Climate Changes Globally in General - Essay Example

Climate Changes Globally in General and particularly in Australia: The Role and Effect of Tax Policies 0 Introduction: Considerable time and efforts have been spent on the evolution of a system by which the potential danger of the global warming can be contained. As a matter of simple background of the issue; global warming is caused by the thickening of the ozone layer surrounding the atmosphere of the earth, by the carbon-dioxide and other green house gases being emitted by the burning of fossil-fuel and other energy sources world-over. Since global warming has a potential impact of increasing the normal temperature it produces a lot of harmful effects for the people living on the earth. In order to restrict the emission of such gases two different forms of providing a deterrent feature is being discussed by the economists and other expert environmentalists; one is the Carbon tax and the other Emission trading. Carbon Tax is a kind of Pollution Tax purported to be applied on the energy sources which emit carbon dioxide. (Wikipedia)1 The Carbon Emission Trading on the other hand as provided by Kyoto Protocol involves the global trading of permits to emit green house gases converted in terms of Carbon dioxide. (Wikipedia) 2 Obviously there is a need to put a price on carbon to force companies to abandon older, dirtier technologies for newer, cleaner ones. Today the atmosphere is being used as municipal dump where carbon dioxide is deposited free. The New York Times (2007) 3 Once the governments start putting a monetary value on this privilege, business and industrial houses will be forced to evolve smarter ways to run their business. A carbon tax is one approach. Another is to impose a steadily decreasing cap on emissions and let individual companies figure out ways to stay below the cap. Several arguments are being advocated for and against each of these two forms of measures that can be undertaken by the different countries of the world. This case study ______________________________________________________________________ 1 Wikipedia Carbon Tax http://en.wikipedia.org/wiki/Carbon_tax 2 Wikipedia Carbon Emissions Trading http://en.wikipedia.org/wiki/Carbon_emissions_trading 3 The New York Times (2007) The Truth about Coal Editorial dated February 25th 2007 http://www.nytimes.com/2007/02/25/opinion/25sun2.htmlex=1176091200&en=6e228e2c74bf5144&ei=5070 attempts to discuss the cases for and against carbon tax and emission trading to contain the global warming globally in general and more particularly in Australia. 2.0 Carbon Tax: Carbon taxes are simply direct payments to government or any other authority or organization that can collect taxes. Kevin Baumert (1998)4 Carbon tax is based on the carbon content of the fuel being consumed by each entity individually. Under economic theory carbon tax represents an indirect tax on the negative externality as such tax would add up to the actual cost of production by internalizing the social cost of polluting the environment by emitting carbon dioxide and other gases. Charles Komanoff (2007)5 opines that to attack global warming, every energy-critical decision needs to be predicated on a trajectory of rising energy prices. A phased-in carbon tax allows this, whereas cap-and-trade will do little to mitigate the price roller-coaster that discourages emissions-minimizing investment. 2.1Cases for Carbon Tax: Levying a tax on the emissions will: Reduce the fossil fuel usage and substitute them by clean fuels and technology Provide a revenue steam to enable a progressive tax shifting - Carbon Tax Centre6 Carbon tax could be extended to all carbon based consumptions while trading systems may not be able to reach parts of the transportation and service sectors Transaction costs are lower in the case of carbon tax as compared to emissions trading Carbon taxes pose an effective system for the reduction of emissions as it is a permanent incentive to reduce the emissions Kevin Baumert (1998)7 ______________________________________________________________________ 4 Kevin Baumert (1998) Carbon Taxes vs. Emissions Trading: What's the Difference, and Which is Better http://www.globalpolicy.org/socecon/glotax/carbon/ct_et.htm 5 Charles Komanoff (2007) Don't Trade Carbon, Tax it Grist Environmental News and Commentary http://gristmill.grist.org/story/2007/2/13/83257/5462 6 Carbon Tax Centre http://www.carbontax.org/ 7 Kevin Baumert (1998) Carbon Taxes vs. Emissions Trading: What's the Difference, and Which is Better http://www.globalpolicy.org/socecon/glotax/carbon/ct_et.htm It is argued that a carbon tax offers certainty about the price of polluting which is considered to be an essential factor by the economists and businessmen. Another argument in favour of the Carbon tax is that the amount of tax collected may be used to reduce the deficits or financing the offsetting of pay roll taxes or the alternative minimum tax. 2.2 Cases against Carbon Tax: The following are the issues against the carbon taxes: The economic cost of carbon tax on the society is very high as the entities will transfer the burden to the ultimate consumers. Imposing a rational standard for taxation on the different consumption levels of fossil fuels is difficult - Richard Darbera (2001)8 3.0 Emissions Trading: Under emissions trading