Carbon Price Mechanism - Essay Example

? Table of Contents Introduction and Background of Carbon Price Mechanism 3 Q What is the effect of rising energy prices for the economic wellbeing of households? 4 Q. 2: What is the likely effect of increases in the cost of traditional sources of energy for the energy consumption patterns of Australian households? 7 Q. 3: What is the effect of increased government cash payments (such as increased pension payments) on household budgets, energy consumption patterns and economic wellbeing? 9 Conclusion 10 Bibliography 11 Introduction and Background of Carbon Price Mechanism Environmental pollution has become a serious concern for the developed as well as developing nations across the globe. To address and cope with this issue, Australian government came forward with an economic reform program that will help to transform the structure of the economy from the conventional resource of energy towards the renewable sources with less carbon dioxide emissions; Australia aims to reduce the carbon emissions up to 90 % from the current value till the 2050. Although the proposed reforms in the economic structure promise a safe and green future for the country yet it has several implications that must be considered by all the stakeholders, this plan also have serious implications for the household economies as it is one of the most important energy consumers and emitters of carbon dioxide. Australian government is determined to implement this plan with the start of the fiscal year 2012 - 13. The main goal of this essay is to comprehend the importance of this plan to the household economies and forecast the impacts of its implementation on these economies from the consumer behaviour perspective. It is crucial to overview main features of the proposed program before going into the discussion on its impacts. This program involves four major areas including the energy consumption, carbon price mechanism, increasing the efficiency of the energy consumption units and the management of the energy resources. The focus of this essay will be the mechanism for carbon price that has direct effects on the household economies and patterns of consumption of energy. This mechanism accompanies a list of various measures to explain its expected consequences on the business and households and methods for reducing the harmful effects by providing assistance in the form of increased cash payments and the reduction of taxes. Beyza (2007) reported that changes in the prices and income impacted the consumer behaviour, the proposed plan suggest two phase strategy for the implementation of carbon price mechanism. The first will continue for three years and during these years the carbon prices will remain fixed for at different levels for each year. For the first year the prices will be set at $ 23, for the second year the price will remain at $ 24.5 and during third year it will be increased further and will be fixed at $ 25.4. It shows that the prices will continuously increase during the first three years. The second phase is referred as the flexibility phase in which the prices remains flexible and will be determined with the help of emission trading scheme. The government will issue permits for the certain amount of carbon emission to various industries and the fees obtained from these permits will be used for the assistance of the household, small scale industries and for the promotion of alternate sources of energy which involve less carbon emission. Deborah (2010) described that the carbon price mechanism and assistance program by the government will have a combined impact on the household economies. The impact of both these factors on the economy of the household is explained below. Q. 1: What is the effect of rising energy prices for the economic wellbeing of households? Household is responsible for loads of carbon emission by consuming conventional sources of energy in large amounts. The economic reform program introduced by Austrian government aims to control the emission of carbon, change the energy consumption patterns of the country and make the environment safe for the future generations. Carbon price mechanism is introduced to achieve these aims which will lead towards the increased prices of the energy in the future as mentioned above. Household utilizes conventional fuels for transportation, cooking and other domestic purposes. The increase in the price of conventional fuels will affect the household budget by reducing their ability to purchase the fuel to fulfil their requirement and causing rise in the prices of other communities. From consumer perspective, price changes play important role in determining the budget lines that in turn are important for the budget modelling of the consumers (Kardes et al., 2010). Moreover, the increasing prices will lead the demand of the carbon fuels towards the decline as suggested by the demand and supply theory. The presence of alternate sources of energy at lower prices will fuel this process if the promotional strategies of the government for non conventional sources of energy prove successful. The effect of the rising prices of carbon based fuels on the budget line is illustrated in following figure. The budget lines