New Zealand's Emission Trading Scheme vs Australia's Carbon Tax (2011)

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Contents

Introduction

What is Carbon and Why is it a Problem?

The burning of fossil fuels from both households and industry produces a by-product in the release of Carbon (CO2) into the atmosphere. Carbon emissions are produced by individuals and firms both directly through the use of combustion engines, but also indirectly through the use of power generated from coal fired power plants. In the last half century there has been growing concern about the direct link between increased levels of carbon released into the atmosphere by humans, and a change to the Earth’s climate. Carbon (CO2) is a greenhouse gas which means it presence in the atmosphere acts as a heat trap, trapping radiation. By absorbing and re-emitting outgoing terrestrial radiation, carbon molecules raise the temperatures experienced at the earth’s surface <ref> http://www.niwa.co.nz/node/82918 </ref>.

Figure 1: The Greenhouse effect: The relationship between greenhouse gases and infared radiation <ref> http://www.niwa.co.nz/node/82918 </ref>.

The addition of extra amounts of carbon or other greenhouse gases into the atmosphere from human activities means the trapping of more thermal infrared radiation, and this corresponds to a further warming of surface temperatures. This extra warming is termed the enhanced greenhouse effect. The enhanced greenhouse effect is widely regarded to be the leading driver of the rapid increases in global mean temperatures that have been observed since the industrial revolution <ref> http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf </ref>. A general warming of the earth’s climate has far reaching environmental, economic, and social implications, and poses a threat to the security of human lifestyles, livelihoods, and survival. The search for a solution to the threat posed by climate change is therefore a pressing issue which is being tackled on many fronts. The implementation of a carbon tax, or an emissions trading scheme (ETS), are economic approaches to reduce the levels of carbon emitted into the atmosphere and thus mitigate the associated negative effects.

Why Should Carbon be Priced?

A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of that decision<ref> http://economics.fundamentalfinance.com/negative-externality.php </ref>. Carbon is a by-product of many industrial processes with its release into the atmosphere caused by the burning of fossil fuels, it is considered to be a pollutant. The cost to the environment of this carbon pollution has traditionally not been born by the individual or firm producing it. In the free market, negative externalities are not included in the price of goods, which leads to overconsumption and social inefficiency (Fig.2). There is in essence a missing market, because the external cost of carbon emission is ignored. Therefore by placing a price on carbon emissions production should return to socially optimal levels and market failure be accounted for. Two approaches in which this can be done are by way of a tax on carbon emissions, or an emission trading scheme, with the latter approach creating this 'missing market' for carbon.

Carbon a negative externality.jpg

Figure 2: Diagram showing market failure as a result of a negative externality|<ref>http://12jungev.wordpress.com/</ref>. The level of production in the freemarket occurs at P,Q, as a result of the negative externality not being born by the producer. At this point, too much is produced at a price which is sub-optimal. At P1,S1 the negative externality has been born by the producer, causing an increase to their costs of production and a subsequent increase in price of their goods and services produced, P to P1, and a decrease in quantity procuded, Q to Q1.

Global Politics Which Has Lead to Emission Policies

International recognition of Climate Change and the damaging effects of associated processes have resulted in the creation of international frameworks and multilateral agreements which seek to oblige states to reduce their emissions of pollutants to meet agreed upon environmental standards, such as the Kyoto protocol. Increasingly, committing to initiating schemes to meet these standards had become a hallmark of a responsible and constructive state contributing to the stability of the international environment. For a small state such as New Zealand, it is fundamental to create a scheme in order to remain being seen as a good mutlilateral partner, and a responsible global citizen. As well as being conducive with our "Clean, Green" image, the fact that New Zealand is the first nation attempting to include Agriculture and Forestry (two of New Zealand's largest industries) into their Emissions Trading Scheme makes New Zealand a world leader in climate change reduction. This has massive implications on New Zealand's power in international politics, making it more visible and meaningful. <ref> Jiang, N., Sharp, B. and Sheng, M. (2009) New Zealand’s emissions trading scheme. New Zealand Economic Papers, 43(1), 69-79. </ref>

Below is a timeline of key global events that have taken place relating to climate change. These events have all contributed to the global politics of climate change and lead to the implementation of New Zealand and Australia's emission policies.

