Applied Analysis of the Carbon Price Mechanism in Australia - Essay Example

2. Increase in cost of traditional energy sources on the energy consumption pattern of Australian household. 3. Impact of increased cash payment on household budget, energy consumption and economic wellbeing. The following section deals with the analysis of the policy implications. Brief review on carbon price mechanism Australia being the hottest and the driest continent on earth has been exposed to drastic changes in the climatic conditions more than any other OECD countries. The excessive temperature variations had affected the country’s agriculture which in turn had effected the food production in the country.

Although a meagre amount of green house gases are emitted by the country in contrast to the worldwide share but the intensity of emission is high in terms of per capita GDP. This is largely due to the heavy dependence on the electricity sector which accounts for one third of the country’s emission. In order to rectify the problem of climate change, government ratified Kyoto Protocol in the year 2007.It is expected that the total emission of green house gases will be reduced below 60% by 2020 1 In order to meet this target, government has planned to go for carbon price mechanism.

The objective of such a mechanism is to make the dirty energy expensive and the cleaner energy attractive. The big polluters are required to pay on the basis of every tonne of pollutant emitted by them. The mechanism is subject to commencement from July 2012.There will be a fixed price for carbon in the first three years such as $23(1st year), $24.15 (2nd year) and $25.40(3rd year).The fixed price has been devised in order to avoid price shocks. The floor price in the first three years will be AUD15 and the ceiling price has been set at AUD20 which will be above market price.

This will be done to ensure greater predictability of price .The presence of floor price also ensures the investors that the price will not fall beyond a certain level. The scheme is expected to cover over 60% of Australia’s green house gas emission. However forestry and agriculture are excluded from the scheme. Free permits will be allocated to emission prone industries that are involved in international trade2 Flexible price mechanism will be introduced from 2015, during which carbon price will be evaluated through Emission Trading Scheme.

Revenue generated via selling the carbon permits will be utilised in investing to cleaner energy activities. It is also decided that various mechanisms will be used to provide assistance to a number of sectors3. Technically the carbon price mechanism is not a tax. In a paper presented by Antonio Cornwell and John Creedy, it has been cited that a tax on carbon emission will eventually affect fossil fuel prices and hence the consumer prices. Such a price change will then lead to alterations in the levels of final demand, use of fossil fuel and overall carbon dioxide emission4.

An important element of this mechanism is to establish a system that would govern the dynamics of carbon price within the nation as well as achieve the goal of long term reduction in emission of green house gases. The major thing that concerns the most is the impact of such price mechanism on the households. It has therefore been proposed that the households will be taken care of by revising the family payments, welfare and income tax scenario. Individuals with a family income of AUD65000, will be given a tax