The impact of an emissions trading scheme on state government budgets

The Rudd Government has announced its intention to introduce an Emissions Trading Scheme (ETS), now being referred to as a Carbon Pollution Reduction Scheme (CPRS), by 2010. Central to the scheme will be the sale by the Federal Government of permits to industrial interests which emit carbon pollution as part of their commercial activities. Businesses that have to purchase permits will pass the additional costs on to their customers. In its recently released Green Paper (Commonwealth of Australia 2008c), the Commonwealth outlined its intention to provide significant compensation to households and selected industries to help them offset the adjustment costs that are likely to be associated with the introduction of a price for carbon. This paper highlights the need for an additional class of compensation payments that do not appear to have been considered in the debate so far, namely, payments to compensate the state and territory governments for the likely increase in the costs they will face in delivering services to their residents