Carbon Tax and Emission Trading Schemes in Australia - Case Study Example

Agriculture and Resources Economics Name Institution Agriculture and Resources Economics Introduction The food industry is one of the largest sectors on a global basis. Its major contribution is towards employment and sustainability. The industry is effectively divided into four sub sectors such as the farm service, marketers, the processors and the producers. Agricultural production economics is characterized by various economic theory goals and objectives. They include: Farm manager’s objectives-A farm manager’s objectives will often revolve around maximizing their gains and satisfaction from their business. This is achieved in line with keen utilization of the factors of production which include land, labor, capital and entrepreneurship. These resources are effectively utilized to eliminate the possibility of depleting them for sustainability. Output production choice-Agriculture entrepreneur will be faced with the dilemma of what production line will gain him maximum utility given the factors of production constraint. A good example is a farmer who decides to only keep livestock as their expertise is best in that line of production. Government influence also affects the production choice in a bid to regulate the agricultural industry. Resource allocation among outputs (Debertin, 2012). Resource economics, on the other hand, is a field of economics that concerns itself with developing appropriate economic theories in understanding a particular field of studies (Debertin, 2012). The following paper seeks to critically analyze agriculture and resource economics in the subheadings of carbon tax and emission trading schemes in Australia, markets and market failure in agriculture industry, sustainability and pricing of emissions resultant form farming economics. These are contemporary issues that are faced by business entities and individuals who venture in the field of agriculture and resource economics. Agricultural sector contemporary issues Carbon tax and emission trading schemes The carbon tax has been introduced in Australia to aid in environmental ethics and encourage proper waste management. It was officially introduced in July 2012 by the Australian labor government. This move by the government has seen the reduction of greenhouse emission since it commenced charging $25.4 per 1000kg of carbon emitted (SBS World News, 2014). Through it, companies in the agriculture industry are able to maximize their profits by reducing their overall operating costs. In Australia, an estimated 75,000 businesses have been paying a carbon tax to the government, which is used in growth and development schemes in the country. After its introduction, the government raised $15.4 billion after only two years. The major difference between a carbon tax and ETS is that business entities have certainty in the price of carbon emission which varies the level of emissions. Emissions Trading Schemes With the evolution of technology in the agriculture industry, farmers do not have to worry about the weather fluctuations and variability. Green houses have developed where the climatic conditions are adjusted suiting the particular produce aimed by a farmer. This ensures a constant supply of food in the world where demand for basic food and shelter is rampant with the rapid increase in population. Greenhouses produce greenhouse gases, which is composed of the carbon dioxide mainly. The Australian government has an objective of redoing these gases by 5% by the year 2020 (Professor Malcolm, 2009). Emission trading schemes are also a move to reduce carbon dioxide emissions, by providing carbon permits with set cap. It works the same as the carbon tax, only difference is that the Australian government sets the caps in a flexible market with floating prices. There are two major types of ETS, the standard and the fixed-price ETS. The government rewards companies that show the effort to enhance their production in an echo friendly environment by producing below the set cap for the specific industry. Unlike in the carbon tax policy, emission trading schemes, colloquially known as ETS, can only put Limit on how much a business in a certain industry would produce (SBS World News, 2014). The government makes it mandatory for these companies to report their emission amounts facilitated by the Negrete National Green Energy Reporting. The ETS works in three ways as follows: When a company is producing the maximum set limit cap by the government, it does not need to incur money on buying extra credits for exceeding. A company that produces lower carbon emission can turn sell out the unused carbon credits in the free carbon market. On the other hand, a company that exceeds the emission cap will have to buy carbon credits from the carbon trading market. If a company needs more emissions permits, they may buy them from a company that requires fewer permits. This way, companies will be charged for polluting more, and others will be rewarded for emitting less. In 2015, the carbon tax is legislated to transition in turn carbon in order to an emissions trading scheme, but the future of the environmental program is uncertain (SBS World News, 2014). Pricing carbon or regulatory methods As aforementioned, carbon pricing is done using carbon credits. The Australian government introduced the carbon farming initiative, which allows farmers in the agricultural sector to store carbon or reduce its emissions. This initiative enhances forming sustainability even in the future as it acts as a land restoration project. Businesses are constantly reminded to register for the initiative, which in turn will ensure that the economy is sustainable in the long run, agriculture being the major contributor to consumer consumption patterns. A report done by Frances Beinecke, 2014 shows that carbon caps of the ETS are more effective compared to carbon taxes for the following reasons (SBS World News, 2014): Carbon caps set clear and easily understood goals of reducing the carbon emission It has been tested that it significantly reduces carbon emission compared to the tax model. Unlike carbon caps, carbon taxes only create a loophole in the tax fiscal policy to divert the urgent matter to issues such as how much should the tax be? Markets The agricultural market is divided into agriculture input and output market. The input market is composed of the labor, agriculture credit facilitators, industrial products, and the use of land. On the other hand, the output market is majorly concerned with production, consumption, marketing and international trade. In explaining the behavior of the agricultural sector industry, economists have used the pure competition theory to explain how the markets function (Debertin, 2012). One of the characteristics of farmer’s markets is that the production is relatively homogenous. This means that farmers do not need to constantly advertise their produce often to consumers since there is little differentiation that takes place. Nevertheless, with the evolution of technology, some farming produce has started differentiating to entice consumers to increase their consumption. In addition, there is hardly free mobility of resources in this sector, unlike a free competitive market where entry and exit is easy. The agriculture sector has evolved with time making free entry and exit hard because of the huge capital outlay requirement by the farming inputs. The increase in the initial requirements of capital has been attributed largely to the inflation rates rise. Most governments and agricultural cooperatives have increased their influence on the sector, which results in restriction of free mobility of resources. For