it is proposed that t he government would first have to put a cap on CO2 emissions, either for certain industries or even the economy as a whole. At the same time, it would allocate quotas for CO2 emissions, either based on current emissions, or on energy output, or some other standard. Review and Outlook (2007)9 In this way it is possible to set the limit on each of the entity that is producing the greenhouse gases. If one plant reduces its emissions more quickly than another, it can sell its credits to the other emitter. A carbon tax would simply increase the cost of emitting each ton of carbon, which could then be passed on to consumers. Juliet Eilperin and Steven Mufson (2007)10 The most common form of emissions trading is cap and trade, under which a maximum amount of emission is determined by a regulatory authority and a number of permits that is equivalent to that amount of emissions is distributed. The permits may be allocated by _____________________________________________________________________ 8 Richard Darbera (2001) Automobile and Climate Change: The Case against a Carbon Tax on Motor Fuels European Transport Conference http://latts.cnrs.fr/site/tele/rep1/RD01-CarbonTax-PTRC.pdf 9 Review and Outlook (2007)9Cap and Charade The Wall Street Journal 3rd March 2007 10 Juliet Eilperin and Steven Mufson (2007) Tax on Carbon Emissions Gains Support Washington Post 1st April 2007 http://www.washingtonpost.com/wp-dyn/content/article/2007/03/31/AR2007033101040.htmlhpid=sec-business auction (to the highest bidders) or 'grandfathered' (given to current emitters according to a fixed ratio that reflects their historical emissions). (Hugh Saddler, Frank Muller, Clara Cuevas 2006)11 Obviously there will be some kind of lobbying by the companies for setting a higher cap and this may pose a difficulty rather than difficulties in the trading. However it is argued that by designing the caps in a way that results in profits by trading, there would be more seriousness attached to the curtailing of the emissions. There is another draw back in setting the cap higher, since setting up the cap really does not deter the companies from emitting the gases but it gives the companies the right to emit a certain quantity of gases. A Cap-and-Trade system involving plant-by-plant measurements would cause administrative difficulties and also would lead to chances for cheating and evasion. 3.1 Cases for Emission Trading: The aspects that go in favour of emission trading are: Emission trading ensures the reduction of emission regardless of the international borders as countries are encouraged to trade internationally on the emission reductions Emission trading acts as an incentive for the private firms to reduce emission in view of the profits they make. Values of Emission permits adjust themselves automatically for inflation and other market price fluctuations whereas carbon taxes do not. Kevin Baumert (1998)12 Emission trading is transparent and administratively efficient for targets, Costs and permit allocation arrangements so that the abatement activities receive maximum benefit. Emission trading has broad coverage of all six major green house gases. BHP Billiton (2007)13 ______________________________________________________________________ 11 Hugh Saddler, Frank Muller, Clara Cuevas 2006)11 Competitiveness and Carbon Pricing Border adjustments for greenhouse policies The Australian Institute Discussion Paper No. 86 http://www.dpmc.gov.au/emissionstrading/submissions/195_sub_emissionstrading_attach2.pdf 12 Kevin Baumert (1998) Carbon Taxes vs. Emissions Trading: What's the Difference, and Which is Better http://www.globalpolicy.org/socecon/glotax/carbon/ct_et.htm 13 BHP Billiton (2007)Submission to the Task Group on Emissions Trading http://www.dpmc.gov.au/emissionstrading/submissions/198_sub_emissionstrading.pdf 3.2 Cases against Emission Trading: The cases against emission trading are: Emissions trading system involves high trading costs as there would be regional, national and sub national trading programmes operating according to their own rules. Cat Lazaroff (2002)14 There are several economic issues like the duration of emission permits, emission loads, emission caps, allocation of permits, administering the scheme etc which may pose a problem when positioned internationally. Don Gunasekara and Antonia Cornwell (1998)15 4.0 Carbon Tax Vs Emission Trading: Although the Kyoto Protocol to the UN Framework Convention on Climate Change advocates an international emission trading system, there is no regulation which prohibits the use of carbon tax as a measure to reduce the green gas emissions. However the two systems are often viewed as competing policy instruments each having its own advantages and disadvantages in terms of the implementation and administration. While the carbon tax places a burden on the gas emitting entities the emission trading takes a positive approach to the issue by allowing the firms to profit out of the reduction from the allotted cap of emissions. According to the Law Council of Australia (2007)16 a regulatory system should be in force to administer the emission trading scheme and this scheme should provide clear guidelines as to the point at which the person or the entity becomes the emitter responsible for the act of emission. Considering this view, it would be