Environmental and Natural Resources Economics - Literature review Example

Environmental and Natural Resources Economics Name: Instructor: Course: Date: Introduction Arguments from economists are that if market is left to operate freely then greenhouse gas emissions are likely to be excess. The position economists take is that there is insufficient incentives for firms or households for emission reductions. As such, Chaabane et al. (2012) have recommended the introduction of polluter pays principle or placing a given price on carbon dioxide or other greenhouse gases. The implementation of this initiative has been taken inform of carbon tax or emissions trading scheme. However, the argument among scholars is the understanding between the two approaches. From the one hand, economists argue that carbon tax is effective especially to low firms and households (Newell et al., 2013). On the other hand, emissions trading scheme has been argued to be effective in dealing with firms producing emissions (Fischer and Fox, 2012). The objective of this paper is to provide a review on the importance of carbon tax against emissions trading scheme. The paper presents evidence based reports, Kyoto Protocols and other strategies to support carbon tax as an approach that effectively deal with the reduction of greenhouse gas emissions. Carbon Tax Definition for carbon tax has remained central in understanding the effectiveness of the two models. Zakeri et al. (2015) define carbon tax as a tax imposed on firms with an aim of providing monetary incentives to carbon dioxide emitters so that the process can reduce the quantity of emissions to what can be socially efficient level. This paper takes a case of electricity producing company basing on figure 1 below to illustrate the definitions of carbon tax. Figure 1 below works by internalizing the cost of the company’s negative externality. Basing from the figure below, carbon tax allows consumers and firms the choice of making a decision on how much they can produce so as to limit the amount of money they pay in form of a tax. Fahimnia et al. (2015) argue that as long as every firm sees the same tax, the firm will generally reduce the amount of externality to the socially efficient level. After taxation, owing to the fact that consumers will have to pay a give price P Efficient the amount of demand will drop to Q Efficient. On the side of supply, since the producers are likely to receive the price P, there are unlikely to produce any units that are beyond Q Efficient. As a result of these processes, the market is likely to produce an efficient quantity of their product. Figure 1: Imposing Carbon Tax Process on Quantity of Electricity to Socially Efficient Level Emissions Trading Scheme Quantity regulation can limit the production of electricity to Q Efficient as also shown in figure 1 below. This process subsequently caps the quantity of the emissions with the target power plant as well as fuel. At Q Efficient the social benefits and social costs of electricity are equal. It is for that reason that scholars argue that quantity regulation can be desirable in conditions where the cost of error is considered great (Fahimnia et al., 2015; Villoria-Sáez et al., 2016). The aim of emissions trading scheme is to create a system of property rights pollution as well as allowing firms or the property owners to trade them. Emissions Trading Scheme versus Carbon Tax Wu et al. (2016) carried a research that compared the efficiency and economic significance of carbon tax as well as emissions trading scheme instruments. The research found that revenue-raising instruments like auctioned emission permits and carbon taxes, with revenue recycling that can reduce other taxes, is likely to reduce emissions at lower cost when compared with grandfathering emission permits and other regulations. This research is in agreement with previous studies such as Fischer and Fox (2012) who noted that carbon tax is having “all the hallmarks of good taxation” (p. 37). They thus concluded that carbon tax has the following benefits: Carbon tax has been found to be tackling different problems including that of negative externality through the process of incorporating the social cost of global warming with regard to the cost of carbon dioxide emission. The model provides an opportunity of stimulating the process of saving energy, investment and innovation in clean technology and economic growth. Carbon tax is low cost and simple when administering through the use of different existing tax structures. Any reverting side effect on low-income groups is considered remedial using a small part of the expected revenues for equalization. Contrariwise to Fischer and Fox (2012), Müller and Slominski (2016) reported that most of European countries including Germany and United Kingdom that introduced carbon taxes also introduced special tax or rebates to deal with the concern regarding industrial competitiveness. This position thus complicates what Fischer and Fox see as benefits of carbon tax. The analysis of feasibility of non-compliance with the carbon tax as well as emissions trading scheme has shown that the emissions trading scheme approach under Kyoto Protocol had a number of weaknesses (Müller and Slominski, 2016). The research noted that one alternative to Kyoto’s quantitative approach was one which was based on an internationally integrated carbon tax. This means that if carbon tax is followed entirely then Kyoto Protocol is unlikely to alleviate the problem it was meant to solve. Specifically, Müller