Impact of Carbon Tax Introduction in Australia - Case Study Example

Impact of Carbon Tax Introduction in Australia Student’s Name Institution Affiliation Introduction The term carbon tax refers to a form of tax that is levied on the contents of carbon that may be found in fuels. It is present in all hydrocarbon fuels i.e. natural gas, coal and petroleum; because when burnt they emit Carbon dioxide (a gas that has been duped a major player in global warming) as compared to non-combustion sources of energy such as nuclear, wind, hydropower and sunlight; all of which do not emit Carbon dioxide (Gandhi, 1998). During this era of globalization and development of Multinational Corporations (MNCs), vast industrialization has taken place: something that has caught the eyes of many governments because they have to do something about emissions. Carbon taxes have provided the better option towards discouraging the emissions of greenhouse gases, because they offer an arguably cost-effective means towards discouraging the emissions because they are Pigovian taxes, that is, tends to address the issue of emission with reduced social or full costs of the emitters actions (Smith, 2013). A good number of nations have consequently implemented energy/carbon taxes. In this paper, Australia is the case study, and will look at how this bold step have or may impact domestic and international investment in the country, bearing in mind this lies under the political, legal, technological and ecological factors in the PESTLE analysis (OECD, 2012). Australia Australia has one of the world’s fast growing economies. Since the 1980s, the country’s government has overseen an economic transformation, turning the country into a high tech one that’s export-driven. The most tangible result has been a remarkable gross domestic product (GDP) rise of 3.6% from 1992 to 2007; compared to OEDCs 2.5% average. Australia has also proved itself economically during the 2008 downturn of the global economy. In fact, the country’s employment levels and economy levels actually grew at the center of the crisis (Lancaster, 2012). In recent times, the Australian economy has become a force to reckon with in the larger world economy, due to its performance and good rewards to investors; this can be largely attributed to its vast good performing industries whose doors are always open for investors to do what they love doing most. It is not a wonder that many global investors have flocked the Australian industries. This proves why many investors come from Asia and further nations flock to invest their resources in sustainable as well as industries with a prospective plan to migrate to Australia shores in the process (Inc., 2009). Carbon Tax in Australia In November 2011, the Australian Senate passed a new tax on the emissions of carbon, something that means that foreign investors would have to go back to their drawing boards and review their business activities in Australia. The government has however continued with the insistence that this new development is less likely to affect foreign investment. Therefore, it is worth examining the two sides of this argument and concluding on the exact effects that the Carbon tax will bring about for foreign investors (Humphreys, 2007). The Carbon tax is part of the larger Clean Energy Future plan as well as a foundation of the bigger Emissions Trading Scheme (ETS). It is worth noting that ETS is market based therefore after 2015 it will solely be upon market dynamics to determine the amounts in price the Carbon emitters will have to part with as part of the plan. Under carbon tax, the country’s biggest polluters will incur charges of A $23 per tonne of emissions that they release. The annual increases are already defined to rise at 2.5% per year until 2015 when ETS will take control and the market will be the determinant henceforth. The idea behind all this is that it will change households and eventually compel the carbon-intensive organizations and industries to shift focus towards reduced emissions, something that will reasonably reduce the Carbon impact on the environment (Hsu, 2011). The carbon tax began at a fixed rate of A $23 for every Carbon dioxide tone. The tax is also an initiative of the government’s plan to reduce emissions by at least 5% below the 2000 levels; this is to be achieved by the year 2020. Any policy whose objective is reducing carbon emission, whether it is under tradable emission permits or carbon taxes will definitely raise the energy prices. The Carbon tax is in a pole position to have a wide economic impact that will affect the country’s gross domestic product (GDP), how trade is done, and most importantly the structures of industries. Since the policy is directed towards emission reductions, it will as well affect taxation such that the tax burden that it bring about is unequally distributed amongst the diverse household groups. The low-income households will of course have to carry the relatively heavier tax burden (Abbott, 2012). How Carbon Tax Will Affect Consumers There exists a wide range of different ways through which a smooth and conflict of interest free transmission from carbon-intensified energy to the better alternative of low-emissions types of energy. Australia has been using the policy of the subsidizidization of low-emission energies in addition to new technologies over of energy generation over the last seven years (Alexander Zahar, 2012). These programs involve direct investments with the aim of the improvement of solar energy, wing energy among others. The programs also involve the extraction of biomass wastes got from sugar mill wastes, geothermal energy, and hydropower generation (World Bank, 2008). This approach is known as ‘pick winners’ and has its drawbacks on the high capital requirements that are needed to install and manage the involved technologies; political decision makers have also been biased. It has been argued that the market-based approaches of greenhouse gas emission reduction are by far superior to the political processes such as the Carbon tax legislation (World Bank, 2008). The government’s decision to apply a market-based approach towards emission reduction through the carbon tax implementation will influence the prices of products