difficult in the case of carbon tax to ascertain the quantum of emission made by each emitter after the act is committed i.e., after the emission has taken place. This may lead to several ______________________________________________________________________ 14 Cat Lazaroff (2002) Greenhouse Gas Trading Growing More Popular http://www.ens-newswire.com/ens/mar2002/2002-03-20-07.asp 15 Don Gunasekara and Antonia Cornwell (1998) Economic Issues in Emission Trading Paper to Kyoto on Australia Conference http://www.apec.org.au/docs/Gunasek.pdf 16 (Law Council of Australia 2007) Submission on the Possible Design of a National Emissions Trading Scheme http://www.dpmc.gov.au/emissionstrading/submissions/64_sub_emissionstrading.pdf complications in administering the taxes and the corresponding legislations. Whereas in the case of emission trading the cap is already set and the emissions are adjusted against the predetermined limits. Moreover under this system an emitter is identified before the emission had taken place as the firms would be expected to get themselves registered for getting the cap allotted. Another factor which needs consideration under carbon tax is the internalization of the cost, as the entities would be more inclined to pass on the additional cost to the consumers. Global Emission Trading promotes the economic growth of the countries on an universal basis as there will be trading in between countries that will lead to more political considerations in the inter relationships of countries. The Carbon tax will more be of an internal affair for a country and the other countries may not know as to what is happening in the other countries; this is not good as the global warming being an universal phenomenon. In view of the foregoing the emission trading appears to be more suited for the reduction of the green gas emissions from the social, political and economic angles. 5.0 Critical Analysis of Carbon Tax and Emission Trading: In order that a considered decision on which of the system is to be followed for controlling the emissions, a critical analysis of both carbon tax as well as emission trading needs to be undertaken. In their submission to the Prime Ministerial Task Group Exxon Mobil 17 Australia has made a detailed analysis of the merits and demerits of both the systems, which is worth considering. According to the submission, both the systems aim to achieve the same outcome; however emission trading establishes the quantity and at the same time allows the price to be determined by the interaction of the entities concerned with respect to the control of the emissions, whereas the carbon tax sets the price of the environmental externality but this system does not provide for any guarantee on the quantum of emission that it will act upon. While the carbon tax has the advantage of certainty and transparency on the price of the emissions, the emissions trading achieves the set limits for emission after providing for the safety valves and other design options. However, each of the systems places the ______________________________________________________________________ 17 Exxon Mobil Submissions by Exxon Mobil Australia Pty Ltd http://www.dpmc.gov.au/emissionstrading/submissions/45_sub_emissionstrading.pdf responsibility for reducing the emission on the market participants by making their own decisions regarding the alternative input sources or the reduction of output depending on the changes in the prices. One important shortcoming of emission trading system is that it doesn't clearly identify factors like price, compliance costs, allocation processes and time limit for the right to trade. This makes the value of the trading rights fluctuate based on chances of cancellation of the rights, the level of available rights, advent of technological innovations and the creation of new rights. As compared to these shortcomings the carbon tax appears to provide a uniform cost of the emission across each nation. But still the cap and trade system overrides the carbon tax when the permits are properly auctioned and allocated since it provides for the allowance of a safety-valve price. Hence any nation desirous of adopting these systems should weigh the relative merits and demerits of both the systems and take a decision that best suits the country. 5.0 Action taken in the direction of Controlling the Emission: With a view that the brunt of the ill effects of global warming would be felt by all the countries of the world, there are certain steps taken to combat this issue globally. 5.1 Global Action: While almost all the major industrially advanced nations have recognized the need to control the emission and thus the potential danger of global warming, more than 160 nations met in Kyoto Japan to negotiate binding limitations on greenhouse gases for the developed nations pursuant to the objectives of the United Nations Framework Convention on Climate Change (Energy Information Administration 1998)18The outcome of the Kyoto protocol is that al the developed nations have agreed to reduce the levels of gas emissions to a certain percentages during the period from the year 2008-2012 taking the 1990 year level as the base. For instance US agreed to reduce the level of emissions by 7 percent from the 1990 level by 2008-2012.The Kyoto Protocol advocated the emission trading system among