Impact of Carbon Tax on the Australian Tourism Industry - Case Study Example

Topic: Impact of Carbon Tax on Australian Tourism Industry Student’s name Course name Lecturer’s name 28th September 2011 Table of Contents page 1.0 Introduction........................................................................................................2 2.0 Carbon Tax.........................................................................................................4 3.0 Assessment/Measurement techniques................................................................6 4.0 Impact/Effects of carbon tax on tourism............................................................7 5.0 Conclusion.........................................................................................................8 6.0 References.........................................................................................................10 1.0 INTRODUCTION Australia is one of the global countries that rely heavily on the natural estate of its environment to promote the tourism industry (Tourism and Transport Forum (TTF), 2011). The tourism industry in Australia is one of the key sectors of the economy that employs more than half a million Australians. By 2020, the tourism industry is projected to create more than 150,000 new jobs which depict the fact that tourism industry is a key sector of the country’s economy. However, the threat of climate change poses a great challenge to the tourism and many other sectors of the economy such as agriculture and subsequently the manufacturing sectors of the economy (Sumner, Bird & Smith, 2009). This means that adequate steps must taken in order to reduce the rate of carbon emissions in order to safeguard important resources such as Great Barrier Reef, Australian Alps, Kakadu (to mention a few) as well as the green image that characterizes Australian geography. One of the proposed measures and decisive actions meant to reduce the rate of carbon emissions is the introduction of carbon tax. The purpose of this paper is to explore the rationale for introduction of a carbon tax, how predictions about the economic impacts of a carbon tax were made and the implications of the introduction of a carbon tax in the Australia economy. 2.0 CARBON TAX According to Shrum (2007) a carbon tax can be defined as the price paid by companies for emitting carbon gases into the air. Shrum viewed a carbon tax as a tax levied on every source of energy that is responsible for carbon dioxide emission. A carbon tax can also be said to a “pollution tax” because it is levied on the carbon content of fuels (Shrum, 2007). This means that a carbon tax is another method of pricing the negative aspects of carbon fossil fuels such as petroleum, coal and natural gas). The introduction of a carbon tax is done in a way that the tax applies in proportion to the amount of carbon dioxide or the amount of pollution caused by a particular fossil fuel. This means that a fossil fuel such as coal that has higher carbon content attracts a higher carbon tax than a fossil fuel such as natural gas that has lower carbon content (Cuervo and Gandhi, 1998). Economists perceive a carbon tax as an important method of reducing the emission of greenhouse gases because it axes the “bad” element that threatens the economy rather than taxing the “good” element of the economy such as income. It is important to note that a carbon tax is meant to address the externalities (Carbon Tax Centre, 2007). According to Nielson (2010) an externality arises when an individual consumption or production imposes befits or costs to the consumers (Nielson, 2010). In this context, the production of fossil fuels imposes costs to the consumers through the pollution of the atmosphere that results into climatic change. However, since the costs of environmental pollution are not reflected in different transactions that involve the production and the subsequent marketing of fossil fuel products such as petroleum and natural gas, economist regard a carbon tax as the element that captures the costs of environmental production in the transaction decisions made by petroleum and natural gas producers (IPCC, 2007). A carbon tax is meant to impose a cost on the externalities with the underlying and the long term purpose being reduction in the amount of carbon dioxide emitted into the atmosphere thereby slowing global warming. The implementation of a carbon tax is undertaken by taxing the burning of petroleum and coal products such as aviation fuel and petrol as well as taxing natural gases in proportion to the amount of carbon emitted from the burning of each of the above fossil fuels. The first carbon tax was introduced in 1990 in Finland. The carbon tax was levied on different types of fuels except for biofuel such as peat. In 1991 and 1992 other countries such as Denmark, Sweden and Norway followed suit and introduced a carbon tax on companies involved in the burning of fossil fuels (Dower and Zimmerman, 1992). In 1999, the ecological tax was implemented in Germany and this involved the carbon tax on burin of electricity, natural gas, fuel ad petrol (Gareth, 2011). Japan introduced a carbon tax in 2001 on vehicles with high rates of pollution and subsequently a lower tax was introduced on vehicles that emitted lower levels of greenhouse gases in order to encourage the production of vehicles with lower levels of carbon emissions. The Federal government of Australia announced in February the planned introduction of a carbon tax in the year 2012 as one of the ways of reducing carbon emissions particularly targeting major polluters such as oil companies and power stations that are coal-fired (Gareth, 2011). The introduction of a carbon tax from 1st July 2012 is projected to take around three to five years after which the carbon tax system will be transformed into a trade and cap system (CBCNews, 2011). 