Carbon Tax Has Reduced Australia's International Competitiveness - Case Study Example

Carbon Tax in Australia Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 9th October 2012 Introduction The introduction of carbon tax effective on 1st July 2012 in Australia’s economy has greatly reduced its international competitiveness. With the carbon tax lesser emissions in the trading sector is expected as a price of $23 per tone of carbon has been set. Australia plans to reduce carbon emission by 2000 levels by the year 2020.To make this possible, the government of Australia has come up with policies on how carbon will be reduced hence a reduction in carbon tax. By incorporating tax in carbon emitting industries, it will have a negative impact on the Gross domestic Product (GDP) and the industry structure hence a strong impact on the microeconomics of Australia. The tax policy will have an unequal effect on individuals where the low income earners will have more burden than the high income earners hence Australia has introduced new technologies that will ensure that there is great reduction in the emission of carbon. The decision made in the carbon taxes will have an impact on the economy as the approach used by the government focuses on the direct market consisting of prices of services and goods as it is through these items that carbon tax is based upon. This report is going to take a review on the impact of carbon tax basing the research on international competitiveness and adopting approaches that can be used to explain a model that can be adopted in explaining carbon tax effect. The report is also going to focus on the advantages and disadvantages of carbon tax and in conclusion draw solutions on carbon tax impact on a macroeconomic environment in the country of Australia. CGE model Basing the report on tax policy is the CGE model that gives a theoretical explanation on the tax policy (He, J, et al 2002). This model employs the following approaches in discussing the economic assumptions which are: There is prefect competition with returns to scale being constant where the buyers and sellers are the price takers. There is cost reduction in production of goods. There is maximum utility of goods and services in both industries and households. There is full employment of labour. There are zero profits assumed in the perfect competition market. In this model, carbon emission is directly related to the inputs in any particular activity such as energy labour and capital but economically energy efficiency is deemed to mean that the investment are high in terms of energy savings. This model assumes an open economy where there are substitution effects among different energy inputs. In the CGE model, various modules are adopted which include the price module consisting of prices such as energy mix, import and export, aggregate price of producers and the price at which commodities are sold. The income module consists of income from households, government and the overall income gotten from the gross domestic product of a country (Ahammad, Curtotti and Gurney 2004). The expenditure module deals with total demand of goods and services that is gotten from the government and the households. It basically deals with the marginal propensity to consume (MPC) on the part of the household. The government expenditure deals with the purchase of commodities and its transfer to households. In the savings and investment module deals with all savings from the government, foreign savings and household savings. This report deals with the environmental module that deals with carbon emission where there are specific rates on any carbon utility and the intensity of levying carbon tax is based on the energy consumption in the households and the industries. Macroeconomic effects In order to reduce emission in Australia, there is the need to deal with ways of reducing highly intensive carbon emission sources and introduce new ways of dealing with renewable energy sources that will reduce the pollution and also the energy consumption. With the introduction of carbon tax, it has affected Australia’s economy because it comprises of producers who are largely dependant on consumers. On the other hand, industries and households are made up of consumers hence the competitive behavior in the CGE model (Horridge 2000). To maximize on the profits made producers increase their production costs which are passed on to their consumers. There are negative impacts experienced on carbon tax which has an impact on both household and enterprise income. Given that there is elasticity in the rate of capital in Australia; profits are decreased due to an increase in the capital rate which is as a result of imposing carbon tax and also leads to a decrease in income earned by entrepreneurs. In the wage rate, a decrease in the wage rate on the other hand leads to a decline in the income gotten by households. Increase in carbon tax also leads to a decrease in household income by 4.520% while in the total consumption, there are different rates charged out of carbon rates that have an impact on the households disposable income which decreases to 0.645%.Carbon tax on the other hand has a positive impact on the macroeconomic environment because out of this, exports increase by a rate of 0.252% which in turn means that the supply of good s and services to other countries is increased to the rise in prices focusing on Carbon intensive products. Imports however