Direct Action and Carbon Tax on Reducing Carbon Emissions in the Banking Sector - Essay Example

Final Project Report Name: Course: Instructor: Institution: Date of Submission: Greenhouse Gas Mitigation The direct action in response to greenhouse gas emissions is developed to reduce the CO2 emissions and improve environmental outcomes. The coalition government has established a support fund aimed at reducing the activities in businesses that reduce the CO2 emissions. On the other hand, the carbon tax is a control measure used for realizing the low-carbon in the society. The carbon tax is a monetary price placed on the cost of the real costs of the economy. The no regrets approach requires all the people in a community or national/international environments to work together for the benefit of the people through justifying to the national and international communities on the social, economic, and environmental benefits of transforming the issue of climate change. Thus, the essay compares the direct action and carbon tax on reducing carbon emissions in the banking sector while using the no-regrets strategy. Climate Change affects the Banking Sector In the banking sector, climate change brings forth risks and opportunities. The main challenge that the banking sector faces is that the direct impact of climate change on their investments is not evaluated. The banking sector is related to all markets through investments and lending practices, which brands it more vulnerable to climate change impacts (World Bank Group, 2015). Climate change affects the operations of the banks customers by influencing the financial circumstances and consumption. Climate change will force the banks to withdraw coverages or increase premiums, leading to a drastic change in the markets that influence the success of the banking sector (Arlinghaus & Hallerberg, 2013). When climate change causes feminine and floods other problems such as decrease in property prices occurs. Consequently, the banking sector loses confidence in the economy, which may lead to a financial breakdown in the economy (Cogan, 2008). Climate change reduces the economic growth and increases the volatility of the economy. Using a carbon tax helps reduces the GHG emissions in an economy. The climate change is currently a significant business risk in all sectors including the banking sector. Climate change affects the banking sector by affecting its customers. That is; climate change affects agricultural production, water scarcity in companies such as mining sectors (Ernst & Young, 206). Low productions and scarcities that the climate change causes lead to poor economic performance of the banking sector leading to poor economy performance as well. The key challenges that the banking sector faces is the inadequate credit risk that they face including the loan pricing processes that the extreme weather causes. The banks do not consider the climate change affects when lending and pricing, which is a key challenge they face today and in the future. The climate change policy and GHG restrictions affect the banking regulatory environment. Theoretical underpinnings of a carbon tax and the Direct Action Plan Carbon tax as presented is a policy where the government sets a certain price, also identified as a fee or tax, carbon emitted by companies. The carbon tax is the key determinant of how sectors and corporations are allowed to emit. The benefit of a carbon tax is the increase in government revenue, which is utilized for compensation and increasing the productivity of business that promotes low-emissions technology. However, the carbon tax may steer to negative growth in productions and incomes in various sectors. The direct action plan, on the other hand, is the process where the government intervenes on the GHG emissions of companies and households ensuring they are reduced significantly. One of the main direct action plan involves closing companies that emit high GHGs and restricting investments to such companies. Unlike carbon tax, the direct action plan does not improve the government revenue, though it is preferred by the federal opposition. The carbon tax is the key element that determines the emissions a company can emit, where they companies must emit less GHG than the maximum allowed emissions (Momoniat & Morden, 2015). The carbon tax has a set price on the GHG emitted, while the companies in all different sectors decide how much to emit. The more you emit, the higher the tax you pay, which leads to an increase in the government revenue earned. The benefit of using carbon tax is that the fee can be set low, which avoids economic disruptions leading while engaging in a steadily increase of the tax to reach the intended level (Palosuo, 2009). Consequently, it attracts investments to business that emit low GHG, which results to higher profits. If a company has low GHG emissions, the pricing