  • 1972 - United Nations conference on the Human Environment: UN's first major conference on environmental issues.
  • 1987 – Brundtland Report looked into sustainable development and global environmental concerns.<ref>[2]Inter Environment Institute. "Landmark events in protecting the global environment 1945-2002". Retrieved 20th September, 2011. </ref>
  • 1987 – Montreal protocol is a treaty designed to protect the ozone layer by phasing out the production of harmful substances.<ref>[3]United Nations Research Documentation. Retrieved 20th September, 2011.</ref>
  • 1992 – The United Nations framework convention on climate change – an international treaty produced to stabilize greenhouse gas concentrations in the atmosphere at a level that would stop anthropogenic interference with the climate system.<ref>[4]Direct Gov. "A History of Climate change". Retrieved 20th September, 2011. </ref>
  • 1996 – EU adopts target of maximum 2 degree rise in average global temperature.
  • 1997 – Koyoto Protocol agreed. <ref>[5]Inter Environment Institute. "Landmark events in protecting the global environment 1945-2002". Retrieved 20th September, 2011. </ref>
  • 2005 - First EU, ETS scheme implemented.
  • 2008 – First ETS scheme enacted in New Zealand by the Labour government.<ref>[6]Climate Change information New Zealand. "Emission Trading Scheme Basics". Retrieved 23th September, 2011. </ref>
  • 2009 – National government comes to power and amends New Zealands ETS <ref>[7]NZ Herald. "Emissions trading scheme passed into law". Nov 25, 2009. Retrieved 20 September, 2011.</ref>
  • 2011 - Australia's labour party introduces its Carbon Tax. <ref>[8] BBC News. "Australia plans to impose carbon tax on worst polluters". 10 July 2011. Retrieved 23th September, 2011. </ref>

New Zealand and The Emissions Trading Scheme

Economics of the Emissions Trading Scheme

Nzets.gif

The Emissions Trading Scheme implemented in New Zealand in 2008 is an example of an uncapped, all sector, all green house gas scheme. This means that there is no limit on the amount of emissions that can be produced under the scheme and that it will cover all sectors in the economy. Information for the following outline of the ETS was gathered from the New Zealand governments site on climate change.<ref>[9], Climate Change Information New Zealand</ref>

The NZ ETS is based around what is called a New Zealand Unit (NZU). These are sometimes referred to as ‘carbon credits’ and act as a sort of currency for the ETS. After the transition period, one NZU will be required to be surrendered for every one metric tonne of carbon dioxide equivalent. Every year, major emitters of greenhouse gases must surrender a number of NZU’s depending on their total emissions, managed by the New Zealand Emission Unit Registry. Emitters seeking NZU’s can buy units from other participants in the ETS that have a surplus or through a carbon market broker. NZU’s will be capped at NZ$25 until the end of 2013, when they will become subject to international markets.

While people or organisations that produce a lot of emissions will have to surrender NZU’s, some will be earn NZU’s by offsetting carbon emissions. One example is a forest owner who will earn NZU’s based on the size and characteristics of the forest. These NZU’s can then be sold on to organisations or people for a profit. It is important to note that it won’t necessarily be the actual emitter of gases that participates in the scheme but the ‘upstream’ producer of that particular product. For example a coal mine will be a participant but the burner of that coal may not be. This will however directly influence these industries as the ‘upstream’ producers encounter higher costs, which will be passed on.

So in essence, organisations or people who offset the effects of carbon emissions will earn higher profits while others who emit carbon will face higher costs. This gives economic incentive for organisations to ‘clean up’ their business practices and lower their emissions. It also gives more incentive to invest in forestry and other schemes that offset carbon emissions. There is an emphasis on market forces to drive the price of NZU’s as the supply and demand of them will change over time. However there is also significant government influence in the scheme with the government ultimately in charge of allocating NZUs. In theory ETSs are economically sound but there are a huge number of real world factors that may influence and alter the outcome of a scheme. It is likely to be a trial and error scenario for the first 10-15 years as ETS’s are still being developed and tested in the real world. It will also take time for industries to adjust to the ETS and the extra costs and benefits associated with it.

Impacts of the Emissions Trading Scheme Environmentally

In the future New Zealand’s ETS is expected to have a marked impact on total Carbon emissions, this has been modelled in Figure 3.

Figure 3. Graph of New Zealand Projected Carbon Emissions to 2050 <ref>Ministry for the Environment (2011) Emissions Trading Scheme Review 2011: Issues statement and call for written submission, Emissions Trading Scheme Review Panel. Wellington, New Zealand</ref>

However, as the ETS has been implemented for only a short period of time it is difficult to quantitatively assess the effects it has had environmentally. The agriculture sector is a significant contributor to New Zealands emissions profile with around 50% of total emissions are attributed to agriculture (Table 1) <ref>Ministry for the Environment (2011) Emissions Trading Scheme Review 2011: Issues statement and call for written submission, Emissions Trading Scheme Review Panel. Wellington, New Zealand</ref>. The agricultural sector has not been incorporated into the scheme to date, so it is therefore unlikely that carbon emissions have been significantly reduced <ref>Motu Economic and Public Policy Research (2008) online: Inclusion of Agriculture and Forestry in a Domestic Emissions Trading Scheme: New Zealand’s Experience to Date. http://www.motu.org.nz (accessed 20.09.2011)</ref>.

