The paper “ The Global Price of Carbon – Determining by the Forces of Demand and Supply” is a thrilling example of the assignment on macro & microeconomics. This strategy of fixed price on carbon emission increases the overall price of energy (electricity), hence having a negative impact on other producing firms. The burden will be unevenly distributed, with the household carrying the highest burden of the increased cost of production. Relative prices of products manufactured using coal electricity will increase, leading to the consumption of alternative products with lower costs of production owing to their low costs.
Conversely, industries will shift to alternative sources of energy, such as solar energy, which are costly to implement. This will lead to a reduced national supply of goods, thereby reduced G. D.P. Question 2The fixed price of carbon emission imposed by the Australian Government is an example of a Pigovian tax. Pigovian taxes are those levies that are structured to internalize negative externalities. The government has dictated that carbon-emitting firms should pay a fixed charge of approximately $24/tonne. A higher Pigovian tax will have a higher impact on the prices of electricity and helps in reducing pollution arising from carbon emission.
The fixed price of emission is also a means of earning government revenue and encourages electricity producers to adopt cleaner methods of generating electricity. However, the Australian fixed price on carbon emission is relatively higher compared to other floating price schemes operating elsewhere, such as in the European Union (the EU ETS), which makes the charge detrimental. The fixed price charge on carbon emitted (Pigovian tax) is unevenly distributed, and much of the burden is borne by the household (consumer) rather than the suppliers. The ability to transfer the tax burden is dependent on the price elasticity of demand, and the price elasticity of demand Incidence of the tax falls on the group with the inelastic price elasticity of demand since they respond less to any price change (Helfand et al 2003).
Convery, F., S. McDonnell and Ferreira S. 2007, “The most popular tax in Europe? Lessons from the Irish plastic bags levy”, Environmental and Resource Economics, Vol. 38, No. 1 (September), pp. 1–11.
Helfand, G., P. Berck and Maull T. 2003, “The theory of pollution policy”, in K.-G. Mäler and J. R. Vincent (eds.), Handbook of Environmental Economics, Vol. 1, Amsterdam: North Holland Elsevier.
Intergovernmental Panel on Climate Change (IPCC) 2005, Carbon dioxide capture and storage, New York: Cambridge University Press.
Johnston, A. 2006, “Free allocation of allowances under the EU emissions trading scheme: legal issues”, Climate Policy, Vol. 6, No. 1, pp. 115–36
OECD.2006. The Political Economy of Environmentally Related Taxes, Paris: OECD