finland, Norway, Sweden, the Netherlands, Costa Rica, and Ireland (Productivity Commission 2011).

The key focus of this article is to assess the potential economic impacts of introducing the proposed carbon price on the Australian tourism industry, using a dynamic multisectoral, multiregional computable general equilibrium (CGE) modeling approach. As far as we can determine, this study represents the first attempt to measure the impact of general climate change mitigation policies on a tourism industry.

The paper is structured as follows. First, the workings of a carbon tax or emissions trading scheme (ETS) are reviewed to determine the role that such a policy instrument can play in affecting tourism demand and supply. Second, the key features of the proposed carbon tax/ETS for Australia are presented and the likely effects on tourism are explored. The paper then outlines briefly the structure of the Monash Multi-Regional Forecasting (MMRF)–GREEN model, which is used to assess the possible economic effects of the proposed tax on the Australian tourism industry, providing a description of the simulation scenarios developed. Fourth, the simulation results for Australian tourism output, gross value added (GVA), gross domestic product (GDP), and employment are reported. It is concluded that while most sectors of the tourism industry in Australia (or “tourism industries”) will experience contractions in output, contribution to GDP and employment relative to projected baseline values, in line with the general shrinkage of the tourism sector as a whole, some tourism industries will actually expand. Some concluding comments are made on the policy implications of the findings.

Imposing a Price on Carbon and Tourism

There are two key approaches that can be taken by governments to bring about a lowering of carbon emissions: direct action measures or the placing of a price on the production of carbon emissions through introduction of a carbon tax or some form of ETS.

With direct action, the government intervenes to direct businesses and households to lower GHG emissions or provides direct assistance for the development or introduction of lower emissions technologies. Examples include closing high-emissions factories or power plants, subsidies for low-emissions products, restricting new investment in high-emissions sectors, and support for research and new technologies. Such direct actions do not increase government revenue and may have negative effects on productivity growth and incomes. Direct action is the approach favored by the main opposition party in the Australian Federal Parliament and is being widely adopted internationally, either as the primary approach or as a part of a broader approach, which also includes pricing measures.

In contrast to direct action, a carbon pricing mechanism raises the price of products that generate carbon emissions. A carbon tax achieves GHG emissions through two broad effects—a demand effect, reducing energy (and other sources of CO₂) demand because of higher prices, and a substitution effect, with switching from more to less carbon-intensive fuels (Winkler and Marquard 2009). With a carbon tax, the government sets the price of carbon. The resulting market forces determine how much the quantity of emissions is reduced. While such taxes can have negative effects on productivity growth and incomes, the increase in government revenue can be used for compensation to ease the burden on those most disadvantaged by the scheme, to encourage productivity, or to promote low-emissions technology. A carbon pricing mechanism can, therefore, give rise to a wide range of responses generating abatement, based on consumer and producer assessments of the relative costs and benefits to them. It is this market-based objective assessment of the costs and benefits of abatement options that underpins why direct pricing mechanisms generally are likely to deliver any given amount of abatement at least cost to the economy as a whole (Productivity Commission 2011).

The most common form of pricing carbon is a cap-and-trade, or ETS, scheme that sets a limit on the amount of emissions, with permits issued that allow holders to emit GHGs up to a quantitative cap. Businesses must hold enough permits to cover the GHG emissions they wish to generate each year. The amount of allowed emissions determines their environmental effectiveness as firms can only generate GHGs to the extent that they have permits. Permits can be traded, thus establishing a market “price” for emissions. The total number of permits issued to all companies cannot exceed the emissions cap, limiting total emissions to that level. Firms desiring to increase their emission permits must buy them from companies that require fewer permits. Thus, permit buyers pay a charge for polluting more, while sellers are rewarded for reducing emissions.

The measures that have been introduced by the Australian Government, though widely referred to as a carbon tax, actually involve implementing a fixed-price ETS from July 2012 and then shifting to a standard ETS within three years. During this period, there is no cap. Since carbon permits are assignable personal property created by statute, they do not constitute a tax in the legal sense. That said, an ETS works in a similar fashion to a tax, by directly raising energy prices to consumers and implicitly subsidizing producers of “clean” products. Any ETS has a “tax equivalent” that would deliver precisely the same amount of abatement from the same sources for the same resource cost. With this in mind, we use the term carbon tax/ETS in this article to describe the Australian government measures while carbon tax and ETS are used interchangeably in more generic references to carbon pricing.

Key Features of Australia Carbon Tax/ETS

The principal features of the measures introduced in Australia in July 2012 are as follows:

The Plan is to include all greenhouse gases included under the Kyoto Protocol: carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), sulphur hexafluoride (SF₆), hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs).

Sectors covered include stationary energy; industrial processes; transport fuel use in domestic shipping, domestic aviation, and rail transport; and nontransport uses of fuel; fugitive emissions; and emissions from nonlegacy waste. A carbon price will not apply to household transport fuels, light vehicle business transport, and off-road fuel use by the agriculture, forestry, and fishing industries.