One area the emissions trading scheme has had a reported positive environmental impact is in the forestry sector <ref>Motu Economic and Public Policy Research (2008) online: Inclusion of Agriculture and Forestry in a Domestic Emissions Trading Scheme: New Zealand’s Experience to Date. http://www.motu.org.nz (accessed 20.09.2011)</ref>. The forestry sector has been included under the emissions trading scheme since 2008 and has seen a marked increase in afforestation rates <ref>Ministry for the Environment (2011) Emissions Trading Scheme Review 2011: Issues statement and call for written submission, Emissions Trading Scheme Review Panel. Wellington, New Zealand</ref>. Estimated annual net change in planted forest area in 2005-2012, New Zealand is shown Figure 4 <ref> http://www.climatechange.govt.nz/emissions-trading-scheme/building/reports/ets-report/ets-report-final.pdf </ref>. The Afforestation Grant Scheme or AGS is part of Emissions Trading Scheme “Plus” which are a subset of measures related to the ETS and are intended to result in changes to land and natural resource use, patterns of economic activity and operational practices <ref>Sinner, J., Lawrence, J., Sapsford, R. and Blaschke, P. (2008) Scoping Report For An Environmental Assessment Of The NZ Emissions Trading Scheme And Closely Related Measures. Cawthorn Institute, Report No. 1436.</ref> . The AGS provides grants for the establishment of new forests providing incentive to increase afforestation rates. Afforestation increases carbon sinks in New Zealand while also providing other environmental benefits such as reductions in erosion and an increase in biodiversity <ref>Sinner, J., Lawrence, J., Sapsford, R. and Blaschke, P. (2008) Scoping Report For An Environmental Assessment Of The NZ Emissions Trading Scheme And Closely Related Measures. Cawthron Institute, Report No. 1436.</ref> This scheme is for those not wishing to participate in ETS trade fully, therefore the government receives the carbon credits derived from plantation in return for the grant given to land owners to establish the forest <ref>Last accessed 25/09/2011,Carbon Farming group, 2009 </ref>. Grant funding will be weighted to recognise co-benefits including soil conservation, improved water quality, downstream flood protection, improved biodiversity and protection of infrastructure <ref>Sinner, J., Lawrence, J., Sapsford, R. and Blaschke, P. (2008) Scoping Report For An Environmental Assessment Of The NZ Emissions Trading Scheme And Closely Related Measures. Cawthron Institute, Report No. 1436.</ref>The government then uses these sequestration credits produced by the forests to help meet Kyoto protocol obligations. Figure 5 shows the reduction in net emissions (emissions less carbon sequestration) in 2008 as a result of the addition of the forestry sector to the ETS <ref>Ministry for the Environment (2011) Emissions Trading Scheme Review 2011: Issues statement and call for written submission, Emissions Trading Scheme Review Panel. Wellington, New Zealand</ref>. The incorporation of LULUCF ‘land use, land use change and forestry’ is significant as this illustrates the impact carbon sequestration through afforestation (Table 1). However, New Zealand is still expected to exceed its Kyoto Protocol commitments by 22% (Table 1).

Table 1: New Zealand’s emissions by sector in 1990 and 2008 <ref>Ministry for the Environment (2011) Emissions Trading Scheme Review 2011: Issues statement and call for written submission, Emissions Trading Scheme Review Panel. Wellington, New Zealand</ref>
Figure 4: Estimated annual net change in planted forest area in 2005-2012, New Zealand <ref> http://www.climatechange.govt.nz/emissions-trading-scheme/building/reports/ets-report/ets-report-final.pdf </ref>.
Figure 5:Graph of New Zealand’s total and net emissions, under the Climate Change Convention from 1990 to 2008.A reduction in net emissions is evident in 2008 following the incorporation of the forestry sector in New Zealands Emissions Trading Scheme <ref>Ministry for the Environment (2011) Emissions Trading Scheme Review 2011: Issues statement and call for written submission, Emissions Trading Scheme Review Panel. Wellington, New Zealand</ref>.

The Emissions Trading Scheme and added “plus” schemes such as the Afforestation Grant Scheme whilst having the best environmental intentions can arguably cause some negative impacts to New Zealand’s Environment. The New Zealand Emissions trading scheme is intended to incur a behavioural change in both resource and land usage. A report undertaken by the Cawthron Institute <ref>Sinner, J., Lawrence, J., Sapsford, R. and Blaschke, P. (2008) Scoping Report For An Environmental Assessment Of The NZ Emissions Trading Scheme And Closely Related Measures. Cawthron Institute, Report No. 1436.</ref> identified a range of potential negative impacts on the New Zealand bio-physical environment as a result this change. This included implications in relation to renewable energy demand and pressures on indigenous biodiversity <ref>Sinner, J., Lawrence, J., Sapsford, R. and Blaschke, P. (2008) Scoping Report For An Environmental Assessment Of The NZ Emissions Trading Scheme And Closely Related Measures. Cawthron Institute, Report No. 1436.</ref>. Indigenous biodiversity is suggested to be at threat, as there is strong incentive to establish exotic conifer species rather than native forest for the purpose of carbon sequestration. The Climate Change Response Act 2002 <ref>http://www.legislation.govt.nz/act/public/2002/0040/latest/DLM158584.html</ref> provides information on the rates of carbon sequestration for both introduced and native species. This information has valued the rate of exotic sequestration above that of native species. The Emissions Trading Scheme (ETS) is therfore likely to increase incentive for exotic forestry planting and cause indigenous land cover losses. Much of New Zealand’s indigenous grassland and significant amounts of low stature scrub (such as matagouri, grey scrub and fernland) is particularly vulnerable to exotic plantation expansion <ref>http://www.pce.parliament.nz/assets/Uploads/Reports/pdf/PCE_Report_to_ETS_SC_on_indigenous_landcover.pdf</ref>. There is also evidence to suggest that widespread conifer afforestation could have implications for stream flow and soil health through increased water uptake and soil acidification (<ref>Jackson, R., Jobba, E., Avissar, R., Roy, S., Barret, D., Cook, C., Farley, K., Maitre., D., McCarl, B. and Murray, B. (2005) Trading Water for Carbon with Biological Carbon Sequestration. Science 310: 1944-1947.</ref>. Freshwater resources are also suggested to befurther at risk due to the likely increase in demand for renewable sources for energy, and hydro electricity generation can drastically alter stream function <ref>Sinner, J., Lawrence, J., Sapsford, R. and Blaschke, P. (2008) Scoping Report For An Environmental Assessment Of The NZ Emissions Trading Scheme And Closely Related Measures. Cawthron Institute, Report No. 1436.</ref>.