of their products and services is fair to consumers attracting loyalty from the market. Carbon tax is beneficial to the government through the earned revenue, which offsets income tax among others. Thus, the carbon tax provides a stability and certainty of prices across markets in the economy. The direct action plan is a competitive grant by the Coalition government with the focus of reducing GHG emissions. The policy sets a goal to achieve in a certain period such as reducing total GHG emissions by 10% in maybe a period of ten years (Denniss & Grudnoff, 2011). Direct action plan is the process of using government subsidies and regulations and other government developed programs to reduce the GHG emissions in the atmosphere (CDAP, 2010). The direct action plan as a competitive grant is not as effective at the carbon tax mainly due to the duration they consume to occur as they were intended. Over the years, the Direct action scheme has been said to reduce lower and insignificant GHG emissions compared to the set emissions to be attained (Hawkins, 2014). For instance, the GGAP scheme only achieved 40% of the intended objectives. The direct action plan is an important factor in empowering policies to reduce the GHG emission levels (Labatt & Rodney, 2011). The disadvantage of using a direct action plan is that it cannot achieve half of the set objectives and yet consumes a lot of funding without benefiting the government. Thus, there is the probability of less sufficient funds to support or see the program through from the beginning to the end based on previous direct action plans such as the GGAP (Denniss & Grudnoff, 2011). Risks and Opportunities for the Banking Sector in a carbon constrained world Climate change as stipulate affect the banking sector through influencing the wealth growth level of societies, the access to resources such as water among many others and affects the price of energy, which in turn influences the value and reputations of companies. Thus, this section evaluates the opportunities and risks that the financial industry faces in the market given the constraints of carbon emissions in the world (IIGCC, IGCC, INCR, PRI, UNEP, 2016). The banking sector has the power to reduce GHG economic risks through providing services and products of a low-carbon economy. Risks Insurance risks involve the climate change effects that insurers do not consider while insuring their clients. That is; climate change brings forth the risks of property claims. Thus, insurers must assess the impact of possible climate change t their clients assets, which will in turn influence the pricing of insurance and contract conditions (BCA, 2014). Thus, in terms of insurance risk on in the banking sectors, the risks are related to properties, casualties, and health and life insurances among others. That is; as GHG emissions occur, extreme weather events threaten the liquidity and solvency of properties. The corporate banking industry also faces risks such as a reduction in the competitiveness of GHG profitable clients. That is; the government may implement carbon tax that affects the productivity of the corporation or imposes a direct action that restricts the financing of such organizations. The mitigation policies by the government may lead to high costs for those consuming energy (Denniss & Grudnoff, 2011). In addition, in a carbon restrained economy, the volatility of prices is perceived leading to reputational risks linked to controversial investments high GHG emitting companies. The investment and the banking sector also face a risk where climate change may steer the industry investing in immature technologies as they are forced to invest in low GHG emitting companies. The carbon affect also leads to additional costs in different sectors such as utilities sector increasing the risks of poor investments. The retail-banking sector also faces a risk of direct damages linked to rainfall that affects the production of agricultural products mainly negatively among other such as soil erosion, famine and flood. On the other hand, the policy change may lead to the closure of subsidies that influence the renewable energies. Opportunities Emission trading is mainly recognized through the Kyoto Protocol. It is the market where clients are provided liquidity by the banking sector. Thus, the banking sector can offer desks for trading emissions where the carbon estimates increase the market size. The emissions trading market is an opportunity since the financing sector has the opportunity of growing the internal return rate (Allianz Group; WWF, 2005). Weather markets involve the weather experts whose forecasts can help mitigate the climate related risks. That is; by investing in weather markets the banking sector has the possibility of introducing weather hedging where the client’s losses are reduced increasing the benefits for the banking sector. Climate