Regulatory Measures for Carbon Dioxide Emission Reduction - Essay Example

Carbon dioxide (CO2) emissions into atmosphere are a negative externality. By using appropriate theories and researching in the current Australian policy debates, compare the following regulatory measures for emission reduction: The Australian government has, since the signing of the 1997 Kyoto Protocol released more than 300 programmes to deal with the issue of climate change. Of these programmes, three that related to the schemes of the market have managed to produce big results by way of having reduced more than 40 per cent of Australia’s emissions reductions since over the past 15 years, based on the exclusion of land clearing (Daley and Eddis, 2011). The programme is therefore the best reduction attained by the government based on any plan or any mechanism that the government has so far tried. As opposed to this, By contrast, the other method that was used for the reduction of carbon emission was the $7 billion scheme that granted tendering schemes, in which straight grants to those responsible for reduction of emission were made, have witnessed little to no progress (Nordhaus, 1994). This despite the fact that the government in such instances made a spending of more than $5 billion on rebate programs that were aimed at the encouragement of the purchase of low-emission products. The programme again has witnessed little to no success. The fourth important programme adopted by the Australian government in lieu of reduction in carbon emission levels was the energy efficiency standards (Mitchell et.al., 1990). This could lead to a reduction in emissions in a cheap and effective manner but the method itself is limited in scope and purpose. In fact based on experience, research has indicated the fact that if the application of the four models over the past 15 years are to be believed then the sole effective way of bringing about a reduction in the carbon emissions where Australia is concerned would be the market-based model, which would also help the country in attaining the 2020 target. This incidentally has been endorsed by both the political parties (Geller and Attali, 2005). According to the theory of Pigou (1932) a simple tax or permit price per unit of emissions can minimize the total social cost of a given amount of emission abatement because it would induce all individual firms to cut emissions in the cheapest ways using any abatement method that costs less per unit of abatement than the tax that would have to be paid on the emissions, in general this Pigouvian tax would have both submission effects an output effects (Richels and Edmonds, 1994). For example a tax on smokestack emissions would raise the price of pollution and encourage the firm to substitute int o cleaner use of capital and other inputs instead (Goldemberg, et. Al., 1987). It would also raise the price that the firm would have to charge in order to break even and so customers would buy less of their output. In other words less pollution per unit of output and less output. In case of the Pigouvian Tax therefore, if a tax or price of carbon is already is place, at the optimal rate then that one policy by itself will encourage drivers to switch to low carbon vehicle technology. Indeed an additional policy to encourage low carbon vehicles would not just be counterproductive but would lead to excess social costs from too many such vehicles. Again a Pigouvian Tax is not always available as an option. For some greenhouse gas emissions, it might be too expensive to measure the number of units from each source in order to apply the tax per unit. Also more often than not political realities in most countries make the implementation of a new tax unlikely or impossible. In many countries the income tax is high and the fear is that an additional tax would just make the government larger. Politically any new tax is a dirty word (OECD, 2010). Even the enactment of a cap-and-trade permit system is called the cap-and-tax. In addition a carbon tax or permit price would raise the cost of electricity an gasoline and have regressive effects with disproportionate burdens on low income families that spend a high proportion of their income on these goods. If all of these reasons prevent the enactment of a carbon tax or price then policymakers cannot achieve the first best cost minimizing policy and can instead consider which policies might be second best. Without a carbon tax or price, the second best might be achieved by a combination of policies that could include a subsidy to low carbon vehicle technology as well as other taxes, subsidies or mandates that help reduce carbon emissions in relatively cheaper ways (OECD, 2010). Image 1: Workings of Pigouvian Tax The diagram above is illustrative of the workings of the Pigouvian tax. A tax shifts the marginal private cost curve up by the amount of the tax. Faced with this cost increase, the producers have an incentive to reduce output to the socially optimum level by reducing the marginal externality to the marginal tax. The total tax revenue (which could be used to mitigate the effect of the negative externality) is equal to the size of the tax times the new output (the shaded area). The primary problem with the system of Pigouvian Tax institution is the "knowledge problem" that has been talked about in Pigou's essay "Some Aspects of the Welfare State" (1954). He talks about the fact that it is not often that the government knows enough to decide for sure the fields and the extent to which it should, on account of the gaps that exist between public and private costs create an interference with individual choice. This therefore means that the system of taxation is assumption and not data or knowledge based, given that the institution of the tax has to be brought about on the basis of information which it is impossible to possess. Aside from efficiency, Pigovian taxes may increase the fairness of how costs of negative externalities are borne. For example, even if a tax on air pollution is not at the perfect level to achieve optimal efficiency, it transfers cost associated with pollution from the public (e.g., via reduction of other taxes or benefit from public spending of the pollution tax proceeds) to the polluter. Direct regulation in pollution management is based on the need for the protection of public interest vis-à-vis market failure in the event of externalities like management of risk and public goods, imperfect information and market power). Again issues of normative justification that leads to the improvement of social welfare and management of economic reasons like demand and supply for regulation. The system of tradable emission rights means that policy makers set an emission maximum in a region or sector. The government would set a price ceiling for emission permits at $10 for 10 years and then reevaluate that ceiling. Endowment holders would buy and sell endowments on the basis of their expectation about future permit prices. The debate about the advantages and the disadvantages of using the price mechanism as opposed to direct regulation in environmental policy focused on affluent charges and, to some extent o marketable effluent permits. However some of the arguments have more general relevance to economic instruments. The two main theoretical arguments in favor of pollution taxes or chargers are as follows: 1. Allocative efficiency: a tax or charge achieves desired environmental quality at minimum resource cost. The same result could be attained with variable legal standards but this requires knowledge of control costs for all polluters. 