Impact of the scheme on Major Stakeholders

Average Kiwi

The average New Zealander will not be a participant in the ETS nor will the average New Zealand business. However they will likely be affected indirectly through price changes for commodities such as electricity. Large emitters in all sectors will be required to join the scheme by the dates laid out in the following table. NZ’s ETS is somewhat unique because it includes the agricultural sector, largely due to the amount emissions produced by the agricultural sector [48% of NZ’s total emissions in 2007 (0.08% for the U.K. in the same year)]<ref>[10], NZ Ministry for the Environment </ref>.

Table 2: Sector Roles & Entry Dates<ref>[1], Participating in the Emissions Trading Scheme (ETS) </ref>

The actual cost to consumers is somewhat debated but there is little doubt that the overall cost of goods will increase due to the ETS. It was initially reported that the ETS would cause a rise in fuel prices of about three cents per litre and electricity bills to increase by up to five percent<ref>[11], The Daily Telegraph </ref>. Producers will be required to monitor their emissions, which will add to their costs, and the government will also incur costs through ensuring compliance and monitoring the trade of NZU’s. However, in the medium to long term the government hopes to make the ETS revenue neutral. The scheme is not yet in full swing so it is difficult to estimate with any certainty the true cost to consumers, however the price of fuel has risen due to the implementation of the ETS.

Unlike the Carbon tax proposed in Australia, the Emission Trading Scheme does not generate any income for the government to redistribute to alleviate economic pressure that might be experienced by lower socio economic people in New Zealand, caused by higher prices of consumer goods. Manufacturers are able to buy unit's to off set their emission, and pass that increased cost to the consumer by raising their prices. This effects lower socio economic consumers disproportionately, as they spend a larger percentage of their income on consumer goods. In this sense, the Emissions Trading Scheme is similar to a regressive tax system, where the most economically vulnerable lose out. <ref> Boyd, E. and Mansfield, M. (2007) Commodifying carbom: the ethics of markets in nature. In: Boyd, E. and Mansfield, M. (Eds.) Environmental Change Institute. ECI Workshop report. Oxford, Environmental Change Institute. Pp. 1-9. </ref>

Industry

[Government Allocation of NZU's]

To help with the transition into the emissions trading scheme the government will help some businesses by allocating them a number of NZU’s. The government has outlined the industries that can apply for these allocations and how much assistance they will be granted. Gaining assistance from the government through NZU allocation is restricted to firms whose activities are emissions intensive and also exposed to international trade. Firms applying for an allocation of NZU’s must pass both a trade exposure test and an emissions intensity test based on the tonnes of emissions produced for every $1m in revenue. Industries that are eligible include things like aluminium smelting, producers of tomatoes and capsicums, and producers of glass containers. Firms can apply for assistance based on the regulations for that specific industry but are usually up to 60% or 90% of their total NZU obligations. This means that many firms will initially only have to surrender 10% or 40% of their proposed obligations. The government’s assistance will decrease by 1.3% annually from 2013. It may seem counter-productive for the government to help these high emissions industries but without these allocations, these industries may be forced to increase prices substantially and therefore become non-competitive in international markets. This is especially true of commodity producers such as aluminium smelters who are exposed to extremely competitive international markets and only a small increase in price may lead to the firm failing. The government is in effect trying to protect some of the more vulnerable industries initially and gradually reduce their assistance over time, allowing these industries to slowly adapt to the added costs. Without this assistance it is likely that many firms will fail and the NZ economy will be negatively impacted with losses of jobs, output and GDP.

Economic

[Economic Pro’s & Con’s of the ETS]

On paper the ETS is an effective way of not only reducing carbon emission, but also offsetting the effects of carbon through the planting of forests. From an economic viewpoint, it should work effectively by providing economic incentives to reduce emissions as well as increasing forested areas. Over time it is expected that market forces will drive excessive polluters costs up while lesser polluters costs will decrease. This is hoped to eventually lead to excessive polluters failing and going out of business and clean industries succeeding with higher profits. One major positive aspect of an ETS is that it will help achieve reductions where they are cheapest, before more expensive measures are carried out. An ETS also has some benefits over other market based carbon reduction methods such as a Carbon Tax. One key aspect of an ETS is that it creates a market which should, in time, become self-sufficient and not rely on government intervention to continue functioning. Because the market sets the price of NZU’s, the ETS will adjust automatically to inflation through price changes, unlike a Carbon Tax, which needs to be constantly monitored and reassessed.