and Slominski noted that nations for which the Protocol provided binding constraints emitted just 19 percent of global emission. However, the challenge was that these countries were supposed to reduce their emissions by as little as 5 percent. Considering internationally carbon tax regime, countries have agreed to criminalize or penalize emissions domestically basing on internationally agreed-upon tax regarding emissions of carbon. This process has been understood as, where no emissions targets, no emission trading thus no base period emission levels that would be involved. Conceptualizing the significance of carbon tax over emissions trading scheme, there a border adjusted tax that can be put in place concerning trade between non-parties and parties of the integrated carbon tax. In detail, businesses are likely to have a number of costs to plan for or deal with as opposed to emissions trading scheme where the prices are unlikely to be constant. Based on this understanding the following are benefits of carbon tax over emissions trading scheme: Firms can use carbon tax in the reduction of deadweight and inefficiencies loss that have been created by consumption and income taxes. Tax based policies on emission reduction are less susceptible to elements of corruption when compared with quota based regulations Permits for emissions create a case for making a profit for firms who control the permits. This scenario gives corrupt administrators and dictators the chance to sell permits and pocket the proceeds. With regard to carbon tax there is little chance of problems related to the definition of baseline emission level or in some cases, emission year and arguing concerning the level of emission credit every country is entitled to. Arguing from the benefits of carbon tax below, it is worth noting that an international climate agreement that codified carbon tax will be beneficial in the reduction of greenhouse gas emissions when compared with emissions trading scheme in terms of compliance and efficiency perspectives. This view supports Müller and Slominski (2016) research findings that theorised third country agency in EU rule transfer. Their findings questioned whether emissions trading scheme was the best regulatory model. As a result, the research found that a carbon tax model if adopted minimized the number of entities subject to the tax thus having administrative benefits. Carbon tax thus allows firms annual and seasonable emission variation as a result of changes in prevailing economic situations. Contrariwise, there are studies that have supported the implementation of emissions trading scheme as the best model in the reduction of greenhouse gas emissions. Based on a review of Kyoto Protocol Fischer and Fox (2012) noted that carbon tax may not be as effective as emissions trading scheme because it has failed to attain a given level of emission reduction since the emission varies from year to year. This view has been supported by European Union Emissions Trading Schedule and the Regional Greenhouse Gas Initiative who noted that for reduction of greenhouse gas emission to be effective there is need for the implementation of a model that attains a given level of reduction. Conclusion This paper sought to review the effectiveness of emissions trading scheme and carbon dioxide in the reduction of greenhouse gas emission. Founded on the research based evidence we conclude that carbon tax remains to be the most favoured model as it does not only reflects targets and goals different countries have put in the reduction of the gas but remains significant option in offering carbon prices thus helping energy producers make investment decisions without fear of regulatory costs that have been fluctuating. The points in favour of carbon tax can be summed as having a model which helps when emissions reductions become cheaper than expected; contrary to emissions trading scheme which does not encourage emissions reductions beyond emissions target. References Chaabane, A., Ramudhin, A., & Paquet, M. (2012). Design of sustainable supply chains under the emission trading scheme. International Journal of Production Economics, 135(1), 37-49. Fahimnia, B., Sarkis, J., Choudhary, A., & Eshragh, A. (2015). Tactical supply chain planning under a carbon tax policy scheme: A case study. International Journal of Production Economics, 164, 206-215. Fischer, C., & Fox, A. K. (2012). Comparing policies to combat emissions leakage: Border carbon adjustments versus rebates. Journal of Environmental Economics and Management, 64(2), 199-216. Müller, P., & Slominski, P. (2016). Theorizing third country agency in EU rule transfer: linking the EU Emission Trading System with Norway, Switzerland and Australia. Journal of European Public Policy, 23(6), 814-832. Newell, R. G., Pizer, W. A., & Raimi, D. (2013). Carbon markets 15 years after Kyoto: Lessons learned, new challenges. The Journal of Economic Perspectives, 27(1), 123-146. Villoria-Sáez, P., Tam, V. W., del Río Merino, M., Arrebola, C. V., & Wang, X. (2016). Effectiveness of greenhouse-gas Emission Trading Schemes implementation: a review on legislations. Journal of Cleaner Production, 127, 49-58. Wu, J., Fan, Y., & Xia, Y. (2016). The Economic Effects of Initial Quota Allocations on Carbon Emissions Trading in China. The Energy Journal, 37(China Special Issue). Zakeri, A., Dehghanian, F., Fahimnia, B., & Sarkis, J. (2015). Carbon pricing versus emissions trading: A supply chain planning perspective. International Journal of Production Economics, 164, 197-205. Read More