The Australian government has announced plans to introduce a carbon tax from July 2012. It is not clear whether it will boost carbon trading and encourage companies to reduce their emissions or it will simply add to the state coffers.  

Traditionally the idea of a carbon tax has been viewed as a knee-jerk reaction of the political classes to force companies to reduce emissions, versus the more progressive cap-and-trade approach which generates significant funding for renewables projects in the developing world. However both can work together if the revenue raised from the carbon tax is used to fund emission reduction projects. There is a big question mark of course as to how this can be implemented in practice.

A carbon tax can only achieve emission reductions if it's sufficiently high to make an impact on a company's turnover. In other words the carbon price per metric tonne emitted must be such that the total carbon tax bill for an average emitter amounts to a significant percentage of the turnover, otherwise there would be no real incentive to make a serious effort to curb emissions (which can be costly to implement). The downside of a high carbon tax is that there can be implications for the end consumer of goods and services in higher prices and a decrease in competitiveness.

Effectively emissions reductions can be very costly and take a long period of time to implement because in most manufacturing processes changes require a timescale of years. Without a clear plan of how the carbon tax revenue will be allocated to drive the low-carbon economy and clean energy investment, it remains simply yet another tax.