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Emission Trading System in Australia - Essay Example

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The Emission Trading System (EMS) refers to a legal license that allows emission of certain substances (carbon containing) to the environment up to a certain preset limit. The Australian government legalized EMS in 2001, which saw the country rise to the third largest user of…
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Emission Trading System in Australia
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The Emission Trading System (EMS) and Carbon Permit in Australia Facilitator Introduction The Emission Trading System (EMS) refers to a legal license that allows emission of certain substances (carbon containing) to the environment up to a certain preset limit. The Australian government legalized EMS in 2001, which saw the country rise to the third largest user of EMS globally until the rule was repealed on July 17, 2014 by a majority vote in the Australian parliament. Environmentally, repeal of the constitution to eliminate ETS shows success for the government. However, the economist views the situation differently with the cost of global warming and environmental degradation elimination set to rise in the short-run due to the repeal. This paper explores the Emission Trading System in Australia and its annihilation with focus placed on three economic variables (demand, supply, and government regulations).
Demand, Supply, and Government Regulations
The price control (EMS elimination) was introduced with the view to lower the amount spent on environmental protection significantly by 2020. However, this process develops differently in the short run and in the long run. Elimination of the EMS in Australia will lead to reduced investment in the Australian market especially for manufacturing companies. Increase in government regulations encumbers economic growth because it makes the economy rigid and costly to invest in. The cost of investment in the Australian market generates two dissimilar effects on the economy. First, it increases the cost of investment in the country and the cost of environmental control within the country. The gridlocked EMS would lower the cost of carbon by $20 to $25 per ton (Davis & Taylor, 2011, p.1). This cost shifts to the investors, which raises operational costs. Second, it increases the price of manufactured commodities in the country.
Increase in price of manufactured commodities does not suffice directly. Low investments in the economy lowers the supply of manufactured goods in the country as shown in figure 1 below.
Figure 1: Relationship between Investments and Supply of Commodities
Figure 1: Relationship between investment and supply derived from Hilletofth, 2011, p.203
Increased investments (loanable funds) from LF0 to LF1 increases the supply of commodities showed through the curve SLF. The reverse is true when investment levels reduce irrespective of the reasons for the reduction. Reduction in investment can also arise from decreased profit margins due to increase in the operational costs for businesses operating within the country. The situation in Australia, with eradication of EMS, produces a combination of both factors working against increased investments in production companies in the country. However, the government regulation to switch to renewable sources of energy as an alternative to carbon emitting sources will reverse the situation (Wang & Blackmore, 2012, p.4389). The initial cost for the companies will definitely be high considering the change in energy sources and machinery. However, after settlement, investment will rise back to normal hence the threat on the economy is short terms and worth the risk.
In the short run, the decision by government to eliminate EMS will lead to shortage in supply of manufactured commodities, which will lead to increase in their prices. The law of Supply states that, “When Supply of a commodity decreases, the price for the commodity increases and vice versa” (Haque et al, 2014, p.1961). This law can be demonstrated through the graph shown in figure 2 below.
Figure 2: Relationship between price and supply of Commodities
Figure 2: Relationship between price of commodities and supply derived from Hilletofth, 2011, p.200
Industry manufactured goods will decrease in supply as investments lower in the short term thus triggering inflation for the industry manufactured goods. The situation will persist as long as the economy does not stabilize.
However, in the long run, the investors will adopt new technology and revert to renewable sources of energy. This will return the supply levels to the optimum level thus reducing the selling price as the economy stabilizes. The vision of the government to lower pollution by 2020 is thus in line with economic stability, as investors will stabilize in time for the economic drift.
In the short run, the reduced supply of commodities will lead to shortages hence increase in demand for the manufactured goods. Demand can increase due to two factors. When prices reduce, demand for commodities increases (Haque et al, 2014, p.1963). This agrees with the law of demand. However, demand also increases when people foresee shortages that may increase prices. The consumer expectations affect demand for manufactured goods in Australia as shown in figure 3 below.
Figure 3: Effects of negative consumer expectations on demand
Figure 3: of consumer expectations on demand for products derived from Haque et al, 2014, p.1960
From the graph, elimination of EMS will cause anxiety among the consumers thus increase demand for manufactured products as people prepare for the worst scenario of shortages. However, this situation will reverse in the long run with manufacturing firms strengthening their positions and investing in alternative energy sources.
Recommendations to the Government
The government should motivate investors in the country through provision of investment tax credits. Investment tax credits lower the cost of investment in the economy. For example, the credit may involve tax waivers on machinery imported to make use of the renewable energy sources. Such a waiver lowers the cost of investment thus encouraging investors. Figure 1 shows that government incentives to increase investment will increase supply thus cut down on inflation.
The government should also adopt direct investment in the production industry with the view of future privatization. Government investment presents a direct way to solve the shortages as private investors prepare to adjust to the new regulations. The main role of the price control mechanism (lowering the cost of environmental conservation) is achievable with increased government investments that would lower the supply gap in the market. The Australian government should thus consider direct investment in the market as an avenue to solving the problems expected in the short term due to the legal change.
Environmentally, repeal of the constitution to eliminate ETS shows success for the government. However, the economists view it as a challenge in the short run that can only improve in the long run. The new regulations will increase the operational costs for manufacturing businesses in Australia, which will in turn lower supply as the businesses restructure in the short run. As demand increases, the businesses will stabilize thus restoring the economy back to equilibrium. The government should develop investment incentives in order to prevent short-term slump while development of investment plans can also help the situation from the government viewpoint.
Davis, M. & Taylor, L. 2011, Billions blown on carbon Systems, Sydney, N.S.W.
Haque, M.M., Rahman, A., Hagare, D. & Kibria, G. 2014, "Probabilistic Water Demand Forecasting Using Projected Climatic Data for Blue Mountains Water Supply System in Australia", Water Resources Management, vol. 28, no. 7, pp. 1959-1971.
Hilletofth, P. 2011, "Demand-supply chain management: industrial survival recipe for new decade", Industrial Management + Data Systems, vol. 111, no. 2, pp. 184-211.
Wang, C. & Blackmore, J.M. 2012, "Supply-Demand Risk and Resilience Assessment for Household Rainwater Harvesting in Melbourne, Australia", Water Resources Management, vol. 26, no. 15, pp. 4381-4396. Read More
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