Impact of Carbon Tax on Business Operations in Australia and the UK - Case Study Example

Impact of Carbon Tax on Business Operations in Australia and UK Student’s Name Subject Professor University/Institution Location Date Introduction Safirova et al, 2001 posits that governments form frameworks and regulations well known as policies, in which businesses can compete against and align with each other. At times, government changes these policies in view of their performance and how they have effectively or ineffectively delivered on the intended purpose. These changes in policies may force the change of manners in which businesses are operated in a particular sector. In other words, businesses and their operations are keenly affected by set policies. For instance, a policy may impose more duties or taxes which do not align well with profit margins in a particular segment of business, and then operating business in that sector becomes hard. In this case, businessmen can either lose interest in the sector or even close down their businesses (Safirova et al 2004). On the other hand, if the set policy exempts or decrease duties and taxes imposed on a sector coupled with reasonable rates for loans, then business operation it becomes easy to operate, hence many businessmen invests in the sector (Safirova et al 2004). This paper looks at a carbon tax policy as the current policy that affects the operations of businesses both in Australia and the United Kingdom. Carbon Tax According to Zhang and Baranzini, 2004 a major policy issue that is currently affecting the operation of businesses in many countries is the Carbon tax policy. Carbon tax is an obligatory tax levied for carbon emission. This type of carbon pricing is imposed on businesses that emit carbon in the atmosphere. Generally, carbon is contained in any hydrocarbon fuel such as coal, natural gas and petroleum. On burning these fuels, carbon in the form of carbon dioxide is released in the air. The gas carbon dioxide has been cited as threat to curbing of climate change. Being a greenhouse gas that can trap heat, carbon dioxide is largely associated with global warming. In this regard, various governments especially those concentrated with industries have framed rules and regulations on emission of carbon, hence imposing a tax on these emissions based on carbon content (Yusuf & Resosudarmo 2007 ). Carbon taxes are aimed at reducing the emission of carbon dioxide in the air. From an economic viewpoint, carbon taxes are referred as pigovian tax. This means the problem is addressed without greenhouse gases emitters paying the full cost of the effect. Moreover, carbon taxes have been argued to be regressive. In other words, they directly or indirectly have an effect on low income business enigmatically. However, the government posits that the regressive impact of carbon tax is can be compensated by using the attained revenues to support low income groups (Clean Energy Future 2011). Carbon Tax in Australia In Australia, the legislation in regard to carbon tax implementation passed through successfully in parliament on 8 of November 2011. This legislation confirmed the start date of the tax implementation in the country. On the first of July in 2012, the federal governments of Australia launched a carbon price of 23 dollars as a price for every tonne of carbon dioxide emitted in the air. This fixed price is effective for 2012 and 2013 year, but meant to change by 2015 when permits are limited and adhere to a pollution cap. This implementation largely targets the big industrial emitters of selected fossil fuels which emerged as 500 at the time of implementation of the policy. The government uses the carbon tax revenue in reducing income tax by rising the part of tax free threshold. Tax revenues are also used to raise welfare and pension payments to cover prices increases, as well as for compensating affected industries (Cox & Stockwell 2011). Impact carbon tax on business operation in Australia In Australia, the carbon tax policy resulted to a heated debate between the government and the policy markers. Despite the relevance of carbon policy in restraining climate change, it has been seen detrimental to business operation and the general economy (Cox & Stockwell 2011). In actual fact, the policy argued to only focus on the 500 emitters, and overlook others sectors such as transport and agriculture responsible for a 15% emission. This means the 500 emitter affected by the tax have to change their business operations techniques and strain their resources so that they can compete well with others. Moreover, since the pressure is exerted only the small part of the economy, this creates distortions in the economy (The Treasury 2011). Secondly, carbon tax increases the cost of production. In turn, the weight is sent to consumers who may be forced to consume less of the product. Humphreys, 2007 observes that households and business use the price signal as an excuse for lowered consumption of various products. Cox and Stockwell, 2011 expresses the same opinion that, consumers may turn to consumption of cheaper imports causing the withdrawal of some industries, hence economic downturn. Moreover, considering the increasingly evident political uncertainty, carbon tax erodes competitiveness of Australian industries in the international market. This is due to an increase in prices on their products in an attempt to cover production cost already raised by the carbon tax. Lose of competitiveness also results from an exaggerated carbon tax in Australia compared to carbon pricing in European countries. For instance, the carbon tax in Australia is triple that of Europe emission trading schemes which generate $23 million as compared to $77.3 million in Australia per week. For that reason, Australian products get higher in price (Humphreys, 2007). Essentially, the operations of small businesses within an industry are badly affected. Indeed, Cox and Stockwell, 2011 observes that carbon taxes has affected smaller business in a greater way due to the fact that these business do not have the immense knowledge, resources, skills, and experiences like the medium and large experts. Thus, they cannot easily meet all expected requirements on an equal intensity as big businesses. Though, they do not directly pay the carbon tax, they face higher prices for electricity and other required resources for their survival. Carbon tax in United Kingdom On the other