Three hundred of the biggest polluters in Australia will be required to buy (or in some cases have issued to them) permits that must be surrendered to the Government on the basis of one permit for every tonne of carbon pollution they emit.

Permit holders will be able to pass on the cost of their permits through the pricing of their products. Producers who are not required to purchase permits will pay indirectly through their use of inputs for which permits have been purchased including, in particular, electricity. All producers will be able to add the additional costs into the pricing of their products (where they are able and choose to do so) with the costs ultimately passing through the economy to consumers.

Carbon pricing is to be delivered in two phases: a fixed price for 3 years followed by a flexible price thereafter.

During the fixed-price phase of three years commencing on July 1, 2012, the quantity of permits will be uncapped. The carbon price per tonne is to be $23 in year 1, $24.15 in year 2, and $25.40 in year 3.¹ These are higher than current prices in comparable global markets, due in part to the currently strong Australian dollar but broadly comparable with the forward prices for the EU ETS quoted for 2015. Arguably, the use of a fixed-price phase provides initial certainty and enables better management of many aspects of the introduction of a carbon tax. Under the Plan, permits could still be traded among emitters and potential emitters, even in the period when there is a fixed price.

The flexible price phase is to be introduced on July 1, 2015, at which time the price of carbon will be determined through an ETS with a transitional price cap and floor applied. As currently proposed, the price ceiling will be set at $20 above the expected international price and will rise by 5% in real terms each year. The price floor will be $15, rising annually by 4% in real terms. The price in the flexible phase will be determined by a range of factors, including the stringency of the cap set, the extent of links to international markets, and the extent of supply from Australian-based carbon offsets.

The number of permits will be subject to an annual cap as from 2015. The Government will announce the first five years of caps in its 2014 Budget. The pollution cap will be extended by one year every year in regulations by a Climate Change Authority from 2015 to 2016 to maintain five years of known caps at any given time. The price of carbon will then be determined by supply and demand.

The carbon price will be accompanied by assistance supporting households, jobs, businesses and communities, to help them adjust, lower their carbon pollution, and to protect Australia’s international competitiveness. All revenue raised from the sale of carbon permits will be used to encourage investment in clean energy activities and to ease the cost burden of transition. Assistance to households will be provided mainly through a Clean Energy Supplement that includes tax cuts and increased tax thresholds, and increased family payments and pensions, and a Jobs and Competiveness Program and Clean Technology Program to assist a number of different industry sectors through both direct and indirect mechanisms (Commonwealth of Australia 2011). It is recognized that emissions intensive export industries, such as aluminum smelting, will lose their international competitiveness, and the government has introduced assistance packages. However, there is no assistance for the tourism industry, which is subject to strong international competition.

In this article, we concentrate on the results to the year 2020, given that the Australian Government has undertaken to achieve particular goals in carbon reduction. The model can be used to estimate impacts further into the future.

Modeling the Impacts of the Carbon Price on Australian Tourism

Although the carbon tax/ETS, came into effect on July 1, 2012, there remain some uncertainties that impact on modeling the impacts of the scheme for Australia’s tourism industry. One type of uncertainty relates to the price of carbon after 2015 when the standard ETS takes effect. This lack of certainty arises in turn from the level of the cap on emissions that will be set from 2015 onwards. The lower the cap, the higher will be the price of emissions permits and vice versa. For present purposes, we have assumed the price of permits to be $25, which is close to the average of the fixed prices of emissions permits in the initial three years of the scheme. Another area of uncertainty relates to the extent to which the scheme will link with international carbon markets. If Australia is linked closely to international markets, and prices in these markets are low, the Australian carbon price will be low (and revenues from permit sales will also be low). It is questionable whether the government will allow this to be the case. Regular reviews will support the ongoing development and continued relevance of the measures. These reviews, which cover the components of the scheme including targets, trajectories, the price mechanism and assistance mechanisms, introduce further uncertainties as to its outcomes. The modeling underlying this study is based on the version of the scheme that was set out in the government’s initial green paper (DCC 2008a, 2008b, 2008c, 2009, 2010). This was based on a similar target of a 5% cut on year 2000 emissions by 2020 and can be regarded as having broadly similar impacts in terms of the model.

The MMRF-Green Model

Because of their computational rigor and extensive analytical capability, CGE models have become the preferred policy-analysis technique in many developed countries for examining economy-wide effects of policy changes. CGE models have been applied increasingly to analyze different tourism issues and study possible economic impacts of tourism shocks on the tourism industry and the wider economy (Adams and Parmenter 1995; Blake, Sinclair, and Sugiyarto 2003; Blake, Sinclair, and Gillham 2006; Blake et al. 2007; Sugiyarto, Blake, and Sinclair 2003; Dwyer et al. 2003; Dwyer, Forsyth, and Spurr 2006; Meng et al. 2010). Standard demand modeling approaches (Seetaram 2010; Assaf, Barros, and Gil-Alana 2011) are unsuitable for the task here. While they provide elasticities of demand for tourism, they are not economic impact models and do not address the industry interactive effects essential to understanding the economic impacts of demand shocks to tourism.