the developed countries with caps fixed on the quantum of emissions. Another measure suggested by the Protocol is the Clean Development Mechanism (CDM) through which developed _____________________________________________________________________ 18 Energy Information Administration 1998 Impacts of the Kyoto Protocol on US Energy Markets and Economic Activity http://www.eia.doe.gov/oiaf/kyoto/kyotorpt.html countries would be able to take credits against their emission caps by establishing emission reducing projects in developing countries. The Kyoto Protocol is in existence for the last two years. Totally 168 nations including all major industrially advanced countries except the United States and Australia have ratified the recommendations made by the Protocol. More than 500 projects in over 40 developing countries have been registered under the CDM. With another 1,100 projects in the pipeline, the CDM is now expected to deliver emissions reductions of nearly two billion tonnes by the end of 2012 (WWF Australia)19 As far as Europe is concerned the European Union has established a 'Cap-and-Trade' scheme covering carbon dioxide emissions from most of the major industrial sources. Working for the last two years the scheme has under its fold 25 countries and around 12,000 large green gas emitting industrial houses are under the scheme. Although there had been initial difficulties the European Union is able to manage the scheme effectively. 5.2 Steps Taken By Australia: With a view to offer its part of efforts for containing the global warming which will benefit not only itself but the world as a whole Australia had embarked on the programme of putting the Kyoto protocol into effect. However there were no major advancements as a result of implementing the protocol and hence the Australian government has not ratified it. With a view to rejuvenate the efforts the Australian Government formed a 'Prime Ministerial Task Group on Emissions Trading' Australian Government (2007)20 This Task group has invited submissions from individuals and organizations on their views and suggestions on emission trading to enable the Australian government to take a final decision on this issue in accordance with the Kyoto Protocol that had advocated emissions trading as the measure to reduce the emissions. The Task Group is expected to submit its final report in May 2007. ______________________________________________________________________ 19 WWF Australia For a Living Planet http://www.dpmc.gov.au/emissionstrading/submissions/195_sub_emissionstrading.pdf 20 Australian Government (2007) Prime Ministerial Task Group on Emissions Trading http://www.dpmc.gov.au/emissionstrading/submissions.cfm However according to the Productivity Commission of Australia both the carbon tax as well as emission trading would be effective in reducing the green house gases but the carbon tax has some administrative simplicity. (Adelaide Now) 21 According to BHP Billiton (2007)22 the emission trading system should have the flexibility to accommodate substantially increased Australian exports of high quality fuels, light-weight metals and technologies including new clean coal technologies and low emission fuels to world markets, resulting in a net beneficial effect on the global environment. CSR Limited 23 through its submission to the Prime Ministerial Task Group has strengthened the argument by pointing out the Brazilian sugar producers are able to benefit from the cost advantages resulting from selling the carbon credits in the European Emission Trading Scheme by installing co-generation facilities. This has really left the Australian sugar mills in a disadvantageous position in respect of the cost of sugar. 6.0 Conclusion: Whether the cap on the emissions is high or low or a certain carbon tax system is prescribed to get into a real reduction of the green house gases, it appears that none of the countries would take it seriously. This is due to the fact that although there are high talks about alternative fuels more than 80 percent of the world consumption of energy produced by the fuels is carbon based. Despite all the efforts it may not be physically possible to change this ratio in the next few decades as more and more vehicles are being produced and there is an upward swing in the industrialization. Hence there is a possibility for this ratio only to increase unless some miraculous technological development takes place in the years to come. Thus any amount of stringent restrictions on the emission of carbon dioxide or other green house gases will result in an enormous increase in the economic costs either in the form of carbon tax or the money being ____________________________________________________________ 21 (Adelaide Now) Carbon tax 'would cut emissions' http://www.news.com.au/adelaidenow/story/0,22606,21503923-5006301,00.html 22 BHP Billiton (2007) Submission to the Task Group on Emissions Trading http://www.dpmc.gov.au/emissionstrading/submissions/198_sub_emissionstrading.pdf 23 CSR Limited Submission to the Prime Minister's Task Group on Emissions Trading http://www.dpmc.gov.au/emissionstrading/submissions/50_sub_emissionstrading.pdf traded on the emissions by corporations. Hence the cap and trade or the carbon tax may have another economic impact but it cannot be expected to do much about global warming. Read More