The Proposed Australian Carbon Tax - Case Study Example

THE PROPOSED AUSTRALIAN GOVERNMENT CARBON TAX Report Student’s Name Instructor’s Name Course Title Date Executive Summary The proposed Australian carbon tax is policy was a measure that introduced to ensure that there is a responsibility of the social damages that a firm causes as they engage in activities of goods production. The measure is aimed at closing the existing gap which allowed many firms to engage in business activities which caused social damages and not be held accountable for their activities. The major focus of the proposed policy is the carbon emission from industries. From the eyes of the many players in the industry with the introduction of the proposed policy is not an all rosy affair as it will bring with it some advantages and disadvantages. The proponents of the introduction of the policy argue that it will help to ensure that other form of energy are used leading to more business opportunities. These proponents also feel that the revenue raised from the taxes would be well utilized by the government to spur growth in other sectors of the economy. Opponents of this policy indicate that the policy would lead to the gap between the rich and the poor widening. It has also been felt that the implementation of the carbon tax policy would lead to loss of jobs as some firms will be forced to reduce their production. Introduction and Background The proposed Australian Government policy on carbon emission is also known simply as the Carbon Tax. Many economists have termed it as a price on pollution. The tax is imposed on carbon emitters in an attempt to reduce carbon emissions in Australia (Van Heerden et al, 2006). This follows a study indicating that of all the developed countries in the world, Australia is the largest carbon emitter. A report published following the studies recommended that ecotaxes be used to address the climate issue. It is for this reason and also the mounting pressure from the civil society and other climate friendly organizations that the Howard Government was forced to establish a Task Group that would advice the government on matters regarding emissions trading schemes. The change of government as the Labour Party took over the realms of power led to the ratification of the Kyoto Protocol. In 2008 following the Garnaut Review on Climate Change, a recommendation of a price of $20 to $30 for each ton of carbon emission which was equivalent to an average rise of 4% per year (Wissema & Delink, 2007). In 2010 following the Gillard’s win the carbon tax was implemented as planned as she thought it wise to get consensus on the matter before enforcing it. A Multi Party Climate Change Committee was then formed and it was agreed that the carbon tax was to be introduced in July, 2012. Arguments in support of the policy decision Proponents of the carbon tax argue that the major benefit of the carbon tax would be to spark a transformational effect on the electricity grid of Australia. According to Wier et al (2005), he direct benefit for the Australians would emanate from expenditure on new power plants and infrastructural network which would prepare the electricity grid for the increased decentralised electricity generation. These sorts of changes combine well to provide a more competitive electricity market which emphasizes on meeting the consumer’s needs at the same time causing lower pollution and at a lower and more affordable price. This would provide the necessary energy incentives required to steer the nation towards higher energy sufficiency. This would also create business opportunities since it would open a way for the entry of other small-scale energy producers such as those providing electricity using gas power plants. The decentralization of energy would however be faced with major challenges which include lack of clear guidelines on how to coordinate these ventures and how to shift reliance on the already existing centralized electricity provision system (Hamilton & Cameron, 1994). It is of essence to note that in other places where such taxes have been imposed, there has been reported increase in the utilisation of renewable energy sources such as solar panels and wind energy. This is in turn a way of creating business growth for the manufacturers of these types of goods. For a long period of time following industrialization greenhouse gases (GHG) have been emitted into the environment without any cost to the polluter. The proposed carbon tax policy intends to correct this failure by imposing on the polluters the importance of incorporating the social damages in their policy formulation. This approach is hailed by the environmental economists since it is viewed as addressing the need to ensure the reduction of GHG’s to an acceptable level which has no major effects on the economic-environmental systems (Barker & Kohler, 1998). The term pollution as conceptualised in theories of economics as an aberration on a market system which is functionally perfect, would be well catered for by the use of the carbon tax policy as proposed. The carbon tax policy is also hailed as one that addresses welfare economics as it involves the estimation of damages on the social aspects of the human lives, attaches a monetary value and imposes an appropriate tax in order to correct these damages. Dejavarjan (2011) states that the damages emanating from the GHG’s have always been transferred to the society since the polluters do not bear any costs, but with the proposed Australian carbon tax policy the balance is going to be restored making firms to pay for the damages they cause. In relation to other carbon emission regulatory measures that can be used, a carbon tax is much simpler to implement and has more certainty when it comes to the impact. The carbon tax is a sure way of ensuring an immediate signal that firms will have to bear the cost of externally imposed damages caused by their production activities (Kerkof et al, 2008). The system is more effective than an emission trading system which when used before created many avenues for corruption. The carbon tax system is also deemed to be more transparent and this is fronted as one of the reasons why there is less corruption when the system is used. Wissema and Delink (2007) indicate that the revenue raised through the carbon tax system is also viewed as to flow into the arms of a capable government which in return uses the funds to provide other socially beneficial services to the low income earners. This is different with other measures of correcting carbon emissions which drive the taxes and commissions channeled into the hands of market participants whose main interest is to ensure the growth of their profits. Arguments against the policy decision Some economists argue that the proposed Australian carbon tax would have a negative effect on the job market. A controversy over the magnitude of this effect does exist among the economists