Applied Analysis of the Carbon Price Mechanism in Australia

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Table of Contents

Introduction
Effect of Rising Energy Prices on Households
Environmental Pollution
Conclusion
Reference List

Introduction

The Australian government has heeded to the international concerns of environmental conservation and thus, set up policies that would help it to cut down its high carbon emissions. As a result, the government established a Carbon Price Mechanism which states that from the 1^st of July 2012, the prices of carbon dioxide equivalents would change.

One tonne of CO₂ which is emitted by about 500 of the country’s largest emitters would cost $23 per ton. This new price would remain fixed for three years starting from 2012 to 2015. This would be indexed per year at a rate of 2.5%. After that period, the government will initiate Market-Based Emissions Trading Scheme and through this systems, the government will define emission level cap.

The market mechanism on the other hand will play their role in determining the price. The carbon price will not affect the fuel consumption by households for lightning, transportation, renewable fuels like ethanol, biodiesel and light commercial motorcars (Graham and others 2008, 114).

Effect of Rising Energy Prices on Households

Many people and organizations claim that they support the introduction of the carbon pricing mechanism in Australia. Nonetheless, the cost of the poor families who earn very little to afford gas will suffer (Seaton 2011, 3). This is because they will be required to spend more of gas because the carbon pricing is intended to cut or reduce pollution that is greatly associated with the uses of the other sources of fuels.

Whereas the anticipated increases in the prices could comparatively modest, they are instruments and important enough to bring further harsh conditions to families that live on low earnings (Hatfield-Dodds and others 2007, 78; Aldy and others 2010, 905).

The government is setting up strategies that will ensure that the support accorded to the poor families will still be in the spirit of environmental conservation and support carbon price policy. In addition, the support provided should ensure that the producers and retailers adjust their prices accordingly (Tamiotti and others 2009 167).

The help accorded to the poor households need to take care of a number of factors that are deemed reasonable (Seaton 2011, 3). They need to be reviewed and adjusted so that it can match future transition to flexibility. That means dealing with things like arrangements (Hatfield-Dodds and others 2007, 78). Compensation should only be done for cost impact of the carbon price. In this context, the policy should not seek to address the fuel prices that were caused by other factors ((Hester and Harrison, 2009, 56)).

In view of the proposed carbon pricing by the Australian government, there needs to be assistance provided which can be achieved through combination of the following factors:

The recurring cash expenses through the income support system which are derived by calculating the values as dollar amount and sufficient indexation (Hatfield-Dodds and others 2007, 78), and
Adjusting tax system including low income tax offsets, family tax benefits

Even though taxation and transfer system can be used to offer the best means of ensuring fairness to exploit assistance for households, the existing payment levels and systems are unbalanced and incompetent (Hatfield-Dodds and others 2007, 79).

It is necessary that the design of carrying out the household assistance in parallel with carbon price mechanism need to account for these deficiencies (Great Britain Parliament 2010). Besides assisting them financially, there needs to be implemented an alternative sustained investment that will help the low income class families improve their energy use efficiency (Meadowcroft and Langhelle 2009, 123).

Environmental Pollution

Environmental pollution is a major concern for the world today because human beings realize that they have a duty to protect the survival of the future generations (Australian Government 2008, 67). It is in line with this fact that the use of environmental friendly energies have been growing very fast to become one of the fastest developing sectors nowadays.

It is in fact the major driving component in the pursuit for sustainable economy. A number of proven clean energies such as solar, bio gas among others exist today and are being employed and becoming a great threat to conventional energy sources (Australian Government 2008, 67).

Liability: As fast as pollution is concerned and with the need to control carbon prices, the Australian government has in place a strategy to address this issue. To begin with, it has decided that about 500 companies will be held liable for the carbon pricing (Australian Government 2008, 67).

Essentially, a threshold of 25,000 carbon dioxide tones emitted directly will be used for rating whether a firm or an industry is covered by the carbon pricing or not (Weyant & De La Chesnaye 2006, 5). All the direct emission by the facility will be used to calculate the threshold except transport fuels or synthetic greenhouse emissions (Seaton 2011, 5). As per by the definition of the National greenhouse and energy reporting act, the entities with operation control will be the ones to be considered liable (Aldy and others 2010, 905).

As already mentioned in the previous paragraphs there is need for compensation as well. This is because the new mechanism will have a negative impact on low and middle income households (Graham and others 2008, 114).

Many of them may not be able to afford the fuel and will resolve to use the most affordable available energy like firewood, which in fact would be more devastating than the use of gases (Seaton 2011, 5). This is therefore the reason why the government has decided that about 50% of the revenue generated from the scheme will be used for compensating the low earning households.

The proposed strategy that the government will use is as below;

A Rise in the tax-free threshold going up to $18,200 in the year 2012 to 2013 and then increasing to $19,400 in 2015 to 2016. (Weyant & De La Chesnaye 2006, 5)
An increase in the household benefit payment, pension and allowances so as to help the households to be able to meet their increasing expenses
To except the families from the carbon price on fuel consumed for transport.

