Market Approach vs Traditional Regulation - Assignment Example

Running Head: Environmental Economics Name: Lecturer: University: Course: Date: Introduction In the contemporary world, global warming is the biggest challenge of our time. Glaciers continue to melt, ocean levels are rising, and unpredictable weather leading to dry spells and heavy flooding are among the negative impacts of global warming. Industries are not left behind either as the calls for industrial emission reduction are all over. The effects of environmental pollution threaten the existence of industries. This essay aims at briefly exploring the effectiveness of Emission Trading Schemes as an approach to reduce emissions significantly in the end. Emission Trading Schemes The emission trading schemes are alternative market approach from the traditional approach that aims at meeting the target of Kyoto protocol in cutting the greenhouse gases emission into atmosphere (Grubb, M. et al., 2009, Climate strategies). Everybody loses while the custodianship of the environment fails. Although the production output stands to rise, the losses that result outweigh these benefits. ETS came to effect in 2005 in many of the European Union nations responsible of over half of the total emission of carbon dioxide, immediately the Kyoto protocol came into force. The scheme integrates flexibility and innovation, a shift from the traditional regulatory approaches in private sectors. The companies in the private sectors use the common price signal to know where the emissions and abatement is highest. Source: International Institute for Sustainable Development, An illustration of how ETS aim to combat emissions. In reduction of carbon emission, ETS sets the target of carbon reduction emission to a specific company. The trading happens when the private companies meet the set target and reduces the emissions measured through Emissions Reduction Units – usually; one unit is equivalent to one tonne of carbon dioxide (Gilbertson and Reyes, 2009). The companies receive allowances for the units gained during a trading period and therefore they can sell them to those industries that are unable to meet the target of emissions reduction. The industries unable to reduce emissions owing to the high opportunity costs are compelled to buy allowances. The overall effect of the market approach is that carbon dioxide and greenhouse emissions are reduced significantly. When the companies whose cost of reduction is not as high in comparison to others, they strive to get more allowances to sell them to the companies that do suffer huge costs of reducing emission. As such, the carbon-trading scheme is centralized to low costs areas. The allowances sale enhances reduction of emissions in different industrial plants who aim to get more allowances to trade to gain an economic compensation. Advantages and disadvantages of ETS There are pros in adopting Emission Trading Schemes. Firstly, it gives the countries the discretion to emit to a certain level. This is in appreciation of the fact that reduction of emission is not costless and if companies focused solely on reduction, they would record hug losses negative to all stakeholders’ contexts (Bell, 2003, International Institute of sustainable development). The corporations and industries have the control of their emissions and hence flexibility is enhanced unlike the traditional emission regulators that were enforced with little consideration to the economic consequences. In addition, the scheme rewards all the companies that embrace new technology and goes beyond the minimum required target of reduction in pollution of greenhouse emissions through allowances that provide basis for trade with other companies. Environmental emissions reduction happen at least cost area as the scheme is implemented. Through common signal price, the corporations and companies reduce emissions in the least costly contexts (Bell, 2003, International Institute of sustainable development). The objective of environmental custodianship is achieved through the overall cap on emissions. Nonetheless, the scheme has come under heavy criticism in the way that corporations adopt it. Firstly, like the traditional regulation, it requires a lot of monitoring that includes reporting and constant technological compliance (Pohlmann, 2009). The scheme in many cases results in centralization of emission of pollutants since the plants concentrate areas with lower economic costs – economically viable. Further, the politics behind the allocation of who gets what pose as another significant challenge that the scheme faces. Besides, the scheme is not applicable to all sectors of economies. It is difficult to control emissions from individual cars and other motor vehicles (The New York Times, 2008). Moreover, it imperative to standardize the currencies so that it is easy to ensure that the amount of carbon emission in one country is equal in another country in terms of economic value. This is a major hindrance in ensuring efficiency in trading among countries. Differences between the market approach and traditional regulation The scheme is dissimilar to other traditional approaches in the sense that it allows for a certain level of emission in consideration with the economic costs associated with reducing emission. Thus, it is flexible unlike some traditional interventions typified by rigidity regardless of the impacts on the productivity of industries. Unlike the prior mechanisms of regulating emissions, the scheme fails to target other emitters outside the realms of private sectors such as motor emissions. The traditional regulations targeted even the households through such measures as eco-labelling. Conclusion Essentially, the scheme is realistic in targeting the industries that are responsible for much of emission. The ETS achieved significantly in the objectives set out in the phase I although some hindrances requires addressing to enhance efficiency and ultimate reduction of greenhouse