Carbon Tax in Australia - Case Study Example

Carbon Tax in Australia Student’s Name Subject Professor University/Institution Location Date Market equilibrium results in economically efficient levels of output in a competitive market. The marginal benefit thus equals the marginal cost. In economic terms, carbon dioxide is considered as a negative externality which negatively affects this equilibrium. It imposes cost on environment and others as the negative externalities are unaccounted for in market transactions, and are hardly ever reflected in pricing structure of services and end-products. Carbon tax legislation is meant to account for such negative externalities that are associated with CO2. This brings market back to equilibrium, reduce consumption and mitigate the global warming effects (Baker & Shittu, 2006). This discussion integrate relevant economic theories to analyze carbon tax while at the same time showing how practical interventions have and will affect it. Fig.1: Negative externalities of CO2 (Adopted from: Environmental Economics) PMC = Private Marginal Cost (cost to individual) PMB = Private Marginal Benefit (benefit to individual) SMC = Social Marginal Cost (total cost to society) There are various economic arguments for and against carbon tax. Carbon tax is taken to be of economic benefits to some extents. Firstly, consideration follows that it would stimulate economic growth as it will increase the government tax which betters the economy. As average incomes increase, CO2 producing energy will increase in use (Mankiw, 2007). With Australian projected income rise by 16% in 2020, this means that the current consumption would go up and thus increase the revenues from carbon tax. In Australia carbon tax revenues will also be directed to low-income households. This will reduce the levels of rebates and therefore per capita. Secondly, carbon tax would imply an increased levels of employment by year 2020 (Wroe, D, & Murphy, K 2011). Since the investors would not support carbon tax-related production, there will be a rise in carbon neutral industries. Research would improve long-distance transmissions to make practical renewable energy. Some among them would include, clean energy providers; including solar, wind and others which assure the considered economic benefit. Tax benefits will be evidenced in boosting prices in the view of an enlarged household energy prices. This directly stimulates the economy (Taylor, D 2012). An important aspect of consideration of carbon tax is the manner by which it would achieve reductions of emissions. Carbon tax could potentially lead to greater reductions when the fundamental economics involving energy change. An action which possibly will promote reduction of carbon emission is the support that the money raised from this tax will support business in transition to cleaner energy. Fig.2: The below diagram describes the way money flows under carbon tax strategy (Adopted from: Impact of the Carbon Tax on the Australian economy and markets). On the other hand, carbon tax has is seen to have detrimental effects to the economy. It is argued that it only focuses on few emitters leaving transport and agricultural sectors which are also responsible for up to 15% of emissions each are not included. This diverts the pressure to be exerted on some included fraction of economy consequently creating alteration in the economy. Secondly, an increased cost of production is in turn sent to consumers. As a result, households and businesses use the price indicator as a scapegoat to reduced consumption for certain products. This means, consumption of cheaper imports lead to withdrawal by most industries and consequently economic downturn. Higher emission is also costly as the plan penalizes emissions and the tax payer possibly will wear some of or all the cost (Oliver, 2011). As Hooke (2012) argues, carbon tax comes with increased government administrative functions and burdens. This would involve a section of personnel in investigation tenders and managing of the new tax payouts. In addition, in such periods of political uncertainty, the tax erodes international competitiveness for Australian industries. Due to increase of prices on Australian products, so as to cover the production cost which is already raised by carbon tax? This is will also be due to carbon tax comparison to the other countries` carbon pricing which affect some markets. For instance, the Australian carbon tax triples that of Europe. The emission trading schemes generates 23 million in comparison to 77.3 million in Australia in a week. Due to this consideration, Australian products get higher prices. The government has set up schemes with initial fixed price at A$23 per tonne for the big emmitters which will apply for 2012-13 financial year.At this time the government will offer unlimited permits. Then, thid fixed price will increase by 2.5% every consequent