3.0 ASSESSMENT/MEASUREMENT TECHNIQUE In order to introduce a carbon tax, economics plays a major role in the process. The predictions about the economic impact of a carbon tax were made by considering a carbon tax as one of the many forms of indirect taxes levied on goods and services. It was viewed as a form of a transaction tax. According to Helm (2005) a carbon tax is different from an income tax because an income tax is a direct tax while a carbon tax is an indirect tax. In this regard, Helm (2005) noted that a carbon tax is an instrument used to attach a price to the amount of carbon emitted into the atmosphere. In this regard, the predictions about the economic impact of a carbon tax were made by considering pollution as a negative externality which affected people or parties that were/are not directly related in the transaction and which results into the failure of the market. In order to reflect the actual production costs of fossil fuels to the society, the Pigou’s theory or framework was applied (The Economist. 2011). The theory proposed the taxation of services and goods which resulted into negative externality or negative effects to the parties not involved in the production of such goods. The objective of Pigou’s theory was to internalize the costs associated with the production of the good. In this context, the Pigou’s theory considered the Australian citizens as third parties not involved in the production of fossil fuels but who suffer from the negative consequences of fossil fuel production in the country (Fouché, 2008). In order to reflect the actual costs of production of fossil fuels in the Australian society, the carbon tax was introduced. The carbon tax is equal to the marginal costs of damages caused by the carbon emitted in the process of production of fossil fuels. The measurement technique used to determine the carbon tax was based on social cost of carbon (SCC) (Hepburn, 2006). Hepburn (2006) referred to social cost of carbon as the marginal cost of emitting an extra carbon tonne (in form of carbon dioxide) in any given period. In order to calculate the social cost of carbon, the estimation of the carbon dioxide residence time in the atmosphere was undertaken as well as the impact that the carbon dioxide would have on the climate (Aldy, 2007). Hence, the impact of an extra tonne of carbon dioxide emitted into the atmosphere was then measured. Economically, if markets are perfect and the estimates of the social cost of carbon are complete, then the carbon tax should be the same as the social costs of carbon. However, it is imperative to note that the Australian market is a not perfect. This means that the carbon tax would not be equated to the social cost of carbon. In this respect, the alternative measurement used was measuring the amount of pollution caused by carbon dioxide by measuring the weight of carbon dioxide molecules (Aldy, 2007). Hence, the Pigou’s theory underpinned the how the prediction of the economic impact of a carbon tax was made. 4.0 EFFECTS OF A CARBON TAX ON TOURSIM The carbon tax proposed to be introduced in Australia in 2012 is projected to yield into both positive and negative effects. One of the key positive effects of the carbon tax is the reduction of carbon emissions in Australia because firms and other individual production activities will be geared towards greener production (Leslie, 2011). This will subsequently reduce the greenhouse gases emitted by firms in Australia with the effect that there will be reduced global warming. However, the effects of a carbon tax on the Australian tourism industry have been a major point of concern. This is because, although, the carbon tax is expected to have positive effects on Australian tourism industry since Australian tourism and travel is dependent on the natural environment and therefore heavily at risk in the continued failure to achieve faster global to reduce greenhouse gas emissions, the tourism industry is also projected to suffer significantly as a result of the introduction of a carbon tax (Ekins and Dresner, 2004). It is imperative to note that Australian tourism industry produces the same share of greenhouse gases as its share of GDP. However, due to the fact that the industry is labour intensive, the tourism industry produces a lower share of greenhouse gas emissions than its share of employment. The introduction of a carbon tax will impact negatively on the