suffer a negative effect because a rise in imports will mean that there will be reduction of goods being imported as other countries will also increase the rate at which they charge carbon related products to other countries. On employment For many years the price of energy has gradually increased due to carbon tax which has in turn seen the production sector look for alternatives in production of energy. Due to this, it is seen that in the macroeconomic environment, the supply of locally manufactured goods decline as well as the total demand in the consumptions by households. Carbon tax also has an effect on the employment because over years, Australia has been enjoying high employment rate (Humphreys 2007). This has brought an argument on the additional tax burden imposed on carbon which will see the economy experience a loss in the employment sector as much money will go back to the government to cater for this carbon tax expense. This is evident where the trading sector will suffer more than the non trading sectors as they will be affected by the employment level and the carbon tax increment. Employment is dependent on the level of production hence tax increment changes the overall production in an economy. Due to these, there are negative effects on the various employment groups in Australia. With a $23 increment on carbon tax, most jobs that suffer are the intermediate jobs that have a high capacity of temporary labourers followed by managers. In between, there are very minimal cases that experience job loss due to increased carbon tax meaning that if the carbon tax was lowered to $15, there would be positive changes in the industrial structure which would reflect to a positive economy. Most of the labourers have blue collar jobs and mostly work in coal mining and electricity industries that tend to produce a high intensity of carbon leading to such industries have a high carbon tax burden .Such industries experience a high turnover of employment which due to lose of employment suffer from payment of high rates of carbon tax. On households Household are not left out in the carbon tax costs because all commodities consumed by households are produced in industries meaning all prices of commodities are inclusive of carbon tax. However with the introduction of new production practices and using energy that does not emit high levels of carbon energy, the commodity prices may decrease (Gillard 2010). To make this a reality there has to be substitutes for energy sources and the prices will decrease. On the consumer side there is a major concern on the rise in prices of consumer commodities that are carbon intensive because it is given that there is an increase price due to carbon tax meaning the overall households are greatly affected due to carbon pricing on the commodities to be consumed. It is a great disadvantage on the part of the consumer because increase in carbon tax means less commodities being bought taking not that the income is still constant. Effects on Sectoral Outputs The Australian economy is supported by various sectors which produce carbon emissions in the process of making products for the Australian market. According to Swanepoel (2011), Carbon emission levels are an indicator to the production capacity of some industries. In most cases Carbon will increase the cost of doing business especially in companies that emit higher levels of Carbon. With the 23 dollar carbon tax, production of electricity has significantly gone down as most energy producing ventures emit high intensity carbon emission. The energy producing sectors which will be most negatively impacted by the carbon tax are those that produce electricity using brown and black coal. These industries have already been affected by the decreasing demand of energy produced from burning coal. Rival means of producing electricity like ‘Electricity-oil’ and ‘Electricity-gas’ have recorded higher output than coal which has become costlier as a result of the imposition of the Carbon Tax. The Carbon Tax might lead to the eventual decline of the coal power generating sector as demand is higher for greener sources of energy (DCC 2008). Generally, the carbon tax has seen the demand for electricity go down as its price increases. Clearly with more expensive electricity the competitiveness of Australia as an investment destination and a source for exports is severely affected. The cost of electricity in a country like Australia which derives a large portion of its GDP from minerals and other industrial products is felt throughout the economy. Mining involves a number of activities that use a lot of electricity and may also involve burning of other fuels to produce the final product. The cost brought about by the carbon tax will adversely affect the mining sector as higher prices of electricity are passed on to final consumers (The Australian 2011). According to the Swanepoel (2011) the carbon tax enhances the competitiveness of non-Australian mining companies. According to the Western Australian Chamber of Commerce, the carbon tax will affect the stability of the mining sector which enabled Australia to persevere the global economic crisis (Swanepoel 2011). The carbon tax on the mining industry leaves Australia exposed to future global economic crisis as it competitiveness goes down. Most mining association view the Carbon tax combined with decreased fuel rebates as imposing double taxation on the mining industry. If the carbon tax