To estimate the impacts of the proposed carbon tax/ETS on the Australian tourism industry the authors have used an updated version of the MMRF-GREEN model, a dynamic multisectoral, multiregional CGE model of the Australian economy (Adams et al. 2000a, 2000b) that can be used to simulate changes in the Australian economy over time including the impacts of variations to specific economic variables at the macro level or specific to individual component industries. The MMRF-GREEN model consists of 58 industries, 63 commodities, eight state/territory regions and three primary factors of production: labour, capital and land. There are five agents in the model: industries, capital creators, households, governments and foreigners. Regions are modeled as having a single representative household and a regional government. There is also a central (federal) government. A particular feature of this model is that it has a detailed greenhouse gas (GHG) emission–accounting component, giving the model an enhanced capability for analyzing environmental policies. This is very rare among CGE models. Emissions are measured in terms of carbon dioxide equivalents (CO₂-e). MMRF-GREEN has been used extensively by various state and Australian government agencies (Victorian Auditor General 2007; Productivity Commission 2007). Recently, it was used in the Garnaut Climate Change Review commissioned by Australia’s federal, state and territory Governments to examine the impacts of climate change on the Australian economy (Garnaut 2008, 2011).

MMRF-GREEN produces results for economic variables on a year-on-year basis. It uses most of the dynamic properties of the MONASH national CGE model (Dixon and Rimmer 2002). These include incorporation of equations relating investment to capital in year-to-year simulations, equations explaining the relationship between year-to-year capital growth and rate-of-return expectations, and equations that facilitate the running of forecasting and dynamic policy simulations into the model. A complete description including the theoretical structure of the MMRF-GREEN model is provided in Adams et al. (2000b).The model is solved using the GEMPACK (General Equilibrium Modelling PACKage) software, developed by the Centre of Policy Studies and the Impact Project, Monash University (Harrison and Pearson 1996).

The estimates of the impacts of the carbon tax/ETS on the Australian tourism industry are derived by linking CGE model and Tourism Satellite Account (TSA) methodology. Notwithstanding the issues comprising the debate as to whether tourism is or is not an “industry,” estimates of tourism’s economic contribution and impacts depend on a clear delimitation as to its scope. For this purpose, we follow the definition of tourism as set out in the International Recommendations for Tourism Statistics advocated by the UNWTO (UNWTO-UNEP 2008). The tourism industries listed in the tables are those that are identified in the Australian Tourism Satellite Account (ATSA) as tourism-related industries (ABS 2009) which are broadly consistent with the international recommendations. ATSA divides these into two types, tourism characteristic and connected industries. Tourism characteristic industries are defined as those industries that would either cease to exist in their present form or would be significantly affected if tourism were to cease. For an industry to be “characteristic”, at least 25% of its output must be consumed by visitors. Tourism-connected industries are those industries other than tourism characteristic industries for which a tourism-related product is directly identifiable and where the products are consumed by visitors in volumes that are significant for the visitor and/or for the producer (TSA, RMF 2008). In the Australian TSA, 6 industries are classified as “characteristic”, and 13 are classified as “connected” as shown in Table 1. All remaining products and industries are classified into “all other goods and services” or “all other industries,” respectively.

Table 1.

Tourism Characteristic and Connected Industries, Australia

Tourism Characteristic Industries	Tourism-Connected Industries
• Travel agency and tour operator services	• Clubs, pubs, taverns and bars
• Taxi transport	• Other road transport
• Air and water transport	• Rail transport
• Motor vehicle hiring	• Food manufacturing
• Accommodation	• Beverage manufacturing
• Cafés, restaurants, and food outlets	• Transport equipment manufacturing
	• Other manufacturing
	• Retail trade
	• Casinos and other gambling services
	• Libraries, museums, and arts
	• Other entertainment services
	• Education
	• Ownership of dwellings

Source: Australian Bureau of Statistics (2009).

Following identification of Australia’s “tourism industry,” we mapped tourism characteristic and connected industries, and “all other industries” (see Table 1) listed in the Australian Tourism Satellite Account (ABS 2009) onto the MMRF-GREEN industries (since the two industry sets do not match precisely). In the case of industries where there is no one-to-one mapping between MMRF-GREEN industry and TSA industry, we use weighted average results to simulate TSA industry values. This approach of integrating tourism economic contribution measures derived from TSA with the industry structure contained in an economic impact tool such as a CGE model represents an innovative approach to solving the problem of defining the tourism industry for purposes of economic measurement, and it has been adopted in several tourism impact studies (e.g., Dwyer et al. 2005; Dwyer and Forsyth 2008, Dwyer et al. 2010) and more recently to address tourism–climate change issues (Pham et al. 2010).

Impact on Tourism Consumption

Tourism consumption is a TSA concept akin to visitor expenditure except for the inclusion of certain unpriced items such as imputed rents on owner-occupied holiday houses and expenditure incurred by their hosts on behalf of visitors staying with friends and relatives. In Australia, TSA consumption is estimated by the central statistical agency (ABS 2010). These data have been mapped to MMRF-GREEN industries to allow incorporation into the CGE model projections. CGE model simulation results are then compared with the baseline projections for tourism for the period 2012-2020. Baseline projections represent the business-as-usual case with no carbon price included in the modeling.

