Environmental and Natural Resource Economics - Example

Student's Name: Institutions’ Name: Environmental and natural resource economics Instructor's Name: Date Submitted: Environmental and natural resource economics Paper Outline Introduction Economic benefits of ETS over a carbon tax Economic disadvantages of ETS over a carbon tax Conclusion References Introduction The world temperature has exceeded the ceiling limit as a result of carbon emissions. Carbon emissions can be largely attributed to energy consumption. A study, which was done, by Garnaut (2008), showed that Australia is among the worlds’ largest emitter of carbon dioxide due to coal-dependency. Scientists have warned that there could be devastating consequences if the world does not fight against carbon emissions. With this regards, world leaders have devised several policies, which are targeted, at halving carbon emissions by 2050. Among the tools that were adopted to lower carbon emissions include carbon tax. Carbon tax is a charge which is levied on fossil fuel usage. In July, 2012, the Australian Federal government introduced a new scheme known as emissions trading scheme (ETS) which requires carbon emitters to acquire a license for all the tones of carbon dioxide that they emit. This new measure has its own economic impacts as compared with the carbon tax policy. This essay explores the relative economic advantages and disadvantages of using an emissions trading scheme in curbing climatic change rather than a carbon tax. Economic benefits of ETS over a carbon tax Compared to the carbon tax scheme, the Australian Federal Government collects more revenue from emissions taxes. The Australian Federal government has not set the carbon emissions ceiling and, therefore, organizations can release carbon dioxide at large quantities to the environment provided that they submit an allowance for each tone they release. With regards to carbon tax system, estimation is done to determine the level of carbon dioxide that should be emitted at a given rate. Under carbon tax, the government is uncertain about the revenue it can collect from carbon emission. ETS is, therefore, predictable and does not change frequently. Carbon tax, on the other hand, changes abruptly forcing the government to adjust the tax on a regular basis in order to achieve its set targets that is, emissions reduction. Carbon tax prices are also attached to every carbon release, and this has an effect of making people restrain from emitting. Also, the industries pay tax if they fail to release carbon (Wilson, 2010, 3-6). Emissions Trading Schemes plays a crucial role of generating a large amount of income to the government as a result of sale of carbon emission permits. The Australian government anticipates receiving a reduction trade dividend of about $ 18 billion by 2021. The revenue generated by the government through the emission permits is in turn used to offset balance of payment deficits .With this regards, an ETS helps the government to achieve its macro-economic objectives that is, stability in balance of payments. Also, an Emissions Trading Scheme ensures that organizations which release carbon dioxide pay the emissions price. In a Carbon tax system, the emissions costs are usually paid by the energy consumers. This, in turn, causes higher energy prices which is detrimental to the Australian economy. Garnaut (2008), in his studies, suggested that unlike carbon tax, Emissions Trading Schemes enhances internal trade. According to Garnaut, ETS enables countries around the globe to come up with efficient carbon mitigation conditions. This, in turn, helps to create well-organized market derivatives. Compared with a carbon tax system, the Emissions Trading Schemes plays a crucial role of enhancing international carbon markets. It links global economies through the introduction of carbon cost programs. The removal of carbon emissions price floor by the Australian Federal Government has enabled Australian industries to purchase permits from other nations across the globe particularly those in the EU. This relationship allows Australia to broaden its prospects for carbon emissions reductions across the globe and hence increasing its trade flexibility (Wilson, 2010, 3-6). ETS helps to fix market failures, which arise from climate change. The ETS acts as a tradable product by permitting companies to emit carbon dioxide to the environment. If the government does not interfere with the ETS through such measures as price controls, an ETS can act as an instrument for securing carbon release in Australia. Sanctioning the market plays a prominent role of determining the carbon reductions permit price. With this regards, a spot price as well as market derivatives will determine the expected yield curve. A well designed Emissions Trading Scheme helps to raise the expected permit price, and in turn, a market intermediation between financial institutions is created. The future permit market offers manufacturers with an opportunity of hedging their price risks. Hedging also enable them to eliminate costs associated with price volatility and uncertainty (Garnaut, 2008, P.9-12). As opposed to carbon tax, there exists a direct relationship between Emissions Trading Schemes and the prices of goods and services in an economy. A research, which was done, by ASME (2009), suggested that a large part of carbon emissions costs is eventually passed over to energy prices casing the price of power to shift upwards. Consumers are, therefore, forced to pay more for electricity prices and the electricity companies reap higher profits, as a result. The passing on of these power charges has economic benefits because the government collects more revenue by taxing the power producers. Emissions Trading Schemes provides investors with, an outlook of the price framework, as opposed to carbon tax. Emitters are mainly concerned with certainty of pollution laws. A fixed rule on pollution enables the investors to plan for the future. It also enables the investors to assess the economic impacts of pollution permits and hence project the costs. The permit trade also acts as an incentive to emitters to keep expenditures at lower rates. Thus, it enables the investors to discover innovative ways of curbing their costs. Also, an ETS encourages investors to spend more on renewable energy when they anticipate the carbon emissions costs to keep on increasing. Economic disadvantages of ETS over a carbon tax The cost of administrating Emissions Trading Schemes is relatively high compared to that of administering carbon tax. Managing ETS is usually a complex process, and this provides a major avenue of appropriation of resources. Key market players usually pocket windfall proceeds from the ETS. Carbon tax, on the other hand, is straightforward, and this enables investors to predict. Unlike carbon tax, the Emissions Trading Schemes permit price is usually passed on from a manufacturing company to the final consumer. Also, an ETS has the effect of raising the cost of electricity, as well as manufactured products. Thus, the