Policy Issues: resource taxes and climate change

Policy Issues: resource taxes and climate change

Key concepts

•The resources super profits tax

The resources super profits tax

•In 2010, the Rudd government announced a proposed Super Profits Tax aimed at raising $9 Billion annually.

•It was highly unpopular in the minerals industry.

•A ‘watered-down’ version was brokered by Julia Gillard called the Minerals Resource Rent Tax (MRRT).

Reasons for super profits tax

Policy implications

•Replacement of the per-tonne royalty with super-profit tax would have resulted in:

–more industry output

–fewer firms exiting the industry when prices are low

–more firms entering the industry when prices are high

Climate Change

Carbon emissions

•Carbon Dioxide (CO2) emissions are:

–widely argued to be the most important contributors to climate change

–the main by-products of burning fossil fuel

•from coal – fired power stations

•crude oil transport

–Generated by industries central to the performance of modern economies.

Graphically incorporating Carbon emission externalities 

reducing market failure of excessive carbon emissions

•Market failure occurs when externalities exist from the market activities.

•Ways of mitigating the market failure:

–carbon tax

–regulation

–emissions trading (ETS)

Carbon tax

•This is where a per unit of carbon emitted tax is imposed on the polluting suppliers

–the tax shifts the supply curve leftwards and thus the market price higher (with reduced output)  in an effort to reduce the production of carbon emitting resources.

regulation

•Firms would be forced to reduce their emissions in order to continue being in business.

•Extra costs, such as pollution control equipment would be incurred by the firm.

•These costs shift the supply curve leftwards and thus the market price higher (with reduced output) in an effort to reduce the production of carbon emitting resources.

Emissions Trading (ETS)

•The government announces the total allowable carbon emissions seen to be appropriate for stabilising climate change.

•This upper limit is known as ‘the cap’.

•This gives the public an economic right to pollute as a society to a maximum level.

•This level is split into permits which can be traded.

•Polluters may purchase permits that allow them to emit the amount of carbon permitted by the amount of permits they hold.

•These permits can be purchased from firms that do not emit carbon pollutants, and therefore can earn a return for ‘being green’.

Which policy is best

•Economists prefer the policies in the following order:

1.ETS

2.Carbon tax

3.Regulation.

Benefits of ETS and Carbon Tax

•ETS encourages firms to treat clean air as a limited economic resource which they must pay to use. The less they pollute they less permits they would require.

•The carbon tax will discourage polluters from emitting, as they will be able to maximise their profits by doing so.

Downside to regulation

•The political agenda can interfere with the overall aim of reducing emissions.

•By enforcing clean air alternatives there is an opportunity for interest-groups to ‘push’ their own energy source.

•Subsidies paid to companies for clean air alternatives can be extremely costly to the economy to install.

•These outweigh the benefits of carbon reduction.

•Solar panels, while clean, can cost much more than ETS permits which encourage self-management.