As shown in Table 2, the simulation results indicate that with the carbon tax/ETS in place, real total tourism consumption falls by 1.56% relative to the baseline value projected for tourism in 2020 in the absence of a price on carbon being imposed. This is equivalent to a reduction of about $2,012 million in today’s dollars. Similarly, real domestic and international tourism consumption falls respectively by about $1,054 million and $958 million in today’s dollars relative to their baseline values in 2020.

Table 2.

Tourism Consumption, Deviation from Baseline Forecasts Resulting from Net Impacts of Carbon Tax/ETS, Australia, Selected Years (in Australian dollars)

Deviation from Baseline Forecasts	2015	2020
Total tourism consumption, $m	−1,360.92	−2,012.11
Total tourism consumption, %	−1.22	−1.56
Domestic tourism consumption, $m	−497.48	−1,053.79
Domestic tourism consumption, %	−0.63	−1.17
International tourism consumption, $m	−863.44	−958.32
International tourism consumption, %	−0.265	−2.47

Source: Author simulations.

Note: ETS = Emissions Trading Scheme.

Table 2 also shows results for domestic and inbound tourism consumption because of a decline in the number of visitors (domestic and foreigners) and a decrease in visitors’ expenditure. The results show that the carbon tax/ETS will have more impact on consumption associated with inbound tourism (2.47%) than consumption associated with domestic tourism (1.17%).

Impact on Tourism Output

Tourism industry output measures the value of goods and services produced by establishments to satisfy visitor consumption, excluding net taxes (taxes less subsidies). It is derived from Tourism Consumption using ABS supply and use tables as part of the construction of the national TSA and mapped by the authors to match the industry classifications in MMRF-GREEN. Total tourism industry output in Australia in the base year 2007-2008 was $74.2 billion. Table 3 indicates that for the MMRF-GREEN model simulation forecast (business-as-usual case), the value of tourism output in 2020 is $113.4 billion in 2007-2008 dollar value. With the carbon tax/ETS in place, real tourism output falls by 0.73% relative to its baseline value in 2020. This is equivalent to a reduction of about $826.5 million in 2007-2008 dollars.

Table 3.

Projected Impacts of Carbon Tax/ETS on Tourism Output, Australia, Selected Years (in Australian dollars)

Tourism Output	2007-2008	2015	2020
Tourism output (actual estimate), $m	74,232	–	–
Baseline forecast (business-as-usual case), $m	–	95,167	1,13,452
Policy forecast (with ETS in place), $m	–	94,695	1,12,626
Net impacts of ETS (deviations from baseline), $m	–	−472.04	−826.52
Net impacts of ETS (deviations from baseline), %	–	−0.50	−0.73

Source: Australian Bureau of Statistics (2009), plus author simulations.

Note: ETS = Emissions Trading Scheme.

The results in Table 3 indicate that the tax sets in train changes across the economy that will impact on the tourism industry. The prices of inputs to the tourism industry rise, eroding the price competitiveness of Australia as a destination. The increase in the real exchange rate, incorporated within baseline projections due primarily to Australia’s mining export boom, will lead to a reduction in exports. The appreciation of the real exchange rate should further negatively affect the growth of inbound tourism (tourism exports). Tourism imports will be affected as the higher exchange rate generates more outbound travel (Seetaram 2010).

Figure 1 shows percentage deviations from baseline values for real tourism output and total output (all industries including tourism) during the simulation period from 2012 to 2020. Until 2014, the percentage fall in tourism output is not as great as the percentage fall in total output, but the percentage deviations become closer after that date. Given the reduced price competiveness of Australia into the future, the percentage deviation of tourism output may well become greater over time than Figure 1 indicates.

Figure 1.

Impacts of carbon tax/ETS on the Australian (national) tourism output and total (all industries including tourism) output during the simulation period from 2012 to 2020: percentage deviations from the baseline forecast

Table 4 presents tourism output by Australian Tourism Satellite Account (ATSA) industry sector for two periods, 2007-2008 and 2020. The tourism industries listed are those that are identified in the ATSA as tourism-related industries (comprising tourism characteristic and tourism-connected industries). In addition, an “other industries” category is identified for industries that produce tourism output but are not classified as tourism related. The first column of Table 4 shows tourism output by TSA sector in million Australian dollars for 2007-2008 taken from the ABS national Tourism Satellite Account 2007-2008 ( ABS 2009). The figures in the remaining columns of Table 4 are derived from CGE simulation results. Columns four and five show deviations (million dollars and percentages) from baseline values for real tourism output by TSA industry sector nationally in 2020.

Table 4.

