Analysis of Carbon Tax in Australia - Essay Example

? Case Study Analysis of Carbon Tax in Australia October 08, Table of Contents Case Study Analysis of Carbon Tax in Australia October 08, 1 1. Executive Summary 3 2. Introduction 3 3. Impact on Australian Environment and Households 5 4. Conclusion 10 References 12 1. Executive Summary The report analyses the subject of carbon tax implemented by the Australian government. This is a tax levied to compensate for the greenhouse gases emitted by fuel consumption, power generation and activities of industries. A PESTLE analysis is used to understand the impact on the macro environment. Important issues arising from the carbon tax were identified by using the Force Field Analysis. The findings indicate that Australian products and the industry will be less competitive due to increased costs of production. Increases are also expected in the consumer price index, power generation, household expenses and job losses. Based on these findings, certain recommendations are made to reduce the side effects of carbon tax burden. These include imposing an entry carbon tax for cheaper imports and launching a scheme of roof top solar panels and wind power systems. The government can buy the power generated through these renewable energy systems. 2. Introduction The carbon tax is a type of indirect tax on the carbon content of fuels and paid by the citizens of a country. The tax is a form of 'Pigovian' tax since they tax the emitters of greenhouse gases while not making them pay the full social costs of excess carbon emission. Most of the hydrocarbon fossil fuels such as coal, diesel, and crude oil have a certain carbon percent that is released as Carbon Di Oxide when the fuel is burnt. The CO2 is a green house gas and it causes global warming while increasing the pollution levels. Firms such as power stations, oil companies, metal foundries, mining firms, cement manufacturers are the greatest emitters of CO2. Carbon tax is levied by adding a certain amount of tax on petrol, diesel and the electric power consumed by citizens in an area (Reuven and Uhlmann, 2009, p. 117). 2.1 Mechanisms used for Carbon tax implementation As per carbon tax regulations, industries identified as high emitters are taxed as per the amount of carbon they emit and this is measured in USD/ AUD per ton of carbon released. Reference tables are available that specify the amount of carbon that each type of industry emits. Therefore, an oil company such as BP will have a high liability while an automobile manufacturer that manufactures small four wheelers used to transport passengers will have a lower liability. A power generation plant that uses coal has a higher liability while one that uses natural gas has a lower liability (Metcalf, 2010, p. 63). As an example, CO2 emission for gasoline is 2.35 kilograms per litre of fuel burnt while for diesel it is 5.08 Kg/ litre of fuel burnt. For lignite coal, it is 1.396 kilogram/ kilogram while for natural gas it is 1.93 Kg/ cubic meter. This translates to a tax of 0.028 USD/ litre for gasoline for diesel it is 0.032 USD/ litre. For coal, tax is 0.0121 USD per Kilo Watt Hour (kWh) and for natural gas, it is 0.0066 USD/ kWh. Emitters are required to purchase carbon credits or they pay the tax for the products (Metcalf, 2009, p. 2). The money obtained from the tax is used to offset carbon, to set up solar and wind generation projects, in developing more fuel-efficient cars and improving power generation plants and so on. Tax placed on electric power consumed is called as energy tax while emission tax is the tax paid for each ton of carbon emitted. Many nations such as UK, Australia, New Zealand, many countries of Europe and USA have implemented carbon tax regimes (Lin and Li, 2011, p. 5138). Each nation has its own system of carbon taxation and levies. This paper will however focus only on carbon taxes for Australia and its impact on the economy and households. 3. Impact on Australian Environment and Households This section analyses the impact of carbon tax on the Australian business environment and households. In this section, first a general discussion of carbon tax implementation is given followed by a PESTLE analysis of Australia due to the carbon tax implementation. Next, the impact on households and the business environment is discussed. This is followed by the leadership strategy analysis along with analysis and recommendations and identification of core issues. 