Are carbon taxes (another) Australian 'magic pudding' policy?

Now assume the carbon tax actually reduces emissions to some extent (the object of this exercise).

All product prices still increase, either because emissions continue and are taxed, or because higher-cost, lower emissions, energy production is substituted. Total carbon tax revenue is less than $X million per annum as a result of partial avoidance of the carbon tax.

Carbon tax revenue now can finance even less consumer compensation, and even more new Budget savings are needed to deliver full compensation. Other reforms are even further out of reach.

What's going on here?

The reason for trying – again – to price greenhouse gas emissions is to change the way we produce and consume goods and services.

We want to reduce greenhouse gas emissions by making them costly – don't we? The carbon tax isn't just an excuse to raise more revenue to finance other policies – is it?

A carbon tax intended to reduce greenhouse gas emissions shouldn't be used to finance other policy reforms. It cannot do both jobs. Ineffective climate policies raise revenue. Fully effective policies don't.

For Ross Garnaut's latest policy reform financing proposals, neither effective nor ineffective climate policies offer any fiscal comfort.

If emissions are reduced because higher-cost, lower-emissions, technology is used, carbon tax revenue will be reduced to that extent. If emissions are not reduced at all as a result of the carbon tax, then new tax revenue is raised, but not enough even to finance 100% consumer compensation, let alone other policy reforms.

(However, a principled, comprehensive and consistent way of dealing with objective (ii), the trade-exposed sector, is possible. It requires a comprehensive carbon tax based on national consumption of emissions instead of national emissions production.)

This leaves three sets of questions for the Government.

First, who will be compensated for losses in real income arising from imposing a carbon tax, and who will miss out?