Net Effect of Carbon Tax/ETS on the Tourism Industry Output, Australia, 2020 (in Australian dollars)

	2007-2008	2020
Tourism Industry	Tourism Output (Actual Estimate), $m	Baseline Forecast (Business-as-Usual Case), $m	Policy Forecast (with ETS in Place), $m	Deviations from Baseline, $m	Deviations from Baseline, %
Travel agency and tour operator services	2,270	3,847	3,830	−16.54	−0.43
Taxi transport	821	1,341	1,321	−19.84	−1.48
Air and water transport^a	11,936	21,304	21,131	−173.66	−0.82
Motor vehicle hiring	1,191	2,018	2,010	−8.68	−0.43
Accommodation	9,889	14,568	14,376	−192.30	−1.32
Cafes, restaurants and food outlets	9,972	14,690	14,496	−193.91	−1.32
Clubs, pubs, taverns and bars	2,488	3,665	3,617	−48.38	−1.32
Other road transport	2,208	3,605	3,552	−53.36	−1.48
Rail transport	1,086	1,931	1,956	24.72	1.28
Food manufacturing	3,808	5,566	5,564	−1.16	−0.02
Beverage manufacturing	1,950	2,825	2,837	11.30	0.40
Transport equipment manufacturing	531	707	709	2.06	0.29
Other manufacturing	2,624	3,496	3,508	12.70	0.36
Automotive fuel retailing	863	1,189	1,182	−7.25	−0.61
Retail trade	7,189	9,904	9,843	−60.41	−0.61
Casino and gambling	323	456	451	−4.69	−1.03
Library museum and art	850	1,199	1,187	−12.35	−1.03
Other entertainment	1,726	2,435	2,409	−25.08	−1.03
Education	3,135	4,628	4,622	−6.02	−0.13
Ownership of dwelling	2,961	4,039	4,024	−14.54	−0.36
Other industries	6,411	10,040	10,001	−39.13	−0.39
Total	74,232	1,13,452	1,12,626	−826.52	−0.73

Source: Australian Bureau of Statistics (2009), plus author simulations.

Air and water transport refers to Australian-based airlines and water transport companies. ETS = Emissions Trading Scheme.

The simulation results indicate that the majority of tourism industries experience a contraction in their real output relative to baseline values. The most negatively affected tourism industries include the Accommodation; Cafes, restaurants, and food outlets; and Air and water transport industries. Their real output falls respectively by 1.32%, 1.32% and 0.82% relative to their baseline value in 2020 (column five). These are, respectively, equivalent to reductions of $193.9 million, $192.3 million, and $173.7 million in 2007-2008 Australian dollars (column four). While most tourism industries experience at least a small contraction in their real output relative to baseline values, there are some that experience expansion. The most favorably affected is the Rail transport industry (which in Australia is small). The real output of this industry grows by 1.28% relative to baseline values in 2020. This is because the emissions price causes substitution toward the Rail transport industry against the high-emissions transport industries (Air and water transport, and Other road transport industry). As the “net effect” reveals, the reductions in contribution to tourism output experienced by the tourism characteristic industries, in particular, far outweighs the gains to less “core” tourism industries.

Tourism Gross Value Added

Tourism gross value added (TGVA) measures the value of tourism gross output at basic prices by all industries that supply tourism products, less the value of the inputs used in producing these tourism products. Again, it is a TSA concept used in the Australian national TSA. For the purposes of the CGE modeling, the TSA industries have been mapped to the industry structure of the MMRF-GREEN. Value added is the most widely accepted measure of the contribution of an industry to the economy and as such might be regarded as the most informative of the economic measures projected in the modeling.

As shown in Table 5, TGVA in Australia in 2007-2008 was $33.7 billion. The CGE model simulation forecast (business-as-usual case) value of TGVA in 2020 is $51.7 billion in 2007-2008 Australian dollars. With the carbon price in place, real TGVA falls by 0.70% relative to its baseline value in 2020. This is equivalent to a reduction of about $361.4 million in 2007-2008 dollars.

Table 5.

Projected Impacts of Carbon Tax/ETS on Tourism Gross Value Added, Australia, Selected Years (in Australian dollars)

Tourism GVA	2007-2008	2015	2020
Tourism GVA (actual estimate), $m	33,732	–	–
Baseline forecast (business-as-usual case), $m	–	43,444	51,720
Policy forecast (with ETS in place), $m	–	43,239	51,358
Net impacts of ETS (deviations from baseline), $m	–	−204.97	−361.42
Net impacts of ETS (deviations from baseline), %	–	−0.47	−0.70

Source: Australian Bureau of Statistics (2009), plus author simulations.

Note: ETS = Emissions Trading Scheme; GVA = Gross Value Added.

Figure 2 shows percentage deviations from baseline values for real tourism GVA and total industry GVA (all industries including tourism) during the simulation period from 2012 to 2020. Until 2014, the percentage fall in tourism GVA is not as great as the percentage fall in total GVA, but the percentage deviations become closer until 2018-2020 when the percentage fall in tourism GVA again is below the percentage fall for all Australian industry.

Figure 2.

Impacts of carbon tax/ETS on Tourism GVA and Total GVA (all industries including tourism) for Australia during the simulation period from 2012 to 2020: percentage deviations from the baseline forecast

Table 6 shows TGVA by TSA industry sector for two time periods. The first column of Table 6 shows TGVA by TSA sector for 2007-2008 (ABS 2009). The figures in the remaining columns of Table 6 are derived from CGE simulation results. Columns four and five show deviations ($million and percent) from baseline values for real TGVA by TSA industry sector nationally in 2020.