Change Microfinance refers to the process where the business opportunities are through the provision of micro loans that influence growth of individuals and businesses (Allianz Group; WWF, 2005). That is; it is an opportunity since it deals with the low income earners, who have been disregarded by other firms leading to the high profits in the market. Appropriate Adaptation Strategies One of the best adaptation strategy for different sectors is developing risk management plans to mitigate against climate change effects. In such a risk, the businesses will invest wisely, stipulating that through a direct action plan they could choose to stop investing in GHG emitting companies and invest on other renewable technologies (Ernst & Young, 206). The No-Regrets approach as defined requires the community and the government joining efforts with the aim of reducing GHG to mitigate climate change influences. The No regrets approach will inform the people of the imminent dangers that climate change caused by GHG emitting companies. GHG emissions threaten their daily lives and possible future’s. The government in relation to the community will impose policies such as the direct action plan, where the community has the power to influence the GHG emissions in their regions. That is; the community will have the power to influence the direction of their investments and the operations of the high GHG emitting companies. Consequently, the community will reduce GHG emissions in the region, which supports a better future for everyone. On the other hand, carbon emissions rate of growth must be reduced significantly for the benefit of the future. In that case, the political and regulatory policies to assist with these reductions must be implemented in the countries (Momoniat & Morden, 2015). For instance, the direct action plan can be imposed hand in hand with the carbon tax, and using the No Regrets approach lower the GHG emissions by companies and personal households. The increase in food prices and other consumer consumptions is a key power that will influence the impact of the No Regrets approach in ensuring the efficiency of the policies and subsidies on carbon emissions and consequently, climate change. Conclusion The carbon tax is considered as the best strategy in reducing the GHG emissions for companies since it is effective and offers the government an income that can be used to improve the economy. The direct action plan is not as effective as the carbon tax, based on historical direct action plans to mitigate carbon emissions but can be used hand in hand with the carbon tax policy leading to a better performance in the GHG emissions reduction. To ensure the community and other business sectors are attracted and support these policies, the no regrets approach will be used for increased support on the policies that effectively help reduce the GHG emissions. The banking sector is the most affected since losses of one of the industries leads to negative impacts to the industry among other industries. References Allianz Group; WWF, 2005. Climate Change & the Financial Sector: An Agenda for Action. Climate Change, pp. 1-57. Arlinghaus, J. & Hallerberg, M., 2013. Why Carbon Pricing? Comparing Design Rationales for Carbon Taxes. Hertie School of Governance Master of Public Policy , pp. 1-39. BCA, 2014. Financing Climate Change: Carbon Risk in the Banking Sector. Boston Commo Asset Management, pp. 1-12. CDAP, 2010. The Coalitions Direct Action Plan. Environment & Climate Change, pp. 1-30. Cogan, G. D., 2008. Corporate Governance and Climate Change: The Banking Sector. The Ceres Report, pp. 1-55. Denniss, R. & Grudnoff, M., 2011. The Real Cost of Direct Action: An Analysis of the Coalition's Direct Action Plan. The Australian Institute: Research that Matters. Policy Brief, Volume 29, pp. 1-8. Ernst & Young, 206. How do companies do business in a carbonconstrained world? Investment decisions and bottom line. IESE Business School for Ernst & Young, pp. 1-12. Hawkins, J., 2014. The Direct Action Approach to Climate Change. Inquiry into the Government's Direct Action Plan Submission, pp. 1-23. IIGCC, IGCC, INCR, PRI, UNEP, 2016. A report on how climate leadership is emerging in the finance sector - and on how public and private actors need to work together to grow leadership into a new normal. FINANCIAL INSTITUTIONS TAKING ACTION ON CLIMATE CHANGE, pp. 1-36. Labatt, S. & Rodney, R. W., 2011. Carbon finance: the financial implications of climate change. New York: John Wiley & Sons. Momoniat, I. & Morden, C., 2015. Reducing Greenhouse Gas Emissions Carbon Tax Policy Paper. National Treasury, pp. 1-5. Palosuo, E., 2009. Rethinking Development in a Carbon-Constrained World: Development Cooperation and Climate Change. pp. 1-196. World Bank Group, 2015. Climate Change and the Financial Sector. International Finance Corporation IFC, pp. 1-5. Read More