Besides, the government agencies will ensure that despite the implementation of the carbon price mechanism, the community services should not be compromised (Graham and others 2008, 135.). The non-profit service providers especially for the most important community services will be exposed to increases in expense on their basic requirements for operations like food, and fuel (Meadowcroft and Langhelle 2009, 123). Since these types of service providers will not be able to survive the cost increases through higher charges, they will need to address revenue increase via other means or devise means of reducing their services.

Promotion of the Living standards of the Australians

Basically, incoming carbon price will have short-term negative implications on the productivity growth and income of a number of families. Even though less compared to the regulatory approaches which secure similar reductions in emissions, it will still be significant (Hatfield-Dodds and others 2007, 34).

The review and the Australian treasury of 2008, identified growth of economy to the middle of the century increasing to few points of national income to be lower by that time. The 2008 review also revealed that if Australian was to reduce emissions in an effective and scaled international standard manner, it would recoup the loss and more by the end of the century because if he decreased cost of climate change (Pearman 2008, 89). This would be so even when value of insurance against exceptionally bad results was ignored entirely.

The modelling of the review did not factor the issue of welfare after 2100 and it also failed to consider benefits to productivity and income that would be protected as a result of sensible of revenue from the carbon pricing mechanism (Hatfield-Dodds and others 2007, 34).

The carbon price revenue could help improve tax mechanism by decreasing the tax disincentives. For instance, modelling revealed that targeted tax reform would manage to offset a considerable share of the modest reduction in the growth rates in income anticipated for the following decades just after initiating the carbon price.

Broadly, this means that the effect will be ranging up to over one-third to half of the macroeconomic impact because if the pricing mechanism without properly targeted tax reforms for the first decade and second decade. That could fall up to 10-20% of the impact by the year 2050 as the carbon prices rise and the amount of greenhouse emissions reduced (Hatfield-Dodds and others 2007, 34).

The current taxes with inclusion of the savings tax, indirect and income taxes will decrease incentive for some people for participation in the employment, Australian Government 2010, 45. The carbon price and other regulatory measures seeking to reduce carbon emissions are comparable in amount. Without reducing the taxation, it would still result in less growth in the real salaries hence decreasing the work incentives more (Wildcat Publishing 2009, 78).

Conclusion

Simplest way of helping Household and alternatives

The simplest way of helping households not to worsen their situation by the carbon price is to effectively increase their percentage on pensions, raise tax benefits and allowances which reduced as the income increased.

This is administratively easier. However, at person levels, it would cost millions of people a lot. In regard to numerous disparities involving support payments for vital earnings, a number of alternatives have been offered. They include pensions, stipends and other benefits instead, in other than paying the percent wage increases.

Furthermore, fixed payments need to be adjusted accordingly bearing in mind the increases in living expenses, the types of households as well as cushion those households of any economic shocks that might arise. This implies that fixed payments will still vary from household to household. This will be based on a number of factors which includes the size of household, the age groups of household members, social economic status and whether the apartment is rented or privately owned.

Reference List

Aldy, J. E., et al., 2010. Designing Climate Mitigation Policy, Journal of Economic Literature, 48, 4, 903-934.

Australian Government, 2008. Australia’s Low Pollution Future: The Economics of Climate Change Mitigation, Australian Government, Canberra.

Australian Government, 2010. Australia to 2050: Future Challenges (2010 Intergenerational Report), Australian Government, Canberra.

Graham, P., Reedman, L., & Poldy, F., 2008. Modelling Of The Future Of Transport Fuels In Australia: A Report To The Future Fuels Forum’, CSIRO, Newcastle.

Great Britain Parliament. 2010. The Role of Carbon Markets In Preventing Dangerous Climate Change: London: Great Britain Parliament.

Hatfield-Dodds, J. Carwardine, M. Dunlop, P. Graham, & C. Klein, 2007. Rural Australia Providing Climate Solutions. Preliminary report to the Australian Agricultural Alliance on Climate Change. Canberra: CSIRO Sustainable Ecosystems.

Hatfield-Dodds, S., Jackson, E. K., Adams, P. D., & Gerardi, W., 2007. Leader, Follower, or Free Rider? The Economic Impacts of Different Australian Emission Targets, Sydney: The Climate Institute.

Hester, R. E. & Harrison, R. M. (eds.) 2009. Carbon Capture: Sequestration and Storage, Issues in Environmental Science and Technology 29: 203-238.

Meadowcroft, J. & Langhelle, O. 2009. Caching the Carbon: The Politics And Policy Of Carbon Capture And Storage, Cheltenham: Edward Elgar.

Pearman, G., 2008. Climate Change Risk in Australia under Alternative Emissions Futures, Department of the Treasury, Canberra.

Seaton, A. 2011. Australia Carbon Pricing Mechanism, Melbourne. Web.

Tamiotti, L., et al., 2009. Trade and Climate Change: A Report by the United Nations Environment programme. World Trade Organization, United Nations Environment Programme, Geneva: WTO.

Weyant, J.P., & De La Chesnaye, F.C., 2006. EMF 21: Multi-Greenhouse Gas Mitigation and Climate Policy. Web.

Wildcat Publishing. 2009. The Oil & Gas Year Australia, Melbourne: Wildcat Publishing Inc.

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