The main arguments against the ETS suggest that it is too far removed from the actual problem of reducing our carbon emissions, and will lead to New Zealand consumers footing most of the added costs. The government allocation of NZU’s to some high emissions industries has been criticized with some believing it will cost taxpayers millions of dollars each year. The ETS will cause prices to increase for virtually everyone in New Zealand, with many fearing that this will cause unnecessary economic uncertainty in a time when we are still recovering from the 2008 recession. Added costs at this point in time may cause the NZ economy to slow, or even fall back into recession.

There has been concerns of "emissions leakages" where the NZ produced raw materials are sent over seas for manufacturing to countries that do not face regulations. In this sense, any rise in emissions outside the Kyoto Protocol Cap system still causes environmental damage globally and undermines the goals of international agreements, which could mean the loss of jobs and company share in manufacturing in New Zealand. This is referred to as "the Tragedy of the Commons" where if only a few people out of group takes action to restrain emissions, the whole action of emissions reductions is arbitrary as emissions will still be produced with benefits to those that have not restrained their emissions. <ref> Kerr, S. and Sweet, A. (2008) Inclusion of Agriculture and forestry in a domestic emissions trading scheme: New Zealand’s experience to date. Motu Economic and Public Policy Research. Motu Working Paper: 08-04. </ref>

Environmental

The impact of ETS on ‘environmental stakeholders’ is explored using the Mid Dome Wilding Trees Charitable Trust as an example. A clear case study to illustrate some flaws in the ETS structure is the Mid Dome Wilding Trees Charitable Trust. The Mid Dome Wilding Trees Charitable Trust was enacted to control the spread of wilding pine. This came after the government enacted a plan in the 1950s to establish 250ha of pine, in a misguided attempt to control the erosion of the highland areas in Southland. Under the Climate Change Act, this trust faced a cost of approximately $3million to continue removing the weed population <ref>Parliamentary Commissioner for the Environment (2009) online: Report to Emissions Trading Scheme Review Select Committee: Impact of the ETS on Indigenous Land Cover. http://www.pce.parliament.nz (accessed 20.09.2011)</ref><ref>Southland Conservation Board (2009) online: Letter to the Minister for Climate Change ‘Adverse Impacts of Emissions Trading Scheme on the Mid Dome Wilding Tree Programme’. http://www.parliament.nz (accessed 4.10.2011)</ref>. Thus ETS does not sufficiently take into account the impacts of encouraging a weed species as a carbon sink, and the implications this may have for pest management organisations. The Mid Dome Wilding Trees Charitable Trust had input also from the Department of Conservation, Environment Southland; Ministry for the Environment and Land Information New Zealand which indicates that wilding pine is a widely acknowledged and significant problem.

The views of further ‘environmental stakeholders’ in relation to the effects of ETS are described in a recent report on the Emissions Trading Scheme <ref>Emissions Trading Scheme Review Panel. 2011. Doing New Zealand’s Fair Share. Emissions Trading Scheme Review 2011: Final Report. Wellington: Ministry for the Environment</ref>. A number of issues were raised by the ‘environmental stakeholders’, among the key themes was concern that to date the price placed on carbon credits was too low to effect the desired behavioural change toward lowered carbon emissions. This was a collaborative view held by environmental NGOs; this included the Environmental Conservation Organisations for NZ and Climate Defence Network, Forest and Bird, the World Wildlife Fund and Oxfam. The Parliamentary Commissioner for the Environment expressed the view as an environmental stakeholder, that the Transition Period under the current (2009) Emissions Trading Scheme it too long. Members of the ‘Peak Group’, which included representatives of the Ministry of Agriculture and Fisheries, Federated Farmers, Fonterra Milk Supply, NZ Forrest Owners Association and the Pastoral Greenhouse Gas Research Consortium; expressed desire for a review process in which the impacts of ETS is sufficiently quantified against its intended purpose of reducing emissions. The potential for negative effects associated with wilding pines, following the afforestation of introduced species were further expressed through the Parliamentary Commissioner for the Environment and Environmental NGOs previously mentioned.

The Australian Carbon Tax

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Economics of the Carbon Tax

The Australian carbon tax is a market based policy which charges a flat rate tax per metric tonne of carbon dioxide emissions or equivalent into the atmosphere. The current rate is set at $23AUS per metric tonne and will only apply to around 500 of Australia’s biggest polluters. These large companies are mainly in the energy, mining and transport sectors of the economy.<ref>[12],Perry, Michael. 2011. “Australia Carbon tax Hits Miners, Airlines.” Reuters, June 11. Retrieved September 30.</ref>

The Australian carbon tax should not only reduce emission but also raise a substantial amount of Government revenue. More than 50% of this will be used provide assistance to households in the form of tax cuts and payment increases. A large portion of this will go to those most affected by the tax. $10 billion will also go towards renewable energy investments which should help Australia reduce its emissions even more. <ref>[13], R. M. 2011. “Breaching the Brick Wall.” The Economist, June 11. Retrieved 30 September 2011.</ref>

Compared to an emissions trading scheme, a flat rate tax can be administered quickly.<ref>[14],Parliament of Australia Parliamentary Library, 2010. Retrieved 29 September.</ref> It is less complicated as it is only dealing with transactions between the Australian Government and an individual firm. The tax's relative simplicity should help to keep its administrative costs down.