3.1. Mechanisms of carbon tax implementation in Australia Carbon tax was implemented in Australia from July 2012. A tax of 23 AUD / ton of carbon emitted is placed on industries that emit more than 25,000 ton of CO2 equivalent per year. This tax will increase by 2.5% each year and it is expected that by 2015, the rate will be 25.4 AUD/ year. Organizations have to purchase carbon permits to compensate for their emissions. Australia generates 1.5% of the world's emissions. However, the per capita emission is 20.58 tons while that of USA it is 19.75 tons. Around 500 polluting firms in Australia will have to pay this tax. These include mining firms, electric power generation firms, heavy industries, airlines and other firms. It is estimated that power generation firms alone will need to pay 3.9 billion AUD/ year as carbon tax. Many industries are opposed to paying this tax and they argue that Australian firms will become uncompetitive when compared to other nations (Dwyer, et al, 2012, p. 17-18). 3.2. Impact of Carbon Tax on Australian firms and the public The PESTLE suggested by Robbins (et al, 2011, p. 85-89) is used to analyse the impact of carbon tax on the Australian business environment and on individuals. As per this method, forces on the external macro environment are examined. Political: The carbon tax bill has been the subject of intense political battle. Successive governments and leadership battles led by Kevin Rudd, Tony Abbott and Julia Gillard have alternately supported and spoken against the bill. The public is against the bill since it will increase their tax burden. The government has to implement the bill since it signed the Kyoto protocol. Some elements of the industry support the bill while others oppose it and the Green group want the bill to be passed. Economic: The vast public opinion is that the carbon tax will increase the burden on the industry and the public. Siriwardana (et al, 2011, p. 4) have run a simulation that shows with a 23 AUD tax/ ton of CO2e, the real GDP will decline by 0.68%, consumer price index will rise by 0.75, and electricity price will increase by 26%. The price of exports will increase by 0.32%, volumes will reduce by 3%, demand for power will reduce by 2.65%, and employment will reduce by 3.1%. Low-income households can expect an increase of 13.32 AUD per month in their monthly costs. Lower income groups will carry a higher tax burden. Revenue will be 6.37 billion AUD. With Australia just emerging from the recession, the industry and the public are not ready to bear the costs and demand that the government discount the tax. Socio Cultural: According to Bristowa (et al, 2010, p. 183), tourism is one of the main industries and Airlines will be forced to increase the airfare by an average of 6 AUD per journey. With increase in costs for hotel tariffs, travelling and food, tourists will face an extra burden of 12 AUD on an average per night of stay in mid level hotels. However, since carbon tax and emission certificates are regarded as being modern, some society members look forward to paying it and bragging about it. Since homes will need to use clean energy systems, the rise in housing costs are estimated at 1.8% and with the housing sector yet to recover, the industry is against the carbon tax. Technological: It is expected that industries facing carbon tax will innovate and invest in making their processes more efficient. This means infusion of technology for process improvement and investment in alternative energy systems such as solar and wind power. This technology will be useful for the public also and they would implement solar energy systems (Lu and Zhu, 2012, p. 259). Legal/ Global: Australia is a signatory to the Kyoto protocols and hence it is obliged to cut its emissions as per the agree targets. The government has brought in various rules such as the Clean Energy Bill 2011. Around 500 firms are shortlisted based on their products, energy, and processes. If these firms do not follow the regulations and pay the carbon tax, they will be liable for penalties under Australian industrial laws. Thus, the carbon tax has sufficient legal support (Siriwardana, et al, 2011, p. 7). Environment: The Australian environment stands to benefit form the carbon tax. A reduction of 73.04 mega tons/ year of emissions is expected while with reduction of 12.24% in the overall emissions. Results of the reduction in emission would be evident after a few years. It is generally accepted that the quality of air, water would increase near cities, power plants and mines. Flora and fauna that have been severely degraded will see resurgence (Lu and Zhu, 2012, p. 267). 