Table 6.

Net Effect of Carbon Tax/ETS on Tourism Industry Gross Value Added, Australia: Deviations from the Baseline Forecast, 2020 (in Australian dollars)

	2007-2008	2020
Tourism Industry	Tourism GVA (Actual Estimate), $m	Baseline Forecast (Business-as-Usual Case), $m	Policy Forecast (with ETS in Place), $m	Deviations from Baseline, $m	Deviations from Baseline, %
Travel agency and tour operator services	1,465	2,505	2,494	−10.77	−0.43
Taxi transport	335	552	544	−8.17	−1.48
Air and water transport	4,241	7,638	7,576	−62.26	−0.82
Motor vehicle hiring	735	1,257	1,251	−5.40	−0.43
Accommodation	4,985	7,410	7,312	−97.81	−1.32
Cafes, restaurants, and food outlets	3,373	5,014	4,948	−66.18	−1.32
Clubs, pubs, taverns, and bars	1,067	1,586	1,565	−20.94	−1.32
Other road transport	936	1,542	1,519	−22.82	−1.48
Rail transport	553	992	1,005	12.70	1.28
Food manufacturing	942	1,389	1,389	−0.29	−0.02
Beverage manufacturing	704	1,029	1,033	4.12	0.40
Transport equipment manufacturing	156	210	210	0.61	0.29
Other manufacturing	885	1,190	1,194	4.32	0.36
Automotive fuel retailing	272	378	376	−2.31	−0.61
Retail trade	3,962	5,507	5,474	−33.59	−0.61
Casino and gambling	181	258	255	−2.65	−1.03
Library museum and art	462	658	651	−6.77	−1.03
Other entertainment	484	689	682	−7.10	−1.03
Education	2,417	3,600	3,596	−4.68	−0.13
Ownership of dwelling	2,432	3,347	3,335	−12.05	−0.36
Other industries	3,145	4,970	4,950	−19.37	−0.39
Total	33,732	51,720	51,358	−361.42	−0.70

Source: Australian Bureau of Statistics (2009), plus author simulations.

Note: ETS = Emissions Trading Scheme. GVA = Gross Value Added.

The simulation results indicate that, as for output, the majority of tourism industries experience contraction in their real TGVA relative to baseline values. The most negatively affected tourism industries include the Accommodation; Cafes, restaurants and food outlets; and Air and water transport industries. Their real output falls respectively by 1.32%, 1.32% and 0.82% relative to their baseline value in 2020. These are, respectively, equivalent to reductions of $97.8 million, $66.2 million, and $62.3 million in 2007-2008 dollars. While most tourism industries experience at least a small contraction in their real TGVA relative to baseline values, there are some that experience expansion. The most favorably affected is the (relatively small) Rail transport industry. Because of a positive substitution effect, real TGVA of this industry grows by 1.28% relative to its baseline value in 2020.

Tourism Employment

Total tourism employment in Australia in 2007-2008 as measured by the national TSA was 497.9 thousand persons (ABS 2009). Table 7 shows the CGE model simulation forecast (business-as-usual case) estimate of tourism employment in 2020 is 595.0 thousand persons. With the carbon tax in place, tourism employment falls by 0.52% relative to its baseline value in 2020. This is equivalent to a reduction of 3,104 jobs. This may not seem to be a particularly large figure but, as noted above, to the extent that the erosion of Australia’s price competitiveness reduces inbound tourism and increases outbound tourism, it is possible that the overall effects on tourism employment may be greater than the simulation results project.

Table 7.

Projected Impacts of Carbon tax/ETS on Tourism Employment, Australia, Selected Years

Tourism Employment	2007-2008	2015	2020
Tourism employment (actual estimate), ×1,000 persons	497.9	–	–
Baseline forecast (business-as-usual case), ×1,000 persons	–	560.7	595.0
Policy forecast (with ETS in place), ×1,000 persons	–	558.6	591.9
Net impacts of ETS (deviations from baseline), no. of persons	–	−2,109	−3,104
Net impacts of ETS (deviations from baseline), %	–	−0.38	−0.52

Source: Australian Bureau of Statistics (2009), plus author simulations.

Note: an employed person is a person aged 15 years and older who, during the reference week, worked for one hour or more for pay, profit, commission, or payment in kind in a job or business. ETS = Emissions Trading Scheme.

Figure 3 shows percentage deviations from baseline values for both tourism employment and total national employment (including tourism) during the simulation period from 2012 to 2020. In contrast to the results for Output and contribution to GVA, the reduction in employment below the projected baseline (business-as-usual) values is significantly greater for tourism throughout the period of the projections than it is for employment across the economy generally.

Figure 3.