A flat rate tax is clear and predictable as it is set by the government and is not susceptible to price variations through market fluctuations. Being able to predict future costs is an essential part of planning future investments. The tax is also not susceptible to market distortions or profiteering as it does not create a tradable commodity.<ref>[15],Shrum, T. 2007 “Greenhouse Gas Emissions: Policy and Economics” .</ref>

A major concern with the tax is that it could, and is likely, to increase the cost of goods and services produced by those companies which are taxed. Many companies have said that they would be forced to pass the cost on to the consumer.<ref>[16],Perry, Michael. 2011. “Australia Carbon tax Hits Miners, Airlines.” Reuters, June 11. Retrieved September 30.</ref> When rising prices is combined with the prospect of major job losses the tax does not sound very inviting, especially if you are in an effected industry. The Australian Government has however said that it would endeavor to relieve this pressure with tax cuts and household support. The tax might cause some Australian companies to relocate to where there is no cost of emissions. This would mean that Australia’s emissions would decrease but in terms of the total global emissions there would be no reduction. If firms where to relocate there would be a decrease in GDP and even further jobs losses. The Australian government has however predicted that the economy will continue to grow despite a price on emissions. Treasury modeling estimates 1.6 million new jobs by 2020 and an increase in gross national income per person of $30000 by 2050 in today’s dollars.<ref>[17], Clean Energy Future. "Benefits of a Carbon Price." Retrieved 1 October.</ref>

The Australian carbon tax cannot guarantee that carbon dioxide emissions will decrease. In theory it should but if it is still profitable for the polluters to maintain pre-tax output levels there might not be any reduction in emissions. This largely depends on the firm’s ability to pass the extra cost onto the consumer and the Price elasticity of demand.

Impacts of the Carbon Tax Scheme Environmentally

Australia’s Carbon tax environmentally aims to pressure large scale polluting companies into reducing emissions by placing pigovian tax on them. It must be noted that Australia’s Carbon Tax does not come into effect until July 2012; therefore any environmental impacts can only be assumed. Environmental outcomes will be assessed through the positive and negative impacts which could potentially occur.

Australia’s Carbon tax scheme generates revenue from the tax imposed on carbon emitters. This scheme is introduced as a simpler and more quickly implemented scheme. It must be noted that the benefits of a carbon tax for the environment are only as an initial interim step and in the long term a change towards a more educated environmental scheme is required in which the behaviour of major polluters can be redirected <ref>[? http://e360.yale.edu/],Yale Environment 360</ref>. However, in the short term Carbon tax is efficient by putting a price on carbon to raise revenue, which in turn can be used to fund future environmental projects.

“The revenue from a carbon tax would go to the government instead of going to a range of private sector market players (as in an Emissions Trading Scheme). This revenue could then be used to subsidise ‘clean’ energy alternatives and low income households that are most likely to be affected by any increases in energy prices due to the increased price of carbon” <ref>[.http://www.cpaaustralia.com.au/],Carbon tax versus an emissions trading scheme – the debate between experts (2009)</ref> .

In Australia this will take effect as of July 2012 when 500 of Australia’s top polluters will be taxed. After three years of the carbon tax an Emissions Trading Scheme will be implemented <ref>[18], Breaching the brick wall (2011)</ref> providing the previously mentioned need for an educating environmental project. Environmentally speaking, Australia’s Carbon tax aims to increase the amount of renewable energy use by placing costs on non-renewable energy through taxes. The aim of this is to pressure a nationwide shift from non-renewable to renewable energy use. At present only 6.9 per cent of Australia’s energy use is renewable (Fig. 6), by 2020 this is hoped to have increased to 20% <ref>[Department of Resources Energy and Tourism],Energy in Australia. Australian Government.Canberra (2010)</ref>.
Figure 6: Australian electricity generation by fuel 2007-08.<ref>[Department of Resources Energy and Tourism],Energy in Australia. Australian Government. Canberra (2010)</ref>

“To tackle climate change, Australia needs to transform its energy sector…by finding better ways of producing energy from existing sources, and by tapping into new energy sources, Australia can lower its carbon pollution substantially” <ref>[19],Securing a clean energy future (2011)</ref>.

