Carbon Tax in Australia - Report Example

Running head: Carbon Tax in Australia Student’s name Institution Course Professor Date A brief discussion of the carbon tax policy in Australia In order to cut emissions and boast renewable sources of energy, the Australian government had a plan to implement carbon tax policy in July, 2012. Carbon tax system was proposed in July 2011 in Canberra, Australia. It will price one tone of carbon at US$24.74 for biggest emitters of carbon. A market based technique that will try to limit the negative cost of pollution by pricing carbon. In this policy, the government hope to negotiate for the closure of biggest coal fired power plants. Moreover, there will be establishment of new, independent climate change authority (CCA) who will be involved in establishing, policing and managing carbon pricing and payments procedures. Carbon emissions from transport and agriculture would be exempted from the commissioning of the plan (Summary overview of ACP.2012). Moreover, the household would benefit in terms of tax cuts and pension increase as compensation. A new security council is to provide support to address energy security by the government. Development and marketing of renewable energy technologies is to be facilitated by Renewable energy agency (Layton, Robinson &Tucker, 2011). Carbon trading system would be put in place to address Australia’s global emissions. Implementation of carbon tax would increase national employments and gross national income per capita. However, there will be existence of carbon pricing uncertainty and carbon tax structure would impact the price of commodities. Thus there is a possibility that consumer price index would rise. The emissions of carbon have become an emerging factor to be considered by many investors. The international competiveness of Australian industries would be hampered due to huge production costs as compared to foreign industries competitors. However, a tax free allowance for essential use of energy, border tax adjustments and long term support to the poor would counteract the regressive effects. To the producers, they will be awarded incentive so as to reduce the emissions contents of their products. Strategies to mitigate the effects of carbon taxes on low income households such as additional income tax relief should be put into consideration. The companies that will face carbon tax are; mining companies, power generators, heavy industry firms. Macquarie ‘generations and Delta electricity will be affected most with the carbon tax policy. Others are; BlueScope (steel makers), BHP Billiton, Anglo American, Boral, La Trope and Rio Tinto. They are estimated to account for more than 95% of emissions covered by the carbon price mechanism. This carbon tax will allow Australians to switch to renewable energy, making carbon neutral investments and establishments of best climate change strategies. A. Marginal cost of abatement exceeds paying the fee ,so pay fee and pollute B. The fee is more than the marginal cost. So abate and don’t pollute Imposition of carbon tax under profit maximizing competitive firms The micro- economic consequences of carbon tax will be influenced by the extent to which prices rises flowed through the wages rates. As market based approach, carbon taxes are designed to reduce emissions from carbon dioxide. For any given amount of output the level of the firm, the effects of the carbon tax would depend on the existing production structure, the quantity of the fossils consumed and the carbon tax rate. The immediate impact of a carbon tax would be on production costs after tax; with a shift up of marginal and average costs shifts on price, output at the level of the firm and industry output will be influence by the market structure of the definite sector. Firms, whether competitive or monopolistic, they will reduce the use of any input that has risen up in price and emission level (Organisation for Economic Co-Operation and Development, 2001). Illustrating impact of carbon tax on perfectly competitive firm Legend MC-Marginal cost AR- Average cost In a perfectly competitive market conditions, the firm is the price taker. In this case, it is impossible for the firm to recover these external costs. Therefore the tax levied will reduce the profits of the firm. The prices of the goods and services will increase if the costs are passed on partially or fully. In addition, the firm ought to look at the full opportunity costs of production rather than the economic costs from production (Organisation for Economic Co-Operation and Development, 2001). In the market economy, under the conditions of perfect competition, the firm optimum will be at the natural market equilibrium thus balancing the costs of production with the benefits accrued from the consumption. Imposition of tax will create new market equilibrium where less polluting is produced. The market prices of commodities in the firm would be raised moreover; the consumer would buy fewer carbon intensive products since they cost more. The output prices are fixed in the world markets. Imposition of tax will result in the upward shift of the representative firm’s average and marginal costs. Increased production costs will result in output reduction. In the output level, the prices lie below the average costs and therefore the firm is accumulating huge economic losses. Consequently, in a competitive industry the prices of the output would increase to cover up the increased production costs. The absence of technological advancement over time, huge economic losses will lead to firm closure. However this can be avoided in situations where the firm adopt technologies that will allow substitution away from fossils fuels to evade the risk