instance, cereal production in Australia and the United States is heavily influenced by the respective federal governments. Another major characteristic of agricultural sector markets is that the farmers are price takers and no single producer may influence the equilibrium prices and quantity demanded. In the agriculture industry, the market is faced with both the demand and supply function that are relatively inelastic (Amosweb.com, 2014). Market failure Market failure is defined as a situation in which allocation of resources fails to take effect effectively in firms characterized by free market category. Different resource economists have identified various types of market failures. In the agriculture sector sense, a market failure is a negative externality which results in huge losses and slow production. For instance, greenhouse carbon emission is a negative externality component as it negatively affects the healthy living of a third party by causing global warming effects. Property rights are another way that market failure occurs. When a farmer fails to secure property rights on a certain line of production, eventually a market failure is bound to occur. This may also apply to manufacturers of farm inputs who require heavy investments in research and development field. There are instances where the agriculture market may fail to have perfect information among the partisans in the market. This is termed as information failure. The government may also require intervening in unstable markets which are also a major cause of market failures. Agricultural produce has high perishability which means that there is a need for a proper and stable market, failure to which, a market failure occurs. Sustainability/ World food problem There are many different schools of thoughts that have come up, all seeking to answer the question of whether there exists any relationship between agriculture and an economic sustainability. Nevertheless, the most common definition of the term sustainability states that it’s a situation in which current generations do not impact negatively on future generation’s survival through their actions today. This implies that the current generation's behavior has to be closely monitored owing to the fact that the environment and people must unavoidably interact. It’s a concept that is central to the wellbeing globally. There are five major principles that help in understanding the question of sustainability. They are: Farm productivity, getting enhanced in the long run Minimizing externalities associated with agriculture and ecosystems. Minimizing agricultural residues Maximizing social benefits of agriculture and resource economics Ensuring that the farming systems used are flexible enough to deal with foreseen risks. Source: (Debertin, 2012) It can therefore be concluded that sustainable farming in the agriculture industry, ensures that there is proper economic growth and development in the country, as well as the maintenance of natural sources which ensures that future generations have similar opportunities as the current generations. The world food crisis translates to a global income problem as well. Consequently, creating a sustainable economy is a goal that every government envisions and tries to achieve for its citizens. . For instance, in Australia, sustainability has always been given priority by the federal government. This means a higher Gross Domestic Product, low unemployment cases and reducing poverty statistics. To effectively comprehend the question of sustainability, several sectors that highly contribute to a country’s growth and development need to be evaluated. In almost all countries, the agricultural sector is a significant determinant of the overall Gross economic welfare, whether commercial or subsistence. Business entities that venture in agriculture and resource economics greatly contribute to a country’s economic Gross Domestic Product in various ways. They include: Provision of food and fiber supply Earning the country foreign exchange income in countries that export agricultural products They earn profits, which are in turn used to finance further capital investment. As a result, infrastructure conditions improved as well as the living standards. The farmers are known to buy farming inputs from other industries that specialize in their manufacture. They also help in maintaining the quality and condition of the key factors of production, land, water, flora and fauna. The world food problem is largely affected by frequent fluctuations in climatic conditions. Climatic changes are categorized into two, namely climate fluctuations or variability, and climate change. The difference being that the latter is shorter unlike the former. A report by the FAO revealed that by the year 2050, the total world cereal production will have increased by 70%, as regions such as the Northern Europe and Canada record good climate for agricultural production, translating to higher pa capital income and better living standards. In Australia, the hugest threat to agricultural sustainability is the policies encourage inhibition of farmers who practice sustainable farming (Professor Malcolm, 2009). It can, therefore, be concluded that, agricultural posterity depends largely on institutions and policies that are required for sustainability. Policies that ensure the social costs of the agriculture industry are properly captured and accounted for, the government effectively taking up their role in correcting market failures, provision of incentives to step up production without compromising quality and encouraging research and development investment in the sector. Agriculture will ensure sustainability of the world as long as proper channels are observed regarding policy making and that there is no political interference in the scientific environments that enhance research and development of more efficient methods of production (Professor Malcolm, 2009). In addition, climatic condition changes necessitate different adaptation strategies by continents to eliminate negative effects of such variability’s. Conclusion Movements that advocate for a sustainable business environment have come up to rally for the resources proper utilization. Australian being the hugest emitter of carbon gases, the Australian government has also put in place emission trading schemes and carbon tax introduction to avoid externality of global warming. The issue of market failure in agricultural markets is corrected using legislation or the government affirmative actions. Such markets are constantly regulated, which is evidence that agricultural markets cannot be fully categorized as pure competitive markets but rather fall under pure markets. Statistics have shown that the world will not run out of resources as new innovations and strategies are invented to enhance sustainability of a growing population. References Carbon Neutral. (2013, July 16). The Emissions Trading Scheme (ETS) Explained. Retrieved from Carbon Neutral: http://www.carbonneutral.com.au/about-us/news/49-news/291-ets-explained.html Debertin, D. (2012). Agricultural Production Economics (2 ed.). Lexington,Kentucky: University of Kentucky: Department of Agricultural Economics ISBN-13 978-1469960647. Professor Malcolm, B. (2009). Agriculture, Can it be sustainable?: Agriculture for Posterity. University of Melbourne ,Victoria: Department of Agriculture and Food Systems and Primary Industries. SBS World News. (2014, June 25). The federal government has plans to abolish the carbon tax from July first onward and replace it with an emissions trading scheme (ETS). . Retrieved from http://www.sbs.com.au/news/article/2014/06/25/carbon-tax-versus-emissions-trading-scheme-whats-difference Read More