Impacts of carbon tax/ETS on the Tourism Employment and Total Employment (all industries including tourism) for Australia during the simulation period from 2012 to 2020: percentage deviations from the baseline forecast

Table 8 shows tourism employment by TSA industry sector for two time periods. The first column of Table 8 shows tourism employment by TSA industry sector for 2007-2008 (ABS 2009). The figures in the remaining columns are derived from CGE simulation results. Columns four and five show deviations (number of persons and percentage) from baseline values for tourism employment by TSA industry sector nationally in 2020.

Table 8.

Net Effect of Carbon Tax/ETS on Tourism Industry Employment, Australia: Deviations from the Baseline Forecast, 2020

	2007-2008	2020
Tourism Industry	Tourism Employment (Actual Estimate), × 1,000 persons	Baseline Forecast (Business-as-Usual Case), × 1,000 persons	Policy Forecast (with ETS in Place), ×1,000 persons	Deviations from Baseline, No. of Persons	Deviations from Baseline, %
Travel agency and tour operator services	23.1	32.7	32.7	−61	−0.19
Road transport and motor vehicle hiring	26.6	28.1	27.8	−323	−1.15
Air and water transport	34.3	42.1	41.9	−143	−0.34
Accommodation	71.7	94.1	93.1	−1,064	−1.13
Cafes and restaurants	53.0	69.6	68.8	−787	−1.13
Clubs, pubs, taverns, and bars	23.2	30.5	30.1	−344	−1.13
Rail transport	3.4	4.5	4.6	131	2.90
Manufacturing	32.8	34.3	34.6	236	0.69
Retail trade	125.6	132.0	131.5	−494	−0.37
Casino and gambling	2.1	2.6	2.6	−17	−0.66
Library museum and art	10.9	13.5	13.5	−090	−0.66
Other entertainment	13.1	16.3	16.2	−108	−0.66
Education	36.4	43.4	43.4	5	0.01
Other industries	41.7	51.3	51.3	−44	−0.09
Total	497.9	595.0	591.9	−3,104	−0.52

Source: Australian Bureau of Statistics (2009), plus author simulations.

Note: The industries do not align in a completely consistent way with those in Table 6 because employment effects are derived differently from TGVA involving a different industry breakup. ETS = Emissions Trading Scheme.

The simulation results indicate that the majority of tourism industries experience contraction in their employment relative to baseline values. The most negatively affected tourism industries include the Accommodation; Cafes and restaurants; Retail trade; and the Clubs, pubs, taverns and bars industries. Their employment falls, respectively, by 1,064 people, 787 people, 494 people, and 344 people relative to their baseline value in 2020. While most tourism industries experience at least a small contraction in their employment relative to baseline values, there are some that experience expansion. The most favorably affected is the Rail transport industry. Employment in this industry grows by 2.90%, or 131 jobs, relative to baseline values in 2020.

Conclusions

This paper has examined the economic effects on the Australian tourism industry following the introduction of an economy-wide price on carbon through the imposition of an initial carbon tax in 2012 converting to an ETS from 2015. The purpose of introducing a price on carbon is to reduce carbon emissions from economic activity in the Australian economy. While not targeted at tourism specifically, the tourism industry will be affected by the proposed scheme.

The proposed carbon tax/ETS will create a price for carbon emissions, raising costs in those industries that directly or indirectly produce emissions, such as tourism. Even though most tourism businesses are not significant enough to be among those firms that are directly taxed under the initial carbon tax, or to be subject to emissions licensing under the subsequent ETS, placing a price on carbon will set in train changes across the economy that will impact on the tourism industry. Tourism exports will be negatively affected by rises in the price of their inputs, and also by the rise in the exchange rate projected for Australia because of its growing exports of mineral products as incorporated into the baseline projections. Tourism imports will be affected as the higher exchange rate generates more outbound travel. The implementation of a price on carbon is also likely to lead to a small reduction in real disposable incomes across the economy that will reduce demand for domestic tourism in Australia.

A particular contribution of this article is that, insofar as the authors can determine, it represents the first attempt to measure the impact of general climate change mitigation policies on a tourism industry. It does so through the use of a customized CGE model, a powerful and highly credible analytical tool that makes it possible to examine economy-wide responses that cannot be dealt with using the more conventional analytical tools used in tourism studies.

The CGE simulations reported in this paper indicate that the introduction of the carbon tax/ETS will result in a small but measurable reduction in real tourism output, TGVA, and tourism employment in Australia relative to projected base levels (business-as-usual). The impact on tourism Output and tourism GVA is less than that for the economy as a whole over the first few years of the scheme, but the reduction below projected baseline values then becomes similar to that for Australian industries generally. In the case of employment, the reduction below projected baseline values is greater for tourism than the average for the Australian economy generally throughout the period to 2020. These reductions occur since the tax is passed on through increased prices to consumers, resulting in a decline in demand for tourism goods and services. If, as expected, carbon prices continue to rise after 2020 this will increase the impact on tourism.