The Australian Carbon Tax Scheme attempts to reduce carbon emissions. In doing so carbon tax may incur on the environment wider negative impacts. A carbon tax provides industries in Australia with the opportunity to pay for the emissions they produce. This does not encourage a behavioural change towards fossil fuel consumption, and indeed historically industries that are greatly affected by the tax often succeed in lobbying for exemption from the scheme <ref>Parliament of Australia Parliamentary Library (2010) online: Carbon Taxes. http://www.aph.gov.au/library (accessed 20.09.2011).</ref>. While the carbon tax in beneficial in penalising fossil fuel emission <ref>Yale Environment 360 (2009) online: Putting a Price on Carbon: An Emissions Cap or a Tax? http://e360.yale.edu (accessed 20.09.2011)</ref> it does not provide incentive for a growth in carbon sequestration; carbon tax is therefore unlikely to have a significant reduction in emissions unless the tax is of a significant value, forcing emitters to change their carbon use behaviour.

Impact of the scheme on Major Stakeholders

Average Australian

An effect of the scheme is the average Australian households can expect to see a consumer price rise by 0.7% due to the effect of carbon prices on major emitters.<ref>[20] ABC News. "Gillard reveals carbon price scheme". July 11, 2011. Retrieved 30th September, 2011. </ref> The judicious use of revenue from the Carbon Tax can remedy some of the effects of the carbon tax on lower income consumers who spent a far larger proportion of their income on consumer goods and services. This could be implemented through investment into energy efficient housing, transport and appliances.

Political

Australia's Labour government is an important stakeholder in the scheme, regardless of any international agreements to reduce emissions, both the Labour Party and the Opposition Party have committed themselves to reducing Australian emissions by 5% by 2020 relative to the 2000 levels <ref>Jiang, N., Sharp, B. and Sheng, M. (2009) New Zealand’s emissions trading scheme. New Zealand Economic Papers, 43(1), 69-79.</ref> One of their 2010 election promises was that they would not put a carbon tax or ETS in place. As a result of this the Labour government has put voters support on the line, especially its huge Union support, by enacting a scheme to meet its Kyoto commitments. Unions said they would oppose the implementation of the bill if any jobs were lost over the scheme. <ref>[21] BBC News - Asia/Pacific. "Australia carbon tax protest targets Julia Gillard". 16 August, 2011. Retrieved 30th September, 2011. </ref> The final form of the Australian scheme to meet it's environmental targets is called the Carbon Pollution Reduction Scheme (CPRS) which currently has no independent regulatory body to monitor the implementation of the plan. This makes the scheme vulnerable to political pressure over time and through different governments holding office. The political will of different parties are diverse and therefore subjective to each party that holds office. For example, Dennis Jensen, a member of the Liberal Party, part of the opposition coalition in Australia said that a benefit of the plan was it could be "wound back" if the science of climate change became less convincing. <ref>Garnaut, R. (2011) Carbon pricing and reducing Australia’s emissions. Garnaut. Update Paper: 6. </ref>


Industry

Obviously this will have a great impact on the 500 or so companies who will have to pay the tax. They are largely opposed to it as it will inevitably increase their costs of production. Many coal mining and steel transporting companies have already experienced a sharp drop in share prices with the announcement of the tax. Australian airline Qantas predicts that the tax will cost them $110 to $115 million a year. However, clean energy producers have welcomed the tax and have experienced a dramatic increase in share prices. Geodynamics share prices rose by 25 percent with the announcement of the tax and the Government’s revenue allocations. <ref>[22],Perry, Michael. 2011. “Australia Carbon tax Hits Miners, Airlines.” Reuters, June 11. Retrieved September 30.</ref>

Economic

As the mineral resource and mining industry accounts for around 10% of Australia's GDP, the effect of the tax on this industry will have massive aggregate effects on the Australian economy as a whole. This was the concern with the proposed "Super profits tax" that was proposed under the Rudd government in 2010 which proposed that resource companies would pay 40% tax on its profitsby Jult 1st 2012. This caused immediate opposition from all resource companies and stocks for these companies went down across the board from the uncertainty the tax poses for international investment in the industry. Along with this plan was a proposal to provide tax rebates to resource exploration, which would have the potential to direct more funding into the mining and use of non renewable resources. <ref>[23], Forest, Dave. 2010. "Australia's Super Profits Tax on resource companies leads to immediate fall-out". Oil Price.com, May 2010. Retrieved October 1. </ref> The current Gillard government then slashed this tax in July 2010 to 30% and replaced the scheme with the Minerals Resources Rent Tax (MRRT) which excluded all commodities from the tax apart from iron ore and coal, which reassured investors internationally and eased industry fear. It was also revealed that in February 2011 the mining industry had spent $21 million trying to stop the mining tax. The cuts in this tax reduced the governments annual revenue which effected the planned tax cuts to businesses. Companies will now pay 29% instead of the planned 28% tax. <ref>[24], Burke, Jessics. 2011. "Carbon Tax could damage foreign mining investments". Australian Mining- Sandvik in Action, March, 2011. Retrieved September 25.</ref>Despite these tax cuts, industry leaders such as the Australian Coal Association (ACA) are fiercely opposed to the tax which they say will have an $18 million cost to Australian mines. ACA commissioned a report by ACIL Tasman on black coal mining, whose preliminary finding were that new mining development jobs would be reduced by 27%, representing over $25 billion in lost revenue for Australia over the next ten years. ACA also reasoned that a cut in GHG's from mine closures and project cancellations will simply be replaced in new projects and emissions from other countries, meaning Australia sacrifices for no net global benefit. <ref>[25], Australian Coal Association, 2011. "Carbon tax hits jobs at the worst possible time". Australian Coal Association Media Release. September, 2011. Retrieved October 2</ref>

