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from the combustion of fossil fuels, has led to proposals for non-market mechanisms such as regulation, and market mechanisms such as tradable emissions permits and carbon taxes, in order to reduce emissions. Market methods are usually preferred in terms of efficiency, and the carbon tax is deemed as being the easiest to implement and monitor. Owen (1992, p. 4)compares carbon taxes with other instruments; Pearce (1991) provides a summary of the advantages and disadvantages of a carbon tax; and Dower and Zimmerman (1992) compare the merits of carbon taxes and tradable emissions permits. A carbon tax would affect the price of fossil fuels and thus consumer prices,both directly for fuels and indirectly for manufactured goods. These price changes would alter the levels of final demands, and therefore fossil fuel use and aggregate carbon dioxide emissions. This paper investigates the orders of magnitude of a carbon tax required to reduce carbon dioxide emissions in Australia such that the Toronto target is met; this requires a reduction in emissions of 20 per cent of 1988 levels by 2005.

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