Applied Analysis of the Carbon Price Mechanism in Australia - Case Study Example

Applied Analysis of the Carbon Price Mechanism in Australia Customer’s Name Customer’s Grade Course Customer tutor’s Name 30th August, 2011 Introduction The global climate is changing day in day out. Greenhouse gas emissions from human related ventures have led to the current topical issue called global warming, which if not checked can lead to global socio-economic, political and health related problems. Some of these impacts are unavoidable. Continued emissions of the greenhouse gases at or above the current rates could lead to further warming, therefore causing further changes of the atmospheric temperatures over time1. Before the initiation of the industrial revolution, the global green house concentration stood at around two hundred and eighty parts per million of carbon dioxide but currently the concentrations are around four hundreds and thirty parts per million. There has been drastic increment in carbon dioxide concentrations and this scenario needs an immediate concise policy action because if nothing is done by the year 2100 the carbon dioxide concentrations will reach a high of 1,560 ppm. These high carbon dioxide concentrations are associated to a high magnitude of irreversible climate change. The scenario where no mitigation occurs is referred to us as the ‘reference scenario’. Which according to economics, it assumes that the current trends are left to continue into the future.2 The reference scenario does not include the impact of global atmospheric climate change on the economy3. Addressing the problem of the rise in atmospheric greenhouse gas concentrations so as to have their emissions reduced significantly, will have a resultant reduction in the risks of dangerous climate change related problems and this requires a fundamental shift in current global carbon dioxide emission trends4. This requires considerable changes in global economic activity5. The carbon price mechanism was formulated to ensure that the cost for carbon sourced energy is properly determined for its impact on the environment over non carbon based solutions6. The purpose of the carbon price mechanism is to create a market framework which means that the lower the carbon intensity of the energy source, the cheaper it is. A premium should be payable for high carbon energy sources because of the damage they do to the environment. The carbon price mechanism is a mechanism for levelling the playing field between zero- carbon –based energy sources. Therefore in an effective and efficient carbon market, the zero/low carbon option will be preferred to high carbon generation. Under an effective carbon price mechanism, energy under storage is priced according to its carbon intensity, whereas demand side reduction is recognised as carbon free. There is therefore need for a greater incentive to reduce demand than to store carbon-based energy sources. The Effect of Rising Energy Prices for the Economic Wellbeing of Households: The initial household impacts of the two Carbon Pollution Reduction Scheme scenarios were modelled with reference to treasury’s price and distributional models7. This model made an assumption that the emission price is completely channelled to the consumers, and also assumes that the consumers do not change their consumption of goods and services in relation to the changing relative prices8. Based on the Carbon Pollution Reduction Scheme scenarios, the emission pricing is believed to project and lead to a rise in the consumer price level of around one to one point five per cent, with minimal effect to the ongoing inflation. Carbon pricing mechanism will have a big impact on those goods which are carbon emitting such as gas, electricity and other fuels9. An average household in Australia is therefore expected to utilise an extra four to five dollars per week on electricity and about two dollars in a week on gas and other fuels10. This also corresponds to a rise in electricity costs seventeen to twenty four per cent and in eleven to fifteen percent of gas costs11. House holds with low-income will be more affected by the role into effect of an emission price than other households12. This will be so because these households will spend a more proportion of their income on emission-intensive goods, and they might find it hard to eliminate these goods with those which are low carbon emitting13. In the Carbon Pollution Reduction Scheme scenario−5, a one pensioner household in the lower quintile of income will incur an average price rise in the year 2010 of 1.3%, while those households found in the highest quintile of income face an average price rise of 0.9%14. See (Table 1.0)15. Table 1.0: Estimated price impacts in 2010 CPRS −5 scenario Note: The introduction of carbon price mechanism will also impact on home ownership as several individuals will not be able to construct, rent or own a home due to the then