Environmental

Two relevant environmental stakeholders who have expressed opinions on the Australian Carbon Tax are Green peace and International organisation “The Climate Group”. The Climate Group a non-governmental organisation which works with governments around the world to push for the policies, technologies and investment to make the “Clean Revolution” happen where a shift towards sustainable energy uses will occur <ref>[26],The Climate Group. (2011). About us-The clean revolution</ref>. The Australian division of the NGO “The Climate Group” welcome the plan. Caroline Bayliss, the Australian director of the organisation believes that the tax will the first big step towards a clean economic and technological revolution that is the only way of securing the quality of life for Australians; she comments that is not only a tax but “a comprehensive suite of measures that together can not only reduce our emissions, but also encourage growth of innovative, green technologies, industries and jobs <ref>[27],The Climate Group. (2011). PM announces details of Carbon Price</ref>.”Greenpeace Australia <ref>Greenpeace Australia (2011) online: http://www.greenpeace.org/australia (accessed online 03.10.2011)</ref> is an NGO which aims to promote a reduction in the release of pollutants into the atmosphere and lobby for the use of clean renewable energies, as such it holds and opinion on Australia's response to climate change. The organisation expressed support for Australia’s Carbon Tax regime. The organisation outlined a number of perceived positives of the scheme which included the creation of independent organisation to manage the scheme. Also revenue is created to fund clean energy and a decreasing protection of carbon emitters over time.

Conclusion & Recomendations

Conclusion

After reviewing both the Australian Carbon Tax and the New Zealand Emissions Trading Scheme we have concluded that both schemes limit their effectiveness in reducing emissions by perhaps placing too much importance on protecting industries within the economy. A balance must be found between protecting the economy and implementing emission reductions measures.

One critique that was noted was the misdirection that the ETS and carbon tax had. Both schemes are implemented by their countries governments in order to achieve the Kyoto Protocol requirements. The Kyoto Protocol’s main goal was reduce the anthropogenic effects on the climate system. Despite this, the studied governments appear to want to protect their industries, with the importance of their agendas to seemingly surpassing those of the environment. If the values set out by the Kyoto Protocol are to be recognised, then this protection of the companies needs to turn into the protection of the environment. The environment needs to become the most important factor in the attempt of reducing emissions.

Overall, we believe a Carbon Tax will be more effective in reducing the effects of greenhouse gases. Both the Carbon Tax and ETS will aid in reducing the amount of emissions produced but a Carbon Tax has a number of key advantages over an ETS. Firstly a Carbon Tax is very simple to understand and implement allowing governments to act quickly on the issue of climate change. A Carbon tax allows a fast response to climate change, which is vital in negating the effects. In comparison the ETS implemented in NZ is relatively slow moving with the government allocating a huge amount of NZU's to industry over the coming years. The ETS is also extremely complicated when compared to a Carbon Tax and requires a great deal more legislation and planning. A Carbon Tax can be monitored and controlled easily by the government, allowing changes to be made in times of recession or expansion. One disadvantage of a Carbon Tax however is that it only provides an incentive to reduce emissions but there is no incentive to offset emissions through the planting of forests. It is also difficult to set the Carbon Tax at the correct level, too low or too high a tax could be ineffective.

At the end of the day the goal of ETS and a carbon tax is to reduce emissions. We feel as though a carbon tax is more effective at doing this. There are however some problems with the tax but we feel as though these can be fixed by following the recommendations below.

Recommendations

A tax does not encourage firms to try and offset carbon emissions through planting new forests. This could be relatively easily incorporated into a tax by rewarding firms that plant new forests. Offsetting emissions could also be achieved directly through the government by using the revenue gained from the tax to plant new forests (domestically or overseas). It is good idea to only include the major polluters in the country to begin with to ease the economy to a price on carbon. However, this needs to be expanded to eventually cover the entire economy to ensure a significant reduction in emissions.

To encourage public support for a carbon tax, government allocations of the revenue gained from the tax need to be to be effective and transparent. Perhaps employing a non-governmental organisation acting under policy to allocate the revenue would be a good way to achieve this. Similar to how the Reserve Bank of New Zealand works.

An incentives program from the government, where if a company invests X into research regarding safer emissions then the government will give you Y off your carbon tax. The relationship between X and Y can be 1 to 2, but over the years the government will reduce the multiplying effect so that eventually it will end up as 1 to 1.

A societal shift needs to occur so that the population as a whole understands the need to reduce emissions and therefore makes decisions in order to affect this. To achieve this, the government could use some of the revenue from the carbon tax to conduct a wide ranging public information campaign and to implement a program in schools that starts to acculturate youth globally into thinking environmentally. Investing in the next generation, in order to make them more emissions conscious, will mean that when they become adults, the decisions they make, as citizens, employers, employee's and community members, will reflect a normalized desire to reduce emissions.

References

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