gases by 2050. References Gilbertson, T. and Reyes, O (2009) Carbon trading: how it works and why it fails Uppsala: Dag Hammerskjold Foundation “Europe Forcing Airlines to Buy Emissions Permits” The New York Times, October 24, 2008 Pohlmann (2009) The European Union Emissions Trading Scheme: Legal Aspects of Carbon Trading Ed. Freestone Warren Bell. (March 14, 2003) “Introduction to Domestic Emission Trading” International institute for sustainable development Retrieved 2010-06-01. Grubb, M. et al. (3 August 2009). "Climate Policy and Industrial Competitiveness: Ten Insights from Europe on the EU Emissions Trading System" Climate Strategies Retrieved 2010-06-01< http://www.climatestrategies.org/our-reports/category/17/204.html> Running Head: International Trade Name: Lecturer: University: Course: Date: Introduction Specialization in what a country can produce most efficiently is the rationale behind international trade. The competitive and price advantages that accrue a country over the others lead to production for exports. This discourse will attempt to analyze the trading partners of Australia in the international realms for the last ten years, elaborating the comparative advantage the country has over the others. The ramifications of trading with these countries will be of primary focus in the ways they affect the Balance of trade particularly on the current account side. Evaluation of whether the slow economic growth recorded in these countries are significant in influencing the quantities and prices of the production. International trade The major trading partners of Australia have been relatively the same in the past decade. Among others, China, Japan and the USA in providing both the market for imports and exports while other minor trading partners provides market for exports and source for imports include Korea, New Zealand, Germany and Singapore. Comparative advantage theory illuminates that the an advantage accrues a country when the opportunity costs of producing a specific product are lower in the country as compared to other countries (Ashby, 2009). For instance, suppose that, Australia can out produce New Zealand in production of both cars and clothes. This implies that the former has an absolute advantage over both products. Assume further that the production possibility frontier of Australia is 5 units of cars and 600 bales of clothes. In New Zealand on the other hand, the production of one car would lead to sacrificing production of 10 bales of clothes hence the opportunity cost. However, the country’s production possibility frontier consists of a combination lower in both products than Australia. In this case, the opportunity cost of producing one car is higher in Australia than in New Zealand. The latter has a comparative advantage than the former. New Zealand can specialize in car manufacturing while Australia can specialize in clothes. Comparative advantage can also be established in comparing the domestic prices and world prices. A country whose goods are at lower prices in domestic market than in the international market leads the country to export more than what it floats in the local market (Ashby, 2009). In this scenario, the country lacks the price advantage and consequently comparative advantage. Impacts of economic growth on quantities and price and quantities of products Most of the countries experiencing low economic growth lack comparative advantage over other players in the international market. It is obvious therefore that the total output of the industries will gradually reduce. Low supply of commodities will raise the prices of the goods both at local market and at the international markets(Ashby, 2009). However, as earlier highlighted, the rise in domestic prices will arouse the need to buy imported substitutes goods that may be relatively lower. The drop in gains may also prompt the domestic industries to specialize in the commodities that are produced efficiently and import the rest. This is due to lack of comparative advantage. The effects of low economic growth experienced by the trading partners of Australia will lead to lower quantities of imports. This is because the governments in these countries may impose trade restrictions that limit the exports – embargoes. Further, the Australian exports receive higher taxes as the importing governments mediate to protect the local production. Thus, lower economic growth will ultimately lead to lowers quantities and higher prices. Lack of these advantages may lead to continued imports in Australia. The overall effect of goods importation is detrimental the domestic producers but advantageous to the consumers. Assuming that the consumers gains more in utility from the imports due to lower prices and wide variety than the losses made by the domestic producers, there is gain in total welfare of the society. If the reverse is true, the society loses and hence the government may intervene to protect the infant industries by imposition of trade restrictions such as quotas and tariffs (Laidler, 2004). Additionally, the government may offer subsidies to local industries to raise their competitiveness in the market against the imported goods. Effects of slow economic growth on current account The economic crisis led to lower demand of goods in the international market. Thus, Australian exports will reduce significantly having a negative effect in the balance of trade reflected in the current account. The net foreign transfer payments will reduce as the countries and individuals will shift from the foreign investments in these countries, also affecting the current account in a negative way. During economic crisis, the international market players lose in the current account leading to the fears of international debt. References David B. Ashby (1979 – 2009) Wholly Macro! Second edition London: Routledge David E. W. Laidler. Macroeconomics in retrospect: the selected essays of David Laidler New York: Edward Elgar Publishing, 2004, 433 pages Read More