factor. Thus the profit maximizing firm will respond to carbon tax in terms of cost reduction of low carbon energy technologies and emissions reductions of existing economic technologies. The research and development into conventional technologies would be enhanced if the firms operations are flexible. In the light of carbon tax, the profit maximizing firm should struggle to equate marginal revenues and marginal costs. Imposition of carbon tax under monopolistic conditions In a monopolist firm, the imposition of carbon tax will increase the long run average and marginal production costs. This upward shift will depend on carbon tax rate chosen and the share of fossil fuels in the monopolist’s costs of production. Rise in the cost curves would increase the price and reduce the output. Due to increase in output price, part of the tax burden will be shifted unto the consumers of the monopolists output. A larger tax burden shift will make output demand more in elastic (Organisation for Economic Co-Operation and Development, 2010). In addition, because of scaling back of the output, there is loss of job opportunities and wage reductions. Due to existence of pure economic rents, the incentive required in research and development to avoid carbon tax would be in adequate. Therefore there is change in the fixed costs and have no impact on the marginal costs or marginal revenue. Illustration of impact of carbon tax on monopolist firm Welfare implications of the tax At least 50% of the revenue accrued from the price of carbon will be channelled to households through household assistance package .Carbon tax will impose compliance costs on business firms and the administrative costs to the government. The introduction of the carbon tax in the market will spur increase in economic efficiency leading reduction in deadweight loss (Organisation for Economic Co-Operation and Development, 2010). Top down model have been used to estimate losses in economic welfare. The economic welfare of a consumer is estimated by equivalent variation measure. The price need to be cut such that it equals the marginal cost of the last unit produced, thus maximizing societal utility. The costs will represent a dead weight loss on the economy as it adjusts itself to verifiable commitment to reduction of emissions. The carbon tax naturally is a cost to producers with regard to carbon contents in their activities. However fewer transactions will take place thus limiting economic welfare. This tax will stimulate the consumers to turn to alternative renewable sources of energy such as tidal power and wind power (Layton, Robinson &Tucker, 2011). Alternatively, the carbon tax has created incentive for both consumers and producers to avoid paying tax through reduction in usage of carbon intensive fuels. Introduction of carbon tax will reduce the emissions to the level where the costs of abatement of emissions and the costs of paying tax on emissions are at equilibrium. A carbon tax would influence competitiness by increasing the costs of polluting inputs. Production costs increases leading to fewer profits due to lower margins or reduction in sales (Layton, Robinson &Tucker, 2011). In addition it changes each emitter’s marginal costs and marginal benefits of emissions reductions. Carbon tax policy will influence tradeoffs through provision of incentives to customers and firms to conduct research and development and adopt technologies that will reduce the environmental impacts per unit of output. The development of environmentally friendly substitutes will be cheaper for consumers to utilize. The carbon tax fixes the marginal costs for carbon emissions and gives room quantities emitted to adjust. The higher cost of energy has created a stronger incentive to encourage energy saving technological innovation. An increase in the marginal costs has impacts on the profits of the firm (Nieuwenhuysen, Lloyd & Committee for Economic Development of Australia, 2001). The level of production reduces since the costs of production increased as the quantity supplied declined. Part of the costs is transferred to the end users and increase in prices will limit the volumes of the commodities. The level of output where marginal costs equal the marginal revenues will be lowered. The revenue accrued will increase economic welfare since it is able to reduce highly distorting taxes. The public are encouraged to invest in socially desirable level of innovation in low-emissions technologies. Raising prices of more emissions intensive goods relative to less emissions intensive goods will influence the consumer to spend more (Andersen & Ekins, 2009). References Allan Layton, Tim Robinson, Irvin B. Tucker, (2011).Economics for Today Asia Pacific, Cengage Learning. Brian Dawson, Matt Spannagle, (2009).The Complete Guide to Climate Change, Taylor & Francis. Fisher & Hinchy, (2009).Impact of Carbon Taxes, Australian Bureau of Agricultural and Resources Economic, Canberra, Australia J. P. Nieuwenhuysen, Peter Lloyd, Committee for Economic Development of Australia, (2001).Reshaping Australia's Economy: Growth with Equity and Sustainability, Cambridge University Press. Mikael Skou Andersen, Paul Ekins, (2009).Carbon-Energy Taxation: Lessons from Europe, Oxford University Press. Organisation for Economic Co-Operation and Development, (2001).Environmentally Related Taxes in OECD Countries: Issues and Strategies, OECD Publishing. Organisation for Economic Co-Operation and Development, (2010).OECD Economic Surveys: Australia 2010, OECD Publishing. “Summary overview of Australia’s Carbon Tax Policy”. Retrieved on 05th May 2012 from http://www.cleane nergycentre.com.a u/about-clean-energy-centre/news/287- summary-overview-of-australias-carbon-tax-policy Read More