year till the transition to adeveloed emission scheme by 2015-16. At this time availbale permits will be limited in accord to pollution cap. Flexible price system will ensure that there is no fixed carbon pricing as it will be set by the market. With a pollution cap placed for emissions, the government issues the carbon units in relation to a certain amount of set by the pollution cap. As liable entities compete to buy a number of carbon units, then they will require setting the carbon price. A set cap by the government achieves such levels of abatement in case marginal benefit equals marginal cost. The government has assumed both a price floor and a price ceiling to be imposed in the market. These controls are put in place as price floor is set to avoid prices being too low. On the other hand, the price ceiling is set as the highest legal price any commodity should be sold at. This will prevents the over pricing of carbon. Initially, a fixed price on carbon from 2012 will work like a normal tax with the intention of moving to full application of set charges and pricing (Taylor, 2012). Before then, the consultations that follow will be implemented accordingly. However, pricing agreements are not yet determined so the process is not conclusive, and involving the stakeholders might delay it or consider other alternatives that may work alongside carbon tax. A basic environmental economic model can describe differences between carbon tax, carbon cap and trade policies. In explanation, a polluting firm facing increasing pollution abatement if left unregulated would chose zero abatement to carbon units. Benefit-cost analysis determines the optimal abatement which is determined at the point where marginal benefit intersects with marginal cost. Tax is a probable way that helps achieve such levels of abatement. The polluting firms counts on the fact that it is cheaper abating carbon emissions when marginal abatement costs are lower as compared to the tax (Fig. 3 below). Fig.3: Firms, Carbon tax and Carbon Cap-and-Trade: Adopted from: Environmental Economics. Carbon Cap-and-Trade To achieve such levels of abatement, the government may also set a carbon cap through issuing of carbon permits to the polluting firms. Every permit then gives a firm the right of emitting a single unit of carbon. If the political will does not favor giving more permits to high cost firms so as to achieve efficiency, this can be done by giving each firm a fairly amount of permits. At some point high cost firm considers having the permit instead of paying the high costs. It can still propose a trade if its marginal cost of abatement is higher compared to the marginal cost of abatement of low cost firm. Such firms are not limited, and have incentive of adopting new technology and reduce the marginal abatement costs involved with both carbon tax and the carbon tax-and-trade (Floros & Vlachou, 2005). There are however many other plans the government can use to ensure reduction of missions other than carbon tax, but the better plan largely depends on its details and implementation of a system. Policy however plays a major role in determining which plan will be applicable at what time and for whom. Implementation becomes a key determinant of how the carbon tax prices will be set and whether it will be used by government in income rising. Both carbon tax and the carbon cap-and-trade achieve same level in increasing efficiency and achieving optimal abatement level with the minimum cost. Distributional implications are other only differences involved with them. For any firm, the cost is lower for the carbon cap-and-trade. The carbon tax earns the government tax revenue and therefore both policies are primarily preferred over technological and output standards. References Australian Government 2012. Why is the Australian Government removing the price floor? Retrieved2012,fromwww.cleanenergyfuture.gov.au:https://www.cleanenergyfuture.gov.au/. Baker, E., & Shittu, E. 2006. Profit-maximizing R&D in response to a random carbon tax. Resource and Energy Economics, 28(2), 160-180. Floros, N., & Vlachou, A. 2005. Energy demand and energy-related CO< sub> 2 emissions in Greek manufacturing: Assessing the impact of a carbon tax. Energy Economics, 27(3), 387-413. Hooke, M. 2012. The Carbon and Mining taxes. Canberra: Mineral Council of Australia. Mankiw, N. G. 2007. One answer to global warming: A new tax. The New York Times, 16. Oliver, S. 2011. Impact of the Carbon Tax on the Australian economy and markets. Retrieved 2012,fromwww.ampcapital.com.au:http://www.ampcapital.com.au/. Taylor, D. 2012. Benefits of The Carbon Tax. Retrieved 2012, Jan 28., from www.finnewsnetwork.com.au:http://www.finnewsnetwork.com.au/. Wroe, D. &. 2011, 10 20. Investors predict carbon tax benefits. Retrieved on 2013, Jan 28, from www.sydneymorningherald.com.au: from www.sydneymorningherald.com.au: http://www.smh.com.au/. Read More