and other policy makers in Australia. Given that reliance on coal and steel would be reduced, it follows that the people in these industries would be affected. The workers working in the mining, processing and other industries which directly deal with these two elements would have to be laid-off so as to accommodate the reduced production of coal and steel (Labandeira et al., 2004). Other industries such as the automotive and related industries would also be adversely affected. The estimate indicated that within its first years of its introduction the carbon tax would lead to the total closure of some coal mines leading to an 18.7% reduction of coal production. This translates to an average decline of two billion dollars in terms of revenue and a whooping 4085 jobs being lost. For this reason the experts feel that the adoption of policies that advance green energy would result in the shrinkage of the economy in an appreciable magnitude. It has been argued that since the introduction of carbon tax would out rightly translate into resource reallocation to the green energy friendly sectors of the economy, there may be an overall negative effect on the Australian GDP. This is because it might take some time before the sectors that the resources are reallocated to be able to reach the level that the carbon emitting sectors have reached in terms of growth following their existence over many years (Verd & Tol, 2009). There have been arguments that an introduction of carbon tax would also lead to loss of effective competitiveness by the firms in related industries. Many factors such as the cost of production, quality of products, the logistics of network, political stability and trade rules all have an influence on the competitiveness of a firm in the market both locally and internationally. The introduction of carbon taxes would have a big impact on the cost of production and in the long run reduce a firm’s competitiveness in the market. When many multinationals are faced with severe effects on the cost of production as would result following the introduction of the proposed Australian carbon tax, they are bound to relocate to friendlier environments (Verd & Tol, 2009). Most shift their businesses and production to other nations mainly the developing ones since the policies on the environment here are less strict. These firms tend to invest abroad or even relocate hence creating further negative effects on the economy due to the reduced revenues and also the loss of jobs for the local population. The effect of the proposed carbon tax policy would be highly felt in the case where other countries fail to introduce similar policies making these multinationals to favour investing in the other countries with lesser restrictions on environment issues (Zhang & Baranzini, 2004). Economists argue that the introduction of carbon tax in Australia would have a negative effect on the relatively equitable and fair income distribution seen in the Australian economy. This is because low income households will bear the biggest burden emanating from the introduction of the policy (Hamilton & Cameron, 1994). This is because an introduction of the proposed carbon tax policy will lead to the increase of the prices of all essential goods which are the main sources of expenditure for the low income earners in the economy. For this reason the inequality between the poor and the rich in the society is bound to increase with the poor being more affected since their savings are bound to decrease since their income might be all spent on the basic commodities whose price have increased. Regional disparity will also set in since even as it stands as of now, the energy prices in all states do not match with the rural population already paying a higher price for these items and it is bound to even get higher (Zhang & Baranzini, 2004). The cost of housing will also increase as a result of the introduction of the carbon tax. This is because from the cost of housing construction to the cost of housing maintenance, there will be an appreciable rise as a result of the introduction of carbon tax as the cost of raw materials for these undertakings will also increase in equal measure. Conclusion The policy decision could be regarded as a sound one when viewed by both economists and environmentalists. This is because it ensures that there will be compensation of the social damages resulting from the production activities of different firms. The compensatory systems of using carbon taxes is appealing to economists as the revenues obtained would be channeled to other sectors of the economy hence spurring growth (Labaindera et al., 2004). The implementation of the carbon tax has enabled some level of reduction of the carbon emitted from the Australian firms as it was intended. There were unintended consequences such as the loss of jobs. This was fore mentioned by the opponents of the policy who argued against it during the introductory phase. The introduction of the carbon tax policy was intended to be done in phases so as to allow the economy to be able to adjust its self to accommodation the new charges on goods produced. For this reason despite there have been some level of short term benefits being realized more benefit are yet to be realized (Wier et al., 2005). The major revolutions which were intended to be created by the carbon tax would only be seen as a result of long term enforcement of the carbon tax policy. References Barker, T & Kohler, J 1998, Equity and ecotax reform in the EU: Achieving a 10 percent reduction in CO2 emissions using excise duties, Fiscal Studies, 19, p. 375-402. Devarajan, S. et al., 2011, Tax Policy to Reduce Carbon Emissions in a Distorted Economy: Illustrations from a South Africa CGE Model, The B.E. Journal of Economic Analysis and Policy, 11(1), p. 1-22. Hamilton, K & Cameron, G 1994, Simulating the distributional effects of a Canadian carbon tax. Canadian Public Policy, 20, p. 385-399. Kerkhof, A et al., 2008, Taxation of multiple greenhouse gases and the effects on income distribution- a case study of the Netherlands, Ecological Economics, 67, p. 318-26. Labandeira, X. et al., 2004, Green Tax Reforms in Spain, European Environment, 14, p. 290-299. Van Heerden, J. et al., 2006, Searching for triple dividends in South Africa: fighting CO2 pollution and poverty while promoting growth, The Energy journal, 27, p. 113-41. Verde, S & Tol, R 2009, The distributional impact of a carbon tax in Ireland. The Economic and Social Review, 40(3), p. 317-38. Wier, M. et al., 2005, Are CO2 taxes Regressive? Evidence from the Danish experience. Ecological Economics, 52, p. 239-51. Wissema, W & Dellink, R 2007, AGE Analysis of the Impact of a Carbon Energy Tax on the Irish Economy, Ecological Economics, 61, p. 671-683. Zhang, Z & Baranzini, A 2004, What do we know about carbon taxes? An inquiry into their impacts on competitiveness and distribution of income, Energy Policy, 32, p. 507-518. Read More