2. Innovative incentives: a charge must be paid on all units of pollution, providing a continual incentive to develop better means of pollution control. With direct regulation the incentive ceases once the permitted level is reached. The assumption is that direct regulation and control through and exercise of ceiling imposition with respect to emissions as alternatives to taxation. The idea however is that these need to be used in combination. It has been an unfortunate tendency to view the idea as being that the use of economic instruments as the rightwing approach to environmental policy, while the regulatory approach is more ideologically sound for the Left. The idea remains that both these approaches based on the premise that the unregulated market cannot provide the right amount of environmental protection, and therefore both involve significant intervention (Owens, Anderson and Burnskill, 1990). Traditionally renewable energy sources and energy conservation have received only a small fraction of total energy subsidies (Moltkee, Morgan and McKee, 2004), and given the green-is-good mood these days, it would take a budgetary calamity to prompt politicians to yank clean-energy subsidies. Despite these problems, subsidies are granted to the energy sector around the world for various reasons, regardless of their effectiveness in achieving their goal, both the fossil fuel sector and the renewable and alternative energy sectors have benefited from these subsidies, it does remain a fact however that the share of fossil fuels in the allocation of energy subsidies worldwide has been disproportionately higher than that for other forms of energy. Moreover while environmental protection has been stated as a policy objective behind promoting renewable through subsidy programmes, these policies have occasionally produced perverse results, for instance in the bio-fuels sector. The amount of subsidies available for the renewable energy (RE) also known as the green or clean energy sector is growing as a policy response to energy security concerns n climate change. The introduction of new incentive schemes to promote RE has become increasingly common especially in the developed world countries like Australia. In Australia the Australia Greenhouse Office (AGO) was set up as a federal government agency at Canberra to promote using renewable energy in Australia. AGO has several programmes to support the installation of renewable based power generation projects, like the renewable remote power generation programme (Kurokawa, 2007). There seem to be prospects for following a similar approach for energy subsidies in the light of similarities between the two areas of environmentally harmful subsidies. The stakes are higher in the realm of energy due to the political social and energy security issues involved. On the first more practical level, the primary issue is the collection of reliable data on current and future levels of support. The second is to define the criteria for harmfulness, given the fact that not all fossil fuel subsidies let alone energy subsidies increase carbon dioxide (Co2) levels (Cotteier and Delimatsis, 2011). A mixed subsidy cum tax policy has been examine which when implemented could result in an effective influencing in the penetration of the renewable. Further, it has an internal financial consistency. In an ideal world renewable electricity would replace equivalent coal or gas which are the dominant alternate sources that would be used to generate the same electricity. Renewable energy replaces up to 126 million tonnes of coal or 40 billion cubic meters of natural gas in the 2035, which is 15 and 25 per cent of the total consumption respectively. Replacement of natural gas results in substantial cost savings, which is again equivalent to 10 per cent of the total energy import bill in the year 2035. Subsidy to renewable is less than the monetary value of carbon emissions saved by renewable is less that the monetary value of carbon emissions saved by renewable under the reference carbon tax. Subsidy to renewable energy technologies is therefore justified on the environmental grounds alone. Under the perspective therefore the subsidy to renewable is more a green environmental subsidy than the energy subsidy. Renewable subsidy would therefore be a small aggregate of carbon tax revenue (Shukla, 1997). In conclusion, therefore one could reiterate the fact that the need of the hour in the case of the effective management of CO2 emission would be a combination of the three discussed strategies that would lead to an effective solution to the issue. It will however take effective political will for this to be a reality. Reference: Kurokawa, K., (2007). Practical proposals for very large scale photovoltaic systems. Earthscan Technologies. p77. Owens, S., Anderson, V., and Burnskill, I., (1990). Green taxes: a budget memorandum. Institute for Public Policy Research. p2 OECD., (2010). ITF Round Tables Stimulating Low-Carbon Vehicle Technologies. OECD Publishing. pp31-35 Goldemberg, J., Johansson, T. B., Reddy, A. & Williams, R. (1987). Energy for a Sustainable World (Wiley-Eastern Report, New Delhi, India & World Resources Institute, Washington, DC).  Richels, R. & Edmonds, J. A. (1994). in Integrative Assessment of Mitigation. Impacts, and Adaptation to Climate Change (eds Nakicenovic, N., Nordhaus, W. D., Richels, R. & Toth, F. L.) 341−352 (International Institute for Applied Systems Analysis, Laxenburg, Austria. Energy Policy (In the press). Cotteier, T., and Delimatsis, P., (2011). The Prospects of International Trade Regulation: From Fragmentation to Coherence. Cambridge University Press. pp225-232 Shukla, P. R., (1997). Energy strategies and greenhouse gas mitigation. Allied Publishers. 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