move inward with the augmentation in the prices of various commodities indicating the disturbance or expansion in the budget (Barraud, 2008). Figure 1: The impact of increasing prices on household budget This disturbance can be balanced by the assistance from the government since the revenue generated through carbon permits is allocated for assisting the household and other industries to cope with the challenges emerged due to the increased carbon prices. The assistance, either in cash or in the shape of tax reductions, can minimize or even nullify the effect of rising prices of conventional fuel after the implementation of carbon price mechanism. Keeping the measures of assistance in view, it can be concluded that the increasing prices may have negative impacts on the welfare of the consumer but assistance provided by the government may nullify the harmful effects and it may even enhance the wellbeing of the household if conducted precisely because more almost 90 % of the household are expected to receive this assistance. Q. 2: What is the likely effect of increases in the cost of traditional sources of energy for the energy consumption patterns of Australian households? As described in the introduction section of this essay, the major goal of the proposed plan is to reduce the carbon emission to more than 90 % with the passage of time, the main source of this carbon emission are the conventional fuels. Therefore, the prices of these fuels will be increased to discourage the use of these fuels and adapt the new and non conventional resource of energy such as bio – fuels. According to the principles of consumer behaviour, the demand and price have an inverse association (Solomon, 2010). That is why the demand and consumption of the conventional source of energy will be reduced to great extent. The promotion of the substitute sources of energy by the government and incentives for their consumption as well as production will aggravate the decline in the demand of non renewable sources of energy. The result will be augmentation of demand for non conventional energy and decrease in demand of the conventional energy. The above discussion depicts the patterns of energy consumption after he execution of the reform program, the pattern will shift from the non renewable to renewable sources of energy. The figure given below illustrates the effect of increase of price on the individual demand of the fuel; it plainly depicts the patterns of demand shift in the conventional sources of energy. Figure 2: Individual Demand curve for fuel with increase in price The increase in price during the first phase (three years) will reduce the demand for the carbon based energy resources. On the other hand, the reduction of prices and the abundant production of new sources of energy will cause increase in the demand of these fuels. It can be concluded from the example of demand of fuel and the discussion of theories and principles of consumer behaviour that the patterns of consumption of energy will shift toward the green fuels due to the increasing prices of the conventional fuels. Q. 3: What is the effect of increased government cash payments (such as increased pension payments) on household budgets, energy consumption patterns and economic wellbeing? The determination of the government to assist the household by enhancing the cash payments like pensions, salaries, allowances etc for the government as well as private job holders. On one hand the increasing prices of the fuel brings price effects into play on the household economies and on the other hand the increased cash payments will enhance the income of the consumers brining the income effect into play. The purchasing power of the consumer will be enhanced to some extent and he or she will be able to purchase more units of the commodities. The effect of income changes on the demand of the electricity is described in the following figure; the increased cash payment will guarantee the improved living standards as well as the more consumption of energy from the consumer behaviour perspective (Deborah, 2010). Figure 3: Effect of Income Changes on the Electricity Conclusion The results of the above discussion can be summarised as follows. The carbon price mechanism is definitely going to impact the household economies and these effects can be balanced by the measures taken by the government to provide assistance to all the stakeholders including the household economies. From consumer’s perspective, the demand for the conventional energy will move downwards and the renewable resources of energy will be used and their demand will rise. Bibliography Hoyer, Wayne D. Consumer Behavior. Hover: Mason:South Western Publishers, 2010. Kardes, Frank, Maria Cronley, and Thomas Cline. Consumer Behavior. New York: Cengage South Western, 2010. Peter, Paul, and Jerry C. Olsen. Consumer Behavior. New York: McGraw Hills, 2009. Solomon, Michael R. Consumer behavior: buying, having, and being. New Jersey: Prentice Hall, 2010. Ural, Beyza. TheThe Impact of Trade Reform on Household Welfare in a General Equilibrium Framework: Empirical Evidence from India. 2007. https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=mwit2007&paper_id=33 (accessed 09 03, 2011). Read More