increased prices of gas, electricity and other fuels16. Effect of Increases in the Cost of Traditional Sources of Energy for the Energy Consumption Patterns of Australian Households In the Carbon Price reference scenarios (in which emission pricing was introduced in the year 2010), a one-off rise in the price level of around 1-1.5 per cent was expected, with minimal implications for ongoing currency inflation17. For the average household, this corresponds to an extra (4-5) dollar per week spending on electricity and 2 dollars per week on gas and other household fuels. Prices of petrol and emission-intensive meat products will not be affected initially, due to reductions in fuel taxes and agriculture’s initial exclusion from the Carbon Pollution Reduction Scheme18. Carbon dioxide emission pricing will have a somewhat greater impact on house holds with low-income as these households will spend a higher share of their income on emission intensive goods19. Short term impacts of implementation of the carbon pollution reduction scheme through carbon price mechanism will be a resultant need for households to incur higher expenses for emission-intensive products, such as gas and electricity20. However the amount of household income utilized on these goods will fall over time21. The prime relative price rise will occur for the emission-intensive commodities such as electricity, transportation and gas used for heating. The relative prices of most commodities that consist of a large share of household spending will however fall. Households will substitute away from utility of emission-intensive products and as a result their relative prices will change. The overall implication of the carbon price mechanism in a long period of time on household consumption generally mirrors the impacts on the overall economy22. The consumption will continue to grow at a slower rate. See (Chart 1.0)23. Chart 1.0: Real consumption per capita Level Change from reference Effect of Increased Government Cash Payments Using the treasury’s price and distributional models it was observed that if the carbon price mechanism is implemented then the gross national product of Australia from the year 2010 to the year 2050 will have an average real GNP per capita growth of an annual rate of 1.1 per cent in the policy scenarios, in comparison to a 1.2% in the reference scenario. It also indicates that by the year 2020, the real GNP per capita will be 9% above the current rates, in relation to 11% in the reference scenario. The model also stipulates that by the year 2050, the real GNP per capita will be 55% above the current levels, in relations to 66% in the reference scenario24. The carbon pricing mechanism according to the model will have a minimal impact on Australia’s Gross domestic product. As from the year 2010 to the year 2050, the real GDP per capita will be growing at an average annual rate of 1.2% in the policy scenarios, in relation to 1.4% in the reference scenario25. However it should be noted that the change in real GDP can not be used to quantify the economic impacts of carbon pricing, because it does not include income transfers related with global emissions trading26. Ensuring lower and stable carbon dioxide emission concentration needs a faster cut in world wide carbon dioxide emissions and higher carbon prices27. In Australia to achieve this stabilization of five fifty parts per million needs an initial emission price of around 23 Australian dollars per tonne of carbon dioxide emissions as at the year 2010.28 The starting price as at the year 2010 is forty percent higher in order to achieve five hundreds and ten parts per million (according to the Carbon pollution reduction scheme scenario 15) and 110% higher to achieve 450 parts per million (according to Garnaut scenario 25)29. Therefore what this means to Australia is that higher carbon emission prices will lead to higher aggregate economic costs30. The carbon pricing mechanism produces a 1.5% rise in the consumer price index according to Carbon pollution reduction scheme scenarios, which commences at around 23-32 Australian dollars per tonne of carbon dioxide emissions (A$20-28 in 2005 dollars)31. It is estimated that the carbon pricing mechanism will however have a minimal implications for ongoing inflation32. Although it is also predicted that if the changes in coverage for example having the Carbon Pollution Reduction Scheme to agriculture get extended up to the year 2015 can lead to an additional smaller increases in the consumer price index at that time.33 In order to achieve a higher magnitude or reduction of carbon dioxide emissions does not need a slow down in economic activity because the economy will adapt to the emission price34. The demand will shift from higher carbon dioxide emission products for example aluminium, road transport and coal to lower carbon dioxide emission products wood products, renewable energy, and railway transport35. The