hand, the UK uses emission trading system (ETS)rather than a carbon tax system. In an ETS, a cap on amount of pollutant like carbon dioxide to be emitted is set by a central authority. Companies then get the caps in form of emission permits, allowing the emitting of a specific amount of carbon. Thus, a firm should hold permits that are equivalenrt to their emissions. Moreover, the number of caps that have been issued to all firms do not exceed central emission cap. Therefore, if a firm needs more permits, they can only get them from companies who need less. Thus, permit buyers are further charged for more emission, while sellers are getting rewarded for less emissions (Ekins et al 2011). In the UK, the initial levying of tax began as fuel duty escalator (FDE) in 1993. This was an envirometal tax imposed on petroleum products at the retail level. Basically, the UK government aimed at reducing emission of carbon dioxide from the transport sector. Considering that carbon emmision is equivalent to the quantity of fuel consumed. Simply, FDE approximated carbon tax, though it later failed due to political critisism. The European Trading Scheme (ETS) limits the numer of carbon that should be emitted. However, heavy emitters can purchase certificates from ETS for emissions above the set limit (Green 2008). In 2002, the UK government formed formed a voluntary emission scheme referred to as UK Emissions Trading Scheme . This was formed before the mandatory EU ETS of the general european union. EU ETS makes the largest greenhouse gases trading system worldwide, which aims at reducing emissions by 20% come 2020. The ETS in the UK closed in 2009, when its management and control shifted to department of climate change and energy in the year 2008. EU ETS in the United Kingdom, has about 1,000 participants. In the year 2011, the government set floor price on carbon at 16 pounds per tonne of emitted carbon dioxide. This price is expected to reach 30 pounds by year 2020 (Feng et al 2010). Impacts of carbon on business operations in United Kingdom By and large as seen in the case of Australia , carbon tax means eXtra cost for industries. As of regard to UK, the issue is even harder bearing in mind that for every tonne of emmission the the businesses pays double price; one from the carbon price in the UK and the other from the EU ETS. Analysts have urgued that the setting of the high floor price and its subsequent raise to £30 is likely to reduce UK`s competitiveness abroad. The suggested top up tax to power generators in the UK means a higher cost compared to other European countries. Thus, some policy makers are afraid that electricity, and other industries production could shift to other countries (Feng et al 2010). Moreover, the UK business operators assert that the tax builds uncertainty for investment (Ekins 1994). Carbon tax is meant to reduce carbon emission in the atmosphere, therefore, energy companies that are prone to carbon emissions are scared to invest any further generally due to the high tax payment and competition from renewable energy plants (Feng et al 2010). Conclusion Conclusively, in line with Kyoto Protocol on climate change, both Australia and United Kingdom are committed to trim down greenhouse gases emissions. By launching the carbon tax in these two countries a policy is deemed critical for the initiative to be implemented. While carbon tax has been considered a valuable measure in reducing pollution in the air, it has raised tremendous debates from policy makers in regard to how it affects business operations and the economy in general, considering that this tax is regressive. Carbon taxes are view to be of great beneficial in encouraging investment in clean energy production. However, as established above, implementation of the carbon tax policy has been detrimental to business through increase in production cost. Many companies that may not be able to meet these costs may end up withdrawing. Consumers are said to turn to cheaper imports from than buying the higher priced domestic ones. Moreover, the competitiveness products from these two countries in the international market are reduced. From the above perspective, carbon tax can be beneficial as well as detrimental. In this regard, governments should look at ensuring a well designed, operated and maintained carbon tax scheme, to ensure it is more beneficial to all. References Ekins, P, S 2011, A Major Environmental Tax Reform for the UK: Results for the Economy, Employment and the Environment. Environmental and Resource Economics, Volume: 50, Issue: 3, Publisher: SPRINGER. , Pages: 447-474. CEF (Clean Energy Future) 2011, Securing a clean energy future, The Australian Government’s climate change plan, Australian Government Chapman, B 2011, How Many Jobs is 23,510 Really? Report prepared for the Australia Institute, 6 June 2011 Cox, A., And Stockwell, D 2011, The carbon tax that ate Australia. The Climate Sceptics, April 21. The Sixty Zone Ekins, P 1994, The impact of Carbon Taxation on The UK Economy. Energy Policy, Volume 22, Issue 7: Pages 571-579. Butterworth-Heinemann LTD. Feng, K., Hubacek, K., Guan, D., Contestabile, M., Minx, J., & Barrett, J 2010 Distributional effects of climate change taxation: the case of the UK. Environmental science technology, Volume 44, Issue 10: Pages 3670-3676. American Chemical Society Green, R 2008, Carbon Tax or Carbon Permits: The Impact on Generatorsʼ Risks. Energy Journal, 29(3), 67-89. International Association for Energy Economics, Inc Humphreys, J 2007, “Exploring a Carbon Tax for Australia”, Perspectives on Tax Reform (14), CIS Policy Monograph 80, The Centre for Independent Studies, Sydney. Safirova, E, K., Gillingham, I., Parry, P., Nelson, W., Harrington, H., & Mason, D 2004, Welfare and distributional effects of read pricing schemes for metropolitan Washington D. C, Research in Transport Economics, Volume 9: Pages 179 -206. The Treasury 2011, Strong Growth, Low Pollution - Modeling a Carbon Price, Commonwealth of Australia, Canberra Yusuf, A, & Resosudarmo, B 2007, On the distributional effect of carbon tax in developing countries: the case of Indonesia, Working Paper in Economics and Development Studies No. 200705 , Department of Economics, Padjadjaran University Zhang, Z, X., & Baranzini, A 2004 What do we know about carbon taxes? An inquiry into their impacts on competitiveness and distribution of income, Energy Policy, Volume 32: Pages 507-518 Read More