Economics of the Environment - Assignment Example

Name Tutor Title: Economics of the Environment Institution Date Question 1 Many economists believe that cost-benefit analysis need to use some positive discount rate to every costs and benefits. They also believed that less value need to be placed on benefits received in future than the ones that are being presently received. They preferred incurring costs in future rather than present. Several economists argue that current generations have the ethical duty to protect the future generations’ interest because the future generations are the recipients of benefits and are not yet born. They cannot also express their preferences (Hussen, 2008). A more hopeful counterargument is that investments created in the economy currently are expected to enhance the future wealth of the descendants, offering them a huge scope of exercising any environmental protection preferences, as long as environmental harm is reversible. The argument therefore follows that zero discount rate ensure intergenerational fairness by preventing the current generations from assuming the long-term environmental and other costs of present-day economic activity. Utilitarian and several other economists have proceeded with this argument one step ahead. They argue that discounting is morally indefensible and is a respectful expression for rapacity. Proponents of zero discount rate argue that discounting can completely devalue the economic impact of even disastrous environmental events happening outside a 50-year time limit. For instance, the current value of a disastrous event happening fifty years from now can be valued at less than one percent of its future value. The moral argument against discounting are convincing, however, the prevalence of inflation, opportunity cost of capital and time preference proposes that a positive discount rate reflects well societal preferences (Asafu-Adjaye, 2005). Question 2 Garnaut review has been criticized for the use of low discount rates. It has been argued many scholars that the discount rates applied in Garnaut review were unfairly low. The selection of discount rate is essential to judgments created in the review. Any rate that is materially higher than two in the review can cause the results on strong improvement to be less clear-cut. It is therefore important to explore the critique. According to Garnaut (2008), some scholars argues that future generations can be better off and that discount rates that are low can fail to discount for future incomes properly. They particularly refers to increasing average global per-capita incomes to propose that the values in the future can be much greater and hence need to be more strongly discounted than as it has been done in the review. The treatment of discount rates in Garnet review differs from other approaches, such as stern’s approach in two ways. Garnet did not take into account stern’s selection to be faulty. It rather anticipated the observations of the kind that Porter suggested and demonstrated that applying the rates that accommodate alternative means of looking at an issue does not material influence the results for Australian policy (Smith, 2011). I do not agree with Garnaut review critics, because, Garneut review examined the sensitivity of the conclusion to a much greater discount rate than the one Stern used. The review went a head and stated a preference for income equality distribution that was far greater than has ever been proposed as a fundamental for useful policy making, for instance, on taxation or advancement assistance. I also do not agree with the critics since the review methodology needed only the choice of a discount rate that is suitable in Australia. In the context of the review, the international distribution issue can be dealt with by advancement of allocation of emissions entitlements in nations that has sensible possibilities for being accepted by emerging nations. Modified Contraction and convergence offers considerable headroom for emerging-nation growth and hence the capability for poorer-income nations to grow substantially, before facing serious restrictions on emissions (Garnaut, 2011). Question 3 (a) Marketable permits are market-based instruments for controlling environment. These instruments are mostly used in the fields of air and water pollution. In a globe of perfect knowledge, marketable emission permits are entirely an equivalent alternative to unit taxes. An environmental officer can set a price, that is tax, and then adjust the price until emissions are adequately minimized to attain the set environmental standard. Environmental authority can also issue necessary number of permits directly and allow polluters’ bidding to decide the market-clearing price. According to Hussen (2008) the regulator therefore can either set a price that is price, or quantity that is emission cap, to attain the desired outcome. Marketable permit approach is beneficial since it provides an environmental authority a direct control over the amount of emissions. Marketable permits system can repeatedly accommodate itself to enhancement and inflation. Enhanced demand can transform itself to higher market-clearing price for permits minus impacts on pollution’s levels. Most polluters usually prefer permit approach because it entails lower compliance costs’ levels. Marketable permits approach depends mostly on supposition of perfect knowledge (Asafu-Adjaye, 2005) Choosing the right level of environmental Quality The preferred level of environmental pollution is a function of the social costs that are associated with pollution. First to be put under consideration is the damage that is created by pollution and this is gotten through grading the physical, natural and social environment. The second is pollution reduction cost and entails the opportunity costs of the resources used curb the rate of pollution and the value of foregone outputs. Marginal Damage