Pricing pollution, again, and why this time may be different
Australia has been here before. A price on carbon was introduced, repealed, and left politically radioactive. Yet a report released today by The Superpower Institute argues that avoiding carbon pricing has not removed the cost of pollution, it has merely shifted it elsewhere in the economy (1).
In The Case for Pricing Pollution, the Institute frames carbon pricing not as an environmental gesture, but as overdue economic reform. The report argues Australia faces three interconnected challenges: emissions reductions are falling short of stated targets, productivity growth has stalled, and the federal budget is under sustained structural pressure. Pricing pollution, the authors contend, is one of the few policy tools capable of addressing all three at once.
For investors, the importance of the report lies less in the politics and more in the signal. Capital responds to incentives, and Australia’s current incentive framework remains fragmented.
What the report is proposing
The central recommendation is the introduction of a Polluter Pays Levy. This would apply a tax to the carbon embedded in fossil fuels extracted or imported for consumption in Australia, levied upstream and covering around 80 per cent of the economy.
As per the report’s modelling, the levy would deliver around 100 million tonnes of additional annual emissions abatement by the mid 2030s. Within its first decade, total emissions reductions would be more than double those expected under existing policy settings.
The levy would also generate significant revenue, averaging $22.6Bn per year over time. The report recommends that a substantial portion of this revenue be recycled through household compensation and targeted support for small businesses, ensuring most Australians are net financial beneficiaries despite higher fossil fuel prices .
Alongside the carbon levy, the report proposes a Fair Share Levy on gas producers. This would replace the Petroleum Resource Rent Tax with a cashflow based levy on economic rents, lifting Australia’s share of fossil fuel profits closer to international norms without increasing export prices or discouraging investment.
Lessons from Australia’s past carbon price
Any discussion of carbon pricing in Australia inevitably recalls the carbon pricing mechanism introduced in 2012 and repealed two years later. The report addresses this history directly, arguing that the earlier scheme demonstrated economic effectiveness but lacked political durability.
During its operation, emissions declined while economic growth continued. Household compensation reduced cost of living impacts, and businesses adjusted investment decisions in response to clearer price signals. The report suggests the failure lay not in the economics, but in political commitment and policy complexity.
This distinction matters for investors. Long term capital is sensitive not just to policy ambition, but to confidence that rules will endure. The proposed Polluter Pays Levy is intentionally simpler, applied upstream, and paired with visible household compensation to improve public acceptance and longevity.
Why current policies are falling short
The report is blunt in its assessment of Australia’s existing emissions reduction framework. Current policies are described as a patchwork of subsidies, baselines and tenders that deliver slow abatement at high fiscal cost and with limited productivity benefits.
The Safeguard Mechanism, which covers only around 30 per cent of national emissions, is criticised for raising no revenue and relying on centrally determined baselines that distort investment decisions across the economy. Expanding the mechanism, the authors argue, would entrench inefficiency rather than resolve it.
By contrast, carbon pricing is described as a corrective tax that improves allocative efficiency by embedding the social cost of pollution into market prices, allowing capital to flow naturally toward lower emissions outcomes.
Key findings worth noting
A notable strength of the report is its treatment of household impacts. While acknowledging that pricing pollution raises the cost of fossil fuels, the modelling shows that revenue recycling allows households to be over compensated on average, easing rather than exacerbating cost of living pressures.
The report also supports the use of carbon offsets within a pricing framework, but only if integrity and measurement issues are addressed. Weak offset credibility, it warns, risks delaying genuine emissions reductions and increasing long term transition costs.
Trade competitiveness is another recurring theme. Without domestic carbon pricing, Australian exporters face increasing exposure to carbon border adjustment mechanisms imposed by trading partners. Pricing pollution domestically allows Australia to retain revenue while protecting export competitiveness.
What this could mean for investors
If implemented, pricing pollution would materially reshape investment incentives across the economy. Emissions intensive assets would face structurally higher costs, while low and zero emissions assets would become more competitive without relying solely on subsidies or government contracts.
For renewable energy, storage, electrification infrastructure and green industrial projects, a carbon price provides a durable, economy wide signal that rewards emissions reduction over time and reduces policy uncertainty.
Nature based investments also stand to benefit. A credible carbon price increases demand for high integrity offsets and strengthens the economics of reforestation, land use and carbon abatement projects, provided governance frameworks continue to improve.
More broadly, the report argues that carbon pricing supports long term economic stability by funding household compensation and productive investment, reducing political and economic friction during the transition.
The Bottom Line
Australia’s experience with carbon pricing is often framed as a failure. This report argues it should instead be viewed as unfinished reform. Pricing pollution remains the lowest cost way to reduce emissions, strengthen the budget and improve productivity.
Whether the politics align remains uncertain. But for investors, the direction of travel is clear. Capital aligned with decarbonisation, efficiency and credible transition pathways is best positioned if pricing pollution returns, in whatever form that ultimately takes.
References
Finighan R, Burfurd I, Hoey L, The Superpower Institute. The Case for Pricing Pollution. January 2026. https://superpowerinstitute.com.au/work/the-case-for-pricing-pollution
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