and services. Once the emitters begin transferring the costs that incur from the tax to into the set prices of products, then the production of goods through carbon-intensive methods will become much more expensive as compared to the use of low-carbon intensified methods. (World Bank, 2009) The relative prices changes will result to industries substitution from carbon-oriented inputs towards low-carbon inputs; consumers will also shift from consuming goods that are produced through carbon-intensified approaches because they will be fetching higher market prices to cater for the carbon taxes. The above behavioral changes will automatically have substantial feedback effects towards the economy’s product-mix, industrial structures, resource allocations, income distribution, and economic growth at large (CCH, 2012). How Carbon Tax Affected Industries and Corporations The effects of the carbon tax in Australia has and will to a greater extent continue to be a cost related affair; this is the government tactic towards compelling corporations to switch to less emitting methods when they feel the heat of high production costs in addition to stiff price competitions in the market. The costs of almost all inputs/raw material that are in any one way related to gas and electricity would rise as an automatic result of the carbon tax. However, the impacts of the carbon tax were likely to have on the other inputs is still unclear, but with time, we will be in a good position to see what happens to them (Claus, 2010). Businesses have had to identify: The inputs that are more likely to experience cost increases The estimated amounts by which the costs are projected to rise by Whether the prices should be adjusted in order to put into account the input cost changes The anticipated cost increments Define the industries that are in a pole position to feel the heat of the carbon tax, the industries include; gas, electricity generation, steel, heavy transport, mining and other energy-oriented manufacturing industries. Understanding the businesses’ consumption of electricity is important in the determination of the cost effect the carbon tax is likely to have on a business (Claus, 2010) However, it is unfortunate that upon the implementation of the carbon tax, its actual impact on costs towards businesses has not been understood precisely. This is because in the cases of many outputs the costs impacts take some time to gradually flow throughout the whole system. Industries have therefore had to experience radical and unexpected price increases because of un-projected occurrences (Cormann, 2011). Price changes are imminent as far as Australian industries and corporations are concerned. The tricky thing here is that businesses have had to adjust prices in such a way that the changes match with the projected profit margins; set prices also have to be flexible because as a business there is competition and a quest to have the maximum possible market share (Dowers, 2009). Some businesses have simply had to notify their customers about the new price adjustments. In most cases, this is a sufficient strategy; the only limitation to this strategy is that the Australian market has resisted price changes (increments in particular). Therefore, the majority of businesses have had to minimize their prices by as far as possible in order to gain some competitive edge over their rivals; something that has generally led to profit minimization since the costs of inputs have already risen (Claus, 2010). The carbon tax objectives are based on its core, which adopts the principle that the prices of commodities directly affects consumer behavior thus businesses will have to urgently make decisions (in this case, decide to be largely energy efficient) for them to gain some foot in the market’s competitive pricing. Business and industrial responses have had to adhere to this core (Claus, 2010). The Carbon tax core has turned the Australian domestic market into a battlefield for competitive pricing. Initially, people thought that upon the implementation of the Carbon tax legislation, prices of commodities would increase, as organizations would seek to delegate the effects of the extra taxes they have to pay because of gas emission to the ordinary Australians; therefore, their profit margins would remain intact. However, the complete opposite has occurred because they have had to fight for their survival; this situation is expected to get better depending on company’s readiness to adopt non-emission energy use (CCH, 2012). Australian companies have received huge blows in the international markets because they have had to pay extra finances towards high carbon taxation back home, compared to most of their foreign counterparts especially from Europe, Americas and Asia who do not pay carbon taxes. To those who pay carbon taxes, they are not as high as they are in Australia. Their international competitiveness has therefore received a slight change and what they face is a kind of an unfair competition. In general, currently Australian businesses are not operating at their level best, something that is expected to continue up to 2015; thus, in the near future they will be having a competitive edge as far as cost effectiveness is concerned both domestically and internationally (OECD, 2012). The Australian government is doing more harm than good to the competitiveness levels of Multinational corporations that operate in the country and eye the same market shares as their foreign counterparts. However, due to the complexity of international business its still too early to declare that Australian MNCs have totally failed or predict that they will fall prey to foreign ones, this is because of globalization, political economy differences between nations, cultural differences, international business ethics (these cases have affected Nike, India’s transformation, Siemen’s scandal etc.) (Hill, 2012). According to Hill (2012), the performance of Australian corporations globally will also depend on the trade & investment environment at the global level e.g. FDI and REI as happened in the Ecuadorian Rose Industry case; the performance of the global monetary system such as foreign exchange markets and the global capital market. Their performance will