Function (MDF) MDF specifies the damages that are linked with the additional unit of the amount of pollution emitted. The overall damages generated by a given level of pollution are represented by the area under MDF. Question 3(b) Carbon tax is an environmental tax that is normally applied to the fossil fuels’ burning so as to limit the generation of greenhouse gas emissions. It is usually considered as a tax on production of fuels such as coal, natural gas and petroleum. This usually encourages non-carbon fuels and technologies to come up within the market and compete well against huge carbon emitting firms. A tax on carbon has been suggested as an option to a cap and trade carbon minimization system. Within a cap and trade program, emissions of carbon dioxide and other green house gases are restricted. The companies generating a lot of greenhouse gas emissions than the ones agreed are forced to purchase carbon credits from companies that produce less emission than the ones agreed. The price for carbon credits is usually decided by what the marketplace permits. Carbon pricing scheme on the other hand is an emission trading scheme that determines the cost of greenhouse gas emissions. The scheme forces big carbon emitters to give up trade-able permits that are in line the emissions. The pricing scheme offers a fixed number of permits and allows the market to determine the price (Revesz & Sands, 2008). A major advantage of carbon pricing scheme is environmental certainty. This is because the scheme usually offers a restricted number of permits to release carbon. It imposes a lawfully binding cap on emissions. The big disadvantage with carbon pricing scheme is price uncertainty. The price of permits usually changes with respect to supply and demand, thus developing uncertainty for business. Carbon tax scheme on the other hand provide business price certainty. This is usually crucial in controlling investment in green business, particularly renewable energy. The big disadvantage with carbon tax scheme is that they cause environmental uncertainty. The government is usually aware about the price signal to be sent in the market. Another advantage on carbon tax scheme is that it is easy to manage as compared to carbon pricing scheme. This is because in carbon tax scheme, there is no carbon market. The problem with the scheme is that it cannot be linked to global carbon market, thus making abatement very expensive (Tisdell, 2009). Question 4(a) Garnaut endorsed the regime proposal for carbon price scheme. The review proposed a test mechanism for minimizing carbon emissions in Australia. The mechanism needed to be an entirely proportionate contribution to international solution. It also needs to impose least economic cost. The costs of domestic improvement effort need to be distributed fairly across the community. The review went ahead to emphasize that, contrary to assertions made by carbon pricing’s critics, the economic effect of carbon price scheme in Australia is expected to be small and under the naturally-occurring factors such as changes in interest rate, currency fluctuations, droughts and increase in oil price. The review also proposes a carbon tax that is likely to be essentially more useful than several other taxes and merits consideration, as part of tax reform program (Garnaut, 2010). The review proposes using approximately half the revenue from sales permitted to compensate household through income tax reductions and through transfer payments mechanisms for people with low income. Garnaut also flags that compensation should be paid through assistance to develop energy competence in low-income households, but recognizes possible problems with the approach. The update is unforeseen win for work in what is threatening as the main struggle of current carbon pricing regime, above industry compensation. Garnaut believes that by introducing a strict anti-climate transform measures, and taking a lead in international negotiations, Australia will be saving itself. A section of this can entail providing developing nation’s assistance in return for setting their emission minimization targets. Question 4 (b) The discussion concerning the future global policy agenda on change in climate is still continuing. Understanding the need to attain a low carbon economy has obtained a given momentum in the past few years, particularly in the run-up to Copenhagen Conference. Though the Copenhagen agreement does not have binding emission minimization targets, a number of its elements contribute to implementing a more predictable international framework that enables nations to address change in climate. A lot should be done to change the wide pledges developed by governments into actionable strategies and measurable outcomes. Policy measures concerning climate change are rapidly advancing (Garnaut, 2008). Bibliography Smith, K., 2011, Discounting, risk and uncertainty in economic appraisals of climate change policy: comparing Nordhaus, Garnaut and Stern. Retrieved May 9, 2011 from Garnaut, R., 2011, weighing the costs and benefits of climate change action, Retrieved May 9, 2011 from Garnaut, R., 2010, What if mainstream science is right? the rout of knowledge and analysis in australian climate change policy (and a chance of recovery?), Retrieved May 9, 2011 from Garnaut, R., 2008, Adaptation and mitigation measures for Australia, Retrieved May 9, 2011 from Hussen A., 2008, Principles of environmental economics, Routledge: London. Asafu-Adjaye J., 2005, Environmental economics for non-economists: techniques and policies for sustainable development, World Scientific: New York. Revesz R., & Sands P., 2008, Environmental Law, the Economy and Sustainable Development: The United States, the European Union and the International Community, Cambridge University Press: Cambridge. Tisdell, C., 2009, Resource and environmental economics: modern issues and applications, World Scientific: New York. Read More