The paper "Environmental and Natural Resources Economics" is a wonderful example of a literature review on macro and microeconomics. Arguments from economists are that if the market is left to operate freely then greenhouse gas emissions are likely to be excess. The position economists take is that there are 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 in the form of a carbon tax or emissions trading scheme.
However, the argument among scholars is the understanding between the two approaches. On the one hand, economists argue that carbon tax is effective especially to low firms and households (Newell et al. , 2013). On the other hand, the 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 of the importance of carbon tax against the emissions trading scheme.
The paper presents evidence-based reports, Kyoto Protocols, and other strategies to support a carbon tax as an approach that effectively deals with the reduction of greenhouse gas emissions. Carbon Tax The definition of a 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 number of emissions to what can be socially efficient level. This paper takes a case of an electricity-producing company basing on figure 1 below to illustrate the definitions of a 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.
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.