also depend on the company’s strategies and international business structures e.g. entry strategies, strategic alliances etc. Business operations will also play a part in determing how Australian companies perform in the global markets e.g. their logistics, production systems, outsourcing, global HRM, their finances and accounting, imports, countertrades and exports (Hill, 2012). Real Life Impact on Industries Australia’s large coal industry is more likely to be affected because of the emissions that coal mining produces; on the other hand, Australia’s competitors in coal exporting are not expected to incur the same. According to the Public Affairs Institute, Australia’s coal industry will more likely lose many jobs to their overseas counterparts and some mines are likely to be closed down (CCH, 2012). Major projects in the many Australian industries are not expected to collapse because of the Carbon tax introduction. The daily industry is another example of industries that will also be impacted by the Carbon tax due to the increased costs of power that is used to process milk. Households’ bill will rise by about $10 per week due to the tax introduction. Carbon prices are projected to rise by 9.1%, consequently lead to power bill increments (CCH, 2012). Government Efforts towards Compensation Some of the industries that are heavily affected by the implementation of the Carbon tax will receive some compensation as part of the larger Energy Security Fund (ESF), a project under which the government will channel $1billion as payments to the largely emission-intensive industries. Most of this funding will be pumped into the coal industry; according to the Institute of Grattan, if compensation does not take place then coal and natural gas mining will come to a stall and that upon full implementation of the Carbon tax the steel industry is more likely to improve drastically (Claus, 2010). Under the Carbon Farming initiative, grazers and other farmers in Australia will be in a position to plant trees and earn some carbon credits, which they will be permitted to sell to the companies responsible for the payment of carbon prices. Another program, known as The Clean Technology Investment Program (CTIP) will assist manufacturers to rally behind in the investment of capital equipments that are energy efficient as well as low emission machineries, products and their processes. Companies in the Australian food sector will have access to grants that are aimed at energy efficiency improvement (CCH, 2012). Conclusion The Australian government took a bold step towards by walking the talk via the implementation of the Carbon tax legislature, something that countries like the United States have always been coy to implement. We cannot deny the immediate consequences are economically negative especially to foreign and domestic businesses that operate in Australia. However we must acknowledge that Australia is one-step ahead of other countries because Carbon taxation is the way to go; in the next 20 or so years, most world nations will have adopted a similar if not exact legislation. By the time, other countries will be realizing how far ahead Australia was in 2012 both socially and economically it will be business as usual in Australia. Currently it is not the best place to operate a business from, especially ones that consume huge amounts of energy. The only way a new or existing business can successfully do business in Australia is the adoption of less carbon emitting methods of power generation; business is favorable if a business chooses to go with the tide rather than to go against the tide and continue incurring high tax expenses. It is good that the government has recognized the fact that the acquisition of the capital that can be used to transform from carbon emission oriented to the non-emission procedures is quite expensive and may not be directly affordable. This is the reason behind which the government has set up some grants e.g. CTIP to ensure that willing investors who wish to move with the tide have minimum financial problems to worry about. Finally, so far the progress towards the implementation of the Carbon tax has been good. The future is bright for businesses (local and international) in Australia. The challenges they are currently experiencing are transitional ones and not permanent ones, thus they do not mean that businesses should pack and leave their premises in Australia. The Australian economy has always emerged on top against all odds, even during the 2008 recession it still emerged head high, in fact, employment levels rose. References Abbott, T. (2012). A Strong Australia. Sydney: Liberal Party of Australia. Alexander Zahar, J. P. (2012). Australian Climate Law in Global Context. Sydney: Cambridge University Press. Bank, W. (2008). International trade and climate change: economic, legal, and institutional perspectives. Doha: World Bank Publications. Bank, W. (2009). WDR 2010: Development and Climate Change. Liverpool: World Bank Publications. CCH. (2012). Australian Master Tax Guide 2012. Sydney: CCH Australia Limited. Claus, I. (2010). Tax Reform in Open Economies: International and Country Perspectives. Duban: Edward Elgar Publishing. Cormann, M. (2011). Interim Report - the Carbon Tax: Economic Pain for No Environmental Gain. Sydney: Select Committee on the Scrutiny of New Taxes. Dowers, S. (2009). Sustainable energy systems: pathways for Australian energy reform. Port Elizabeth: CUP Archive. Hsu, S.-L. (2011). The Case for a Carbon Tax: Getting Past Our Hang-ups to Effective Climate Policy. Yokohama: Island Press. Humphreys, J. (2007). Exploring a Carbon Tax for Australia. Sydney: Centre for Independent Studies. Inc., W. P. (2009). The Oil & Gas Year Australia 2009. Sydney: wildcat publishing. Lancaster, S. (2012). Green Australia. Duban: Wakefield Press. Hill, C. W. (2012). International Business. Toronto: mcgrawhill. OECD. (2012). Southeast Asian Economic Outlook 2011/12. New York: OECD Publishing. Smith, T. (2013). Fiduciary Duty and the Atmospheric Trust. Birmingham: Ashgate Publishing, Ltd. Ved P. Gandhi, J. C. (1998). Carbon Taxes - Their Macroeconomic Effects and Prospects for Global Adoption - A Survey of the Literature. New York: International Monetary Fund. Read More