I was flying back across the Pacific from the United States when a friendly face appeared in what had been an empty seat alongside me. ‘I got a lot out of reading your report on climate change’, said the chairman of one of Australia's largest greenhouse gas emitters, formerly chief executive officer of another. ‘But I have a question. Why did you go for an emissions trading scheme and not a carbon tax? There's going to be such a fight about free permits for trade-exposed industries because everyone can see exactly what's happening. With a carbon tax, you could just make the exemptions and everyone would forget about them, just like all the other tax exemptions.’

Well, I don't think it would have been quite like that. Apart from anything else, I saw my job as making sure that Australians understood the implications of policy decisions that were eventually taken. Every dollar of revenue from carbon pricing is collected from people, in the end mostly households, ordinary Australians. Most of the costs will eventually be passed on to ordinary Australians. Every dollar handed out for one purpose is not available for something else. Here we discuss the best uses of the carbon revenue.

The carbon price is the central element of a set of policies that will secure large reductions in Australia's emissions at the lowest cost to the Australian economy. In addition, unlike regulatory or direct action measures, a market-based mechanism can collect revenue in a way that is more efficient than some existing taxes, for use in raising productivity, promoting equity, encouraging innovation in low-emissions technology, providing incentives for sequestration in rural Australia, and easing the transition for trade-exposed industries.