tourism industry because costs of private vehicles used for tourist transportation as well as the costs of fuelling airplanes used for transporting tourists will increase. This means that tourism in Australia will be more expensive than in other parts of the world and both the domestic and foreign tourists will prefer going to other tourists destinations (NZPA, 2005). As a result, jobs in the tourism industry will be lost as a result of a drop in revenue generated from tourism activities. It is estimated that a carbon tax of around $25 per tonne of carbon dioxide emitted in the tourism industry will amount to more than $500 additional costs on the tourism industry in Australia. The additional costs will be passed on to the consumers meaning that consumers will have to pay additional costs for being tourists in Australia. In the short term, the carbon tax is expected to reduce the revenues generated from the tourism industry by 0.7% and 1.2% respectively. This will have a significant impact on profits owing to low margins in tourism business (Tourism and Transport Forum (TTF), 2011). The introduction of a carbon tax on tourism estimated to cause more than 6000 job losses in the short term and more than 20,000 job losses in the long term. In the long term, it is estimated that the arrivals of tourists in Australia will fall by more than 140,000 if a carbon tax is levied on petrol. This will significantly reduce revenues and consequently tourist operators will seek to reduce their operation costs by cutting down on their number of staffs. 5.0 CONCLUSION A carbon tax is projected to be effected in the Australia economy by 1st July 2012. The introduction of the carbon tax has been viewed as a relief to the continued pollution of the atmosphere that has resulted into global warming. The tourism industry which is highly dependent on the natural environment that is adversely threatened by the emission of greenhouse gases is set to benefit by the introduction of the carbon tax. Similarly, the Australian tourism industry is also set to suffer significantly through the introduction of a carbon tax due to increasing operation costs. This is will be felt in the number of job losses that will characterize the tourism industry because operators will seek to reduce their operation costs through cuts in their sizes of staff. 6.0 REFERENCES Aldy, J. 2007, "Cap-and-Trade vs. Emission Tax: An Introduction". ClimatePolicy website. http://www.climatepolicy.org/?p=46 Carbon Tax Centre, 2007, why revenue-neutral carbon taxes are essential, what's happening now and how you can help, Carbon Tax Centre. CBCNews, 2011, Australia Unveils carbon Tax. http://www.cbc.ca/news/world/story/2011/07/10/australia-carbon-tax.html Cuervo, J. and Gandhi, V. 1998, "Carbon Taxes – Their Macroeconomic Effects and Prospects for Global Adoption – A Survey of the Literature. Working Paper No. 98/73". International Monetary Fund, Fiscal Affairs Department. http://www.imf.org/external/pubs/cat/longres.cfm?sk=2601.0. Dower, R., and Zimmerman, M. 1992, "The right climate for carbon taxes: Creating economic incentives to protect the environment". World Resources Institute website. Ekins, P. and S. Dresner, 2004, "Green taxes and charges: Reducing their impact on low-income households". Joseph Rowntree Foundation. http://www.jrf.org.uk/node/1231. Fouché, G. 2008,"Sweden's carbon-tax solution to climate change puts it top of the green list". The Guardian. http://www.guardian.co.uk/environment/2008/apr/29/climatechange.carbonemissions Gareth W, 2011, "Can eco-taxation be effective in reducing carbon emissions?". Professor Tom Tietenberg's research site. Colby College. http://www.colby.edu/personal/t/thtieten/eco-taxation.htm Helm, D. 2005, "Economic Instruments and Environmental Policy". The Economic and Social Review 36 (3). http://www.dieterhelm.co.uk/node/631 Hepburn, C. 2006, "Regulating by prices, quantities or both: an update and an overview". Oxford Review of Economic Policy 22 (2): 226–247. doi:10.1093/oxrep/grj014. http://www.economics.ox.ac.uk/members/cameron.hepburn/Hepburn%20(2006,%20Oxrep)%20Regulation%20by%20P%20or%20Q.pdf. IPCC, 2007, "Climate Change 2007: Synthesis Report". International Panel Climate Change. p. 14. http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr_spm.pdf. Leslie, T. 2011, "Gillard unveils Carbon Price Details". ABC News. http://www.abc.net.au/news/stories/2011/02/24/3147523.htm Nielson, L. 2010, Emissions Control: your policy choices, Background note, Parliamentary Library. NZPA, 2005, "Carbon tax ditched". The New Zealand Herald. Archived from the original on 24 September Shrum, T. 2007, Green house gas emissions—policy and economics, Kansas Energy Council. Sumner, J, Bird, L, & Smith H (2009). "Carbon Taxes: A Review of Experience and Policy Design Considerations". National Renewable Energy Laboratory. http://www.nrel.gov/docs/fy10osti/47312.pdf. Retrieved 2011-06-06 Tourism and Transport Forum (TTF) 2011. Carbon tax and tourism and travel-trade and global warming exposed. The Economist. 2011, Pushing for a carbon tax in Australia: An expensive gamble. http://www.economist.com/node/18959030 Read More