3.3. Identification of issues The main issues are identified by using the Force Field Analysis as suggested by Robbins (et al, 2011, p. 225-226). The carbon tax regime is illustrated as below and two states are give, the present state and the desired state (Metcalf, 2010, p. 81; Siriwardana, et al, p. 11). Table 3.1. Force Field Analysis of Carbon Tax Issue Present State Desired State Acceptance Less acceptability by industries and public Wider and full acceptance by the public Commodities Prices escalation Fears that prices of food, essential goods, cost of living will escalate Need to reduce impact of price escalation and allay fears of the public Impact on competitiveness Fears that tax will raise cost of production and with extra taxes, Australian goods will be more expensive than imports and hence uncompetitive Need to reduce impact on end price of goods OR levy extra tax on goods based on country of origin and the carbon tax regime implemented in there Impact on employment Fears that price rise of goods will reduce consumption and demand and lead to job losses Need to delink price rise from consumption reduction and remove fears of job loss Passive acceptance by public and organisations Public and organisations cannot help to reduce tax burden or cut emissions realistically Government must find ways to involve public by helping to set up domestic solar and wind project and buy the power generated. This will offset the extra carbon tax amount 3.4. Effective Leadership strategy From the above discussions and analysis, it appears that the Australian government lacks the correct perspective and leadership strategy. The Effective Strategic Leadership model proposed by Robbins (et al, 2011, p. 329) is recommended. Following figure illustrates the model. Figure 3.1. Effective Leadership Strategy Model (Robbins, et al, 2011, p. 329) The organisation in this case is the Australian government that wants to implement the carbon tax. A strong vision and culture must be created and the people must believe that the government has good intentions. 3.5. Recommendations Based on the analysis from the previous sections, the following recommendations are made. These must be implemented by the government after due consideration and thought. Industrial competitiveness - To allay fears that Australian goods will be priced higher due to the carbon tax, the government must introduce an entry carbon tax for all imported goods. This will place cheaper imports at par with Australian manufactured goods. At the same time, exports should be given a rebate so that the rates are balanced when international prices are concerned. Sharing the burden of price rise - Methods to reduce the tax burden must be considered. Schemes such as starting solar and wind plants at homes, roof top solar panels must be encouraged. Green power from these schemes should be bought back by the government or rebate in electricity charges must be given. Loss of employment: Once the above recommendations are brought in, the question of job loss due to carbon tax will not rise. This fact should be made clear to the people. 4. Conclusion The report has examined the carbon tax plans for Australia. The government plans a tax of 23 AUD/ ton of CO2 released. A PESTLE analysis was conducted and it showed that there would be an increase in the cost of living. Several issues were identified and recommendations to reduce the tax burden were made. There is a need to use an effective leadership strategy that will include the public and the industry and work in a pro-active manner. References Bristowa, AB, Wardmanb, M, Zannia, AM., & Chintakayal, PK 2010, ‘Public acceptability of personal carbon trading and carbon tax in Australia’, Ecological Economics, 69 (9), pp: 182-187 Dwyer, L, Forsyth, P & Spur, R 2012. ‘Wither Australian Tourism? Implications of the Carbon Tax’, Journal of Hospitality and Tourism Management, 19, pp: 16-25 Lin, B, & Li, X 2011, ‘The effect of carbon tax on per capita CO2 emissions’, Energy Policy, 39 (9), pp. 5137-5146 Lu, Y, & Zhu, X 2012 ‘Effectiveness and equity implications of carbon policies in the Australian construction industry’, Building and Environment, 49, pp: 259-269 Metcalf, GE 2009 ‘Tax Policies for Low-Carbon Technologies’ NBER Working Paper, No. 15054 Metcalf, GE 2010, ‘Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions’, Review of Environment Economic Policy, 3 (1), pp. 63-83 Reuve,S, & Uhlmann, DM 2009, ‘Combating Global Climate Change: Why a Carbon Tax is a Better Response to Global Warming than Cap and Trade’, Stanford Environmental Law Journal, 28 (3), pp. 117-123 Robbins, S, Bergman, R, Stagg I & Coulter M 2011 Introduction to Strategic Management, London: Pearson Custom Books Siriwardana, M, Meng, S, & McNeill, J 2011. ‘The Impact of a Carbon Tax on the Australian Economy: Results from a CGE Model’. Business, Economics and Public Policy Working Papers, Number: 2011 - 2, University of New England, Australia Read More