Rationale and Implications of Australias Carbon Tax - Case Study Example

Rationale and Implications of Australia’s Carbon Tax Introduction Beginning in July of this year, the Australian government introduced a “carbon tax”, a tax on each tonne of carbon dioxide emissions from industrial facilities, as the key part of efforts to reduce harmful emissions that can cause climate change. Jotzo (2011, 9) identifies a few central concerns of different sectors in Australia regarding the impact of a carbon tax. The foundation of the whole concept is the concern for Australia to do its part in reducing emissions, not only for the country’s sake but as a responsible part of the global community; this is the objective of the ‘environmentally-concerned’ sector. The concern for the general population is that any emissions-reduction programme does not raise costs of energy and other goods or services too much, and is actually effective in reducing emissions. The concern of the businesses which are considered ‘emissions-intensive’ is that the financial impact of an emissions-reduction programme is minimised as much as possible. In this essay, the overall environmental and economic reasons for the introduction of a carbon tax are outlined first, followed by a discussion of the estimated economic impacts of the new tax and the models used to produce those estimates. The potential impact of the carbon tax on the tourism and travel industry is then explained, with the main points of the discussion summarised in the final section. Economic and Environmental Factors The environmental impacts of greenhouse gas (GHG) emissions are still debated by many people, but are considered a real threat that must be addressed by the Australian government, other governments around the world, and major industry groups like the Tourism & Transport Forum Australia (Tourism & Transport Forum, 2011). The rationale for introducing a carbon tax is that scientific evidence suggests that significant reductions in carbon emissions are needed to reduce the risk of future damaging climate change, such as increased temperatures that lead to rising sea levels and shifts in weather patterns that harm agriculture (Adams, 2007; Jotzo, 2011). The economic reasons behind the introduction of a carbon tax are to make the large social, business, and technology changes that are needed to successfully reduce GHG emissions as gradual and ‘painless’ as possible; taking gradual action early is less disruptive and less costly than taking major action later (Jotzo, 2011). From the point of view of the government, introducing the carbon tax is needed to honour a commitment Australia has made to reduce carbon emissions below year 2000 levels by the year 2050 (Meng, Siriwardana & McNeill, 2011). The reason Australia draws attention from the rest of the world is even though the country only accounts for about 1.5% of global GHG emissions, because of Australia’s small population it has the highest per capita emissions in the world (Ibid.). However, simply eliminating emissions is not a good solution, because it would also eliminate much of the country’s energy supply. The largest part of Australia’s GHG emissions come from electricity generation, and about 75% of that is created by burning coal (Meltzer, 2012). Therefore, the objective of the carbon tax is to encourage a shift away from ‘dirty’ coal to cleaner alternatives such as solar, wind power, geothermal, and more advanced ‘clean’ coal technology rather than reducing energy creation and use (Humphreys, 2007). Assessing Economic Impact of Carbon Tax Most estimates of the economic impacts of the carbon tax are based on the ORANI applied general equilibrium model of the Australian economy, which is a complex model that considers the whole economy, and can be used to forecast changes in different parts of the economy when something in one or more other parts is changed. The model used most often is the ORANI-G model (the G stands for generic), which has some flexibility to be adjusted for specific conditions, but still relies on basic neoclassical economic assumptions that producers and consumers seek maximum optimisation; that is, minimising costs and maximising utility as much as possible (Horridge, Parmenter & Pearson, 1998, 2). Another model which has been used is the Monash Multi-Regional Forecasting (MMRF) model, which is a slightly reduced version of ORANI that combines 52 industries, 56 products, eight states or territories, and 56 smaller regions with five types of agents (industries, capital creators, households, government, and foreigners) to generate an equilibrium model (Adams, 2007). The reason equilibrium models are used, which is obvious though not specifically explained by the various analyses, is that the objective is to see what would change in order to make the economy ‘balance’; in other words, so that the net effect across the entire economy, if one thinks of it as a very large equation, is the same after the imposition of the carbon tax as before. Except for supply and demand for energy, the models do not make forecasts about supply and demand for other kinds of goods and services. These, however, can be inferred from the forecasts that are made, which are generally described in terms of the impacts on GDP, energy costs, wages and employment, and overall consumer prices. The economic impacts are estimated under a variety of scenarios: imposition of the carbon tax with no other compensating variables (McDougall, 1993; Ahammad, Clements & Qiang, 2001; Siriwardana, Meng & McNeill, 2011); the carbon tax with income or excise tax reductions, or other compensation to the people (Humphreys, 2007; Meng, et al., 2011); and comparing the effects of the carbon tax with carbon trading schemes, which are to be introduced in the