Federal government will be obliged to compensate the end users in an effort to enhance their living standards. This implies that the finances reserved by the Australian government for development projects will be used to lower the people’s cost of living. The Emissions Trading Schemes does not provide incentives to prospective investors to invest in emissions reduction expertise as opposed to carbon tax. Investment in Carbon emissions reduction is a major force as far as Australians’ economic growth is concerned. The decision to regulate the amount of carbon emissions through the introduction of permit prices does not favor research and development. The lack of investments in emissions reduction technologies causes uncertainties such as high costs and employment creation. Compared to carbon tax scheme, the Emissions Trading Scheme is not an ideal instrument of creating green jobs. Carbon tax aims at moving from a carbon financial system to a clean energy financial system. Before the introduction of ETS, the rate of green employment creation in Australia had increased significantly. The Australian Federal Government had invested in green infrastructure which resulted to the creation of more green jobs. Many people were employed in such sectors as energy efficiency, ecotourism, sustainable farming among others. However, the introduction of Emissions Trading Schemes has hampered this pace. Many more environmentally driven jobs in Australia have since been lost since the introduction of ETS. The main reason why ETS does not promote green jobs is that the scheme focuses mainly on the amount of carbon emitted and not the cost of emission. This, in turn, causes uncertainty and volatility in the market .On the contrary, a carbon tax focuses on raising the price of carbon emissions and thus, it provides stability of prices at relatively low-costs. Also, carbon tax enables the government to redirect its carbon intensive businesses to renewable energy at minimum carbon leakage. This thus has a positive effect on key sectors of the economy and green jobs, as well (ASME, 2009, 17). Unlike carbon tax, Emissions Trading Schemes does not generate huge revenues to the government. Revenue arising from the carbon tax is used by the government to support poor households. With this regards, Emissions Trading Scheme does not play its rightful role of shifting the tax burden from the governments’ income tax and value added tax (CPA Australia, 2009, 5-12). A graph showing the effect of carbon tax on the tax revenue Obtained from: climatelab.org Unlike carbon tax, Emissions Trading Scheme does not help to lower the consumption of fossil energy. Indeed, ETS encourages the consumption of fossil fuels, and this has a negative effect on both people and wildlife quality of life. The increase in consumption of fossil fuels causes poor health in both people and animals. This, in turn, causes the economy to suffer because people spend much of their time in hospitals. The tourist sector is also affected as wildlife decreases as a result of carbon emissions. Compared to carbon tax, the design of Emissions Trading Schemes is complex and this makes it easily evadable. Evasion of ETS has negative effects as far as Australia’s economy is concerned. One of the major impacts of tax evasion is that, it causes the Australian Federal government to utilize resources in order to reclaim the taxes it is indebted. This is uneconomical because the money used to recoup the taxes could be used to finance key projects. Emissions Trading Schemes evasion in Australia give rise to artificial disadvantages. Companies that emit carbon dioxide tend to outlast those with well-organized practices by evading tax and this can cause serious harm to the economy (Wilson, 2010, 6). Compared to carbon tax, ETS has many emissions’ rules which requires industries to work extra hard in order to comply with them. According to CPA Australia (2009), Emissions Trading Schemes is difficult to implement. The presence of many rules causes industries to incur immense losses particularly the small emitters .This regulatory burden causes investors to close their ventures and hence an obstacle to Australia’s economic growth ( CPA Australia,2009,5-12). Compared to carbon tax, Emissions Trading Schemes gives rise to excessive pollution and hence an increase in pollution costs. The pollution permits allow companies to emit as much as they can and this causes additional costs of cleaning up. According to economists, the cost of cleaning additional greenhouse gasses is higher than the economic gain associated with the pollution. A figure showing marginal costs of pollution and control Obtained from: publicecon.wikispaces.com Compared to carbon tax, Emissions Trading Scheme does not provide analysts with definite results .It is hard to estimate the pollution costs and thus, industries are tempted to make predictions which could be inaccurate. This judgment call by industries has the effect of boosting the price of goods and services in an economy (Harris, 2006, 358-378). Compared to ETS, the imposition of carbon tax is as an effective way of solving the challenge of externalities that is, the external costs that arises from pollution. With regards to carbon tax, the government imposes charges in order to curb the carbon emissions. This, in turn, play a key role of internalizing the emissions cost. On the other hand, Emissions Trading Schemes does not solve this problem because manufacturers find it meaningful to increase pollution in order to their control marginal costs (Harris, 2006, 358-378). A graph showing the effect of carbon tax on the external costs Obtained from: economicsonline.co.uk Conclusion Conclusively, the Emissions Trading Schemes as an instrument of meeting environmental objectives has proved to be cost effective compared to carbon tax. ETS enables investors to determine the long-term prosperity for their businesses. In addition, ETS offers certainty to investors by providing them with a lasting and predictable cost signals upon which they base their investment decisions.ETS also plays a crucial role of correcting the key market failures. Also, an ETS does not provide a ceiling on carbon release and, therefore, industries are free to release as much as they can and this enables the government to collect more revenue. However, an ETS is not 100 % effective as far as a reduction of greenhouse gas emissions and economic growth are concerned. References ASME. (2009). ASME General Position Paper: Reducing Carbon Dioxide Emissions. ASME: Washington, DC. CPA Australia. (2009).Climate Change Policy: carbon tax versus an emissions trading scheme-the debate between experts.CPA Australia Ltd. Garnaut, R. (2008). An Australian Policy Framework: The Garnaut Climate Change Review.Ed:13.Cambridge: Cambridge University Press. Retrieved from Harris, J. (2006).Environmental and Natural Resource Economics: A Contemporary Approach.2nd Ed.Boston: Houghton Mifflin. Wilson, O. (2010). Auctioning from 2013-modalities and prospects: A European Perspective. The Sunday Press: Dublin. Read More