remains higher than that imposed by other countries most coal mines in Australia will be shut down and a supply gap in the international sector will result. Consequently, the companies from South America and the United states will step up to fill this gap. According to Comb (2012), the Carbon tax will also affect sectors that have very little contribution to the overall Carbon emission. These include such industries as meat processors, dairy companies, food processors and sugar refineries. The fact that the tax targets the largest emitters, means that companies can break up to stay below the emission threshold that attracts the penalty tax. Instead of large scale operations producing food at higher cost because of the carbon tax, some companies will circumvent the tax by forming smaller operations that produce emission below the threshold. It is evident that the combined emission of the devolved units may surpass or equal the emission threshold while in actual sense attracting no tax. In the face of a world population that is nearing 9 billion people, the effects of the Carbon tax on the agricultural industry is a real concern to the world as agricultural output declines and prices of agricultural commodities go up (Comb 2012). For the dairy industry the tax is particularly harsh as most of its products are exported and they have to compete with products from countries that charge lesser or no carbon tax at all. The fertilizer industry has also been hit by the new tax and some suppliers are substituting Australian products with imports as they deem them too expensive. Like the mining industry the effects of the tax will see the decline of the agricultural sector and the eventual reliance of Australia on exported agricultural commodities. Despite this negative effects on sectors that contribute more than a quarter of Australia’s GDP the government has put in place measures that shield industries that are affected by the Carbon tax. The government promised 9.2 Billion as assistance for employees who will be retrenched from their jobs as a result of the carbon tax (Swanepoel 2011). Conclusion To conclude on the above report, it is evident that using the CGE model clearly explains the impact carbon tax has on the economy of Australia and on the macroeconomics sector that implements environmental policies which will enhance effective reduction of carbon through imposing of carbon tax. With the CGE model, the report has come up with methodologies on how the carbon tax policy can have an impact on the economy of Australia. The model is designed in a static nature where there is perfect competition in the industries meaning that both suppliers and consumers of such an economy are the price takers. The government has also being incorporated in this model as it is the one that imposes tax on carbon emission in the household and industrial sector. In the report it has been seen that carbon emission in the economy has increased the cost of living in the economy because it has had several negative effects more than the positives in sectors such as the households, employment levels, export and import sector, agricultural sector and electricity generation sector. The report has given both positive and negative effects that originate from imposing carbon tax in the economy. Among some of the negative effects this tax has is that there is inflation experienced in the economy making the consumer price index to reduce to 0.75 % in the households and industries, there is a rise in electricity prices and as the model predicts there is an increase in the price of electricity by 26%.The rise is because Australia uses electricity generation on highly emitting carbon materials such as coal hence a high tax burden on energy consumers. Negative effects on electricity generation as energy will be expensive in terms of heavy burdening of carbon tax which makes the energy generating sectors to look for alternative means such as generators to produce energy. Low income families will be negatively affected due to the increased cost of consumer goods leaving them on the mercy of the government. The only positive effect is that the import prices will increase leading to rise in the gross national product in the Australian economy. 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M., 2000. “ORANI-G: A General Equilibrium Model of the Australian Economy”, Humphreys, J., 2007. “Exploring a Carbon Tax for Australia”, Perspectives on Tax Reform (14), CIS Policy Monograph 80, The Centre for Independent Studies, Sydney. Implications for the Australian Energy Sector, ABARE eReport 04. 13, Prepared for Minerals Council of Australia, Canberra. Minister and Cabinet, Canberra. Rahman, M 2011, The proposed carbon tax in Australia: impacts on income distribution, employment and competitiveness, 19 October 2012http://eprints.usq.edu.au/20809/1/Rahman_2011_Income_Distribution_Theory_and_Policy_Conf_AV.pdf Swanepoel, E 2011, Miners say carbon tax undermines Australia’s competitiveness, MiningWeekly 11th July 2011. the Australian Government Department of Industry, Tourism and Resources and the The Australian, 2011. Carbon tax will cost 4000 coal jobs, 14 June. 9 October 2012, http://www.miningweekly.com/article/miners-say-a23t-carbon-tax-undermines-australias-competitiveness-2011-07-11 The Economic Development of Australia, Sydney, Transcript, Department of Prime The Journal of Quantitative and Technical Economics, vol. 10, pp. 39-47. Read More