future (Ahammad, et al., 2001; Adams, 2007). The one thing that all the models and forecasts do agree on is that emissions will be reduced; estimates range from 11 to 12 percent (Ahammad, et al., 2001; Siriwardana, et. al., 2011) to as much as 21 percent (Adams, 2007). The introduction of the tax, however, does have some negative impacts. Without a compensation scheme Siriwardana, et. al. (2011) estimate the carbon tax will reduce real GDP by 0.68%, increase consumer prices overall by 0.75%, and increase the cost of electricity by 26%. In a follow-up study that included a scheme to return some of the revenue collected from carbon taxes to taxpayers, however, the same authors found that the compensation scheme reversed the GDP decline and increased household consumption without significantly changing the reduction in emissions; consumer prices and electricity costs still increased, but consumer demand improved (Meng, et al., 2011). Under an emissions-trading scheme, the impact on GDP is greater, a reduction of 1.3 to 3 percent (Ahammad, et al., 2001; Adams, 2007); household consumption also declines, but this is cancelled out in a way by the decline in real wages, about 1.4% for both by 2030 (Adams, 2007); in other words, the entire economy declines slightly, but the effect is not as noticeable because it does so uniformly. Impact on the Tourism and Travel Industry The travel and tourism industry will suffer serious impacts from the carbon tax, according to two different studies. First, the carbon tax will reduce exports, and the effect is worse under a scenario in which some compensation for the carbon tax is offered; a 3.8% reduction with the tax alone, and a drop of 6.4% with compensation (Meng, et al., 2011). This is important to the tourism industry not because of exports, but because of the reason why exports decline, which is the increase in prices that make exports decline; these increase the value of the Australian dollar relative to other currencies, and make the country a less economical destination for travellers. The currency exchange factor is cited by the Tourism & Transport Forum (2011) as part of the negative impacts the industry will suffer from the carbon tax. The Forum estimates that direct costs for the industry from the carbon tax will range from $600 million to $865 million, and revenue losses may amount to $731 million to $1.156 billion, depending on whether or not the carbon tax is to be imposed on vehicles. Furthermore, industry net profits will be reduced by up to 10%, with a loss of jobs of between 3,600 and 6,400 (Tourism & Transport Forum, 2011, 15-16). Conclusion The introduction of a carbon tax assessed by the Australian government against each tonne of carbon emissions produced by industries in the country is considered to be an important tool to reduce the country’s emissions and ‘do its part’ to help fight the effects of global climate change. The reason a carbon tax is considered the best method is that it introduces needed changes as gradually as possible, reducing emissions effectively by encouraging the use of alternative energy while minimising as much as possible the negative economic effects. Nevertheless, the carbon tax will have economic costs, and in most models the reduction in emissions is accompanied by a reduction in consumer demand and national GDP, and higher prices for energy and consumer goods. Effects of the carbon tax on the currency as well as direct costs to the travel and tourism industry mean that this sector will suffer the consequences of the carbon tax more than most, with large losses in revenues and net profits, and potential losses of hundreds of jobs. (1,527 words) References Adams, P.D. (2007). “Insurance against Catastrophic Climate Change: How Much Will an Emissions Trading Scheme Cost Australia?” Australian Economic Review, 40(4), 432-452. Ahammad, H., Clements, K.W., and Qiang, Y. (2001). “The Economic Impact of Reducing Greenhouse Gas Emissions in WA”, University of Western Australia Economic Research Centre Discussion Paper 01-23, 2001. Horridge, J.M., Parmenter, B.R., and Pearson, K.R. (1998). “ORANI-G: A General Equilibrium Model of the Australian Economy”, Centre of Policy Studies and Impact Project, Monash University, June-July 1998. Available from: http://monash.edu.au/policy/ftp/oranig/oranidoc.pdf. Humphreys, J. (2007). “Exploring a Carbon Tax for Australia”, Perspectives on Tax Reform, 14, October 2007. Centre for Independent Studies, available from: www.cis.org.au. Jotzo, F. (2011). “Carbon pricing that builds consensus and reduces Australia’s emissions: Managing uncertainties using a rising fixed price evolving to emissions trading”, CCEP Working Paper 1104, Centre for Climate Economics and Policy, Crawford School of Economics and Government, The Australian National University, Canberra. McDougall, R.A. (1993). “Short-Run Effects of a Carbon Tax”, Centre of Policy Studies, Monash University, General Paper No. G-100, June 1993. Meltzer, J. (2012). “Carbon Pricing in Australia: Lessons for the United States”, The Brookings Institution, 2 July 2012. Available from: http://www.brookings.edu/research/ opinions/2012/07/02-carbon-australia-meltzer. Meng, S., Siriwardana, M., and McNeill, J. (2011). “Australian Carbon Tax: Winners and Losers”, University of New England, Business, Economics and Public Policy Working Papers, 2011-3. Siriwardana, M., Meng, S., and McNeill, J. (2011). “The Impact of a Carbon Tax on the Australian Economy: Results from a CGE Model”, University of New England, Business, Economics and Public Policy Working Papers, 2011-2. Tourism & Transport Forum. (2011). “Carbon tax and tourism & travel – Trade and global warming exposed”, Tourism & Transport Forum Australia Position Paper, May 2011. Available from: www.ttf.org.au. Read More