overall result will be a drop in carbon dioxide emission intensity, which will then imply that metals processing sector for example will produces more steel and iron per unit of carbon dioxide emission36. Various assumptions, analytical scope on economic relationships between global, national and sectral and model parameters all drive cost estimates37. To add on that, estimated costs are influenced by the carbon dioxide emission levels in the reference scenario, which is different across studies, as this dictates the magnitude of economic adjustments required to enable any given carbon dioxide emission reduction goal. Other important assumptions are availability of technology & its costs and the design of the mitigation interventions including reduction of carbon dioxide targets38. Various studies findings indicate that even by having a substantial emission reduction scheme the nation can still maintain a strong economic growth. The reports also note that the predicted impacts will be smaller at the national level but bigger economic implications will be felt at the sectoral level39. All sectors covered by the carbon pricing mechanism can effectively reduce emissions40. See (Chart 2.0)41 below. Chart 2.0 National Indicators The particular mix of government set carbon pricing mitigation activities planned depends on the kind of assumptions made on supply-side opportunities to reduce the carbon dioxide emissions, and the demand-side outcomes to changes in relative prices42. These factors i.e. opportunities and responses are also uncertain, especially for long term predictions. World wide economic developments will have a big impact on Australia’s carbon pricing mitigation costs43. World wide mitigation interventions will create costs, such as through lower demand for Australia’s coal exports, and benefits, such as through increased development of low-emission technologies44. The World wide carbon dioxide emission price will also have an impact on the Australian carbon price through international carbon dioxide emissions trading45. Conclusion The impact of pricing carbon will be felt by indigenous communities in Australia due to their consumption and production activities46. On the consumption side, overall price impact of the scheme on an individual household’s welfare will be difficult to quantify47. It will depend on many factors including the carbon price; the extent to which the carbon costs are reflected in the prices of goods; individual consumption patterns; the individual household’s levels of disposable income; the assistance provided to households by the government to manage the impacts of the carbon pollution reduction scheme; and the ability of households to adjust consumption patterns in response to higher carbon prices48. Bibliography Ahamaad, H., Matysek, A., Fisher, B.S., Curtotti, R., Gurney, A., Jakeman, G., Heyhoe, E. and Gunasekera, D., Economic Impact of Climate Change Policy: the Role of Technology and Economic Instruments, ABARE research report 06.7., Canberra, 2006. Allen Consulting Group, ‘Deep Cuts in Greenhouse Gas Emissions: Economic, Social and Environmental Impacts for Australia’. Report to the Business Roundtable on Climate Change, 2006. Australian Government, Intergenerational Report 2007, Australian Government, Canberra, 2007. Barker, T., Qureshi, M. S., and Kohler, J., ‘The Costs of Greenhouse Gas Mitigation with Induced Technological Change: A Meta-analysis of Estimates in the Literature,’ 4CMR, Cambridge, 2006. Concept Economics, ‘Estimated Impacts of the Proposed Domestic Emissions Trading Scheme on the Oil and Gas Industry’, Prepared for the Australian Petroleum Production and Exploration Association, 2008. Department of Climate Change (DCC), Carbon Pollution Reduction Scheme Green Paper, Australian Government, Canberra, 2008. Department of Climate Change (DCC), Tracking to the Kyoto Target, Australia’s Greenhouse Emissions Trends, 1990 to 2008-12 and 2020, Australian Government, Canberra, 2008. Garnaut, R., Garnaut Climate Change Review Economic Modelling Technical Paper 2: Climate Data Methodology and Assumptions. Cambridge University Press, Port Melbourne, 2008. Garnaut, R., Garnaut Climate Change Review Final Report, Cambridge University Press, Port Melbourne, 2008. Intergovernmental Panel on Climate Change (IPCC). Fourth Assessment Report Synthesis Report, Summary for Policy Makers, Cambridge University Press, Cambridge, 2007. Pearman, G., Climate Change, Risk in Australia under Alternative Emissions Futures, Department of the Treasury, Canberra, 2008. Prime Ministerial Task Group on Emissions Trading, ‘Report of the Task Group on Emissions Trading’, Commonwealth of Australia, Canberra, 2007. Stern, N. The Economics of Climate Change: the Stern Review, Cambridge University Press, Cambridge, 2007. Yohe, G., Andronova, N. and Schlesinger, M., ‘To Hedge or not Against an Uncertain Climate Future?’, Science, vol. 306,(2007):p.p. 416-417. Read More