Climate change mitigation presents particular policy challenges for Australia, a country that is dependent on low-cost fossil fuels for almost 95% of its electricity production from which derives a substantial competitive advantage, especially for energy intensive industries such as aluminum production. Fossil fuels also directly account for more than 22% of Australia’s exports. It is also the case that policies adopted by Australia, which accounts for only 1.5% of global emissions, will have little direct effect in mitigating overall climate change. However, Australia is, at the same time, uniquely vulnerable both to climate change and to inevitable international changes in demand and pricing for high-carbon goods and materials. The proposals in the Government’s “Plan” have drawn from experience elsewhere in the world and were seen as allowing for future linking to wider carbon pricing and trading regimes. However, the pace of implementation of carbon pricing regimes internationally appears to have has slowed markedly since the global financial crisis. This has contributed to a considerable decline in public support for carbon pricing generally and criticism that the introduction of a carbon tax in 2012 at the level proposed will place the Australian economy at a competitive disadvantage in world markets.

In relation to tourism, a problem for any country that introduces a carbon tax or similar measure to mitigate the effects of global warming is that tourism is very much a footloose industry. If one country (or several, such as Australia and European countries) raise the costs of visits to their shores, travellers will switch to other destinations. For this to occur, it does not require the industry to shift plant and equipment from one country to another, as would be the case with industries such as manufacturing or mining. Rather, tourists may simply change their travel plans—something that can occur very quickly. Such tourists can switch to other destinations, at least some of which are not implementing price-based climate change mitigation policies.

The simulations for Australia indicate that with a carbon price in place, most tourism industries will experience a contraction in output, gross value added, and employment relative to their projected baseline values in line with the general shrinkage of the tourism sector as a whole and with the impacts on the overall Australian economy. The largest falls occur in the Accommodation, Air and water transport, and the Cafes, restaurants and food outlets industries. While most tourism industries experience contraction in their real output relative to baseline values, the Rail transport industry experiences an expansion, resulting from likely increases in demand as passengers shift from other modes of transport. Overall, the gains experienced by tourism-connected industries will be heavily outweighed by contractions in some of the, more important, tourism characteristic industries.

These negative effects on tourism occur regardless of whether other countries implement similar climate change mitigation policies. The reduction in GDP will mean that spending, especially domestic spending, will be reduced. The effects on inbound tourism will depend on a range of factors. In particular, should other countries not introduce equivalent price-based mitigation strategies, Australia’s loss in relative competitiveness over time would increase.

Two particular limitations to the analysis presented in this paper need to be noted. First, while a CGE model is a powerful tool for estimating the impacts of a change or “shock” to an economy, it does this by analyzing the full range of economic changes that flow through the wider economy in response to the introduction of an initial shock or change. The model does this by assuming that historical relationships between prices, exchange rates, demand and supply functions, and exchange rates continue to operate. As such, it is generally unable to deal with changes in preferences, fashion, technological change, government policy change, the economic performance of inbound visitor source markets, or externally driven changes to the terms of trade. Sometimes, several of these factors will, to some degree, be reflected in longer term trends incorporated into the model structure and hence into the baseline projections. But generally they will not all be accounted for. In this sense, the projections shown here for the years 2012-2020 inform us on the direction and values of the underlying economic forces that flow from the initial shock, in this case introduction of the carbon tax/ETS. They should not, however, be confused with forecasts for which a far more wide-ranging analysis would be required.

Second, the impacts on tourism projected by the modeling take no account of any wider benefits to the tourism industry that might flow from successful action on climate change. It is of course possible that if climate change policies are not introduced in Australia and globally then tourism industries will, in any case, experience increased costs, either as a direct result of climate change effects on tourism destinations and consumer demand, or through adaptation costs incurred by tourism businesses to manage the impacts of anticipated climate change effects (Turton, Hadwen, and Wilson 2009). Clearly, to the extent to which the operation of global climate change policies achieve their objective of mitigating the impacts of global warming, these costs would be lower than would be the case in their absence. However, analyses of these effects lie beyond the scope of the analysis in this paper.

While this paper has focused on a particular set of measures being implemented in Australia that incorporate an initial carbon tax to be replaced by an ETS, the analysis is of general relevance, and the broad conclusions are not limited to only one policy option. The direction of impacts on the tourism industry can be expected to be much the same for any carbon price scheme to reduce GHG emissions through the implementation of a carbon tax or ETS. Given the confusion that exists among tourism stakeholders about the implications for tourism of specific types of climate change mitigation schemes, the discussion should serve to increase understanding of the likely effects of any carbon tax or ETS based policy initiative. The findings of this paper are therefore very relevant to engagement by the tourism industry in policy discussion on climate change mitigation measures and for increasing understanding of the implications for tourism of climate change issues generally.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

Notes

Bios

Larry Dwyer is Professor of Tourism and Travel Economics in the School of Marketing, Australian School of Business, University of New South Wales. He is President of the International Academy for the Study of Tourism and President of the International Association for Tourism Economics.

Peter Forsyth is Professor of Economics at Monash University, Melbourne. His main research areas are tourism economics, aviation economics, and microeconomic policy.

Ray Spurr is a consultant to Tourism Research Australia and the Centre for Tourism and Economic Policy at the University of New South Wales.

Serajul Hoque, formerly a research fellow with the CRC Sustainable Tourism, is now an economist with the Victorian Government, Australia.

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