Climate Change Economics and Policy Essay Example

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Climate Change Economics and Policy

Climate Change Economics and Policy


The debate around Carbon emission in to the atmosphere with the immediate policy of carbon emission pricing was a contagious topic during the Federal elections of 2013 in Australia. The Labor government recommitted the continued emission trading scheme while the coalition of Liberal National Party advocated for a direct action. The Liberal National Party challenged the effectiveness of carbon emission pricing applied in the electricity sector. The policy focused on reducing the carbon intensity of electricity generation. Notably, the carbon emission pricing as demonstrated in the electricity sector was used to manage the long run expectations of the pricing mechanism in terms of benefits through sound investment decisions given that the effects of carbon emission in to the atmosphere are irreversible and are causing drastic climatic changes. These climatic changes require urgent mitigating actions by the government adopting relevant policies. These policies were aimed at meeting national Emission Target by 2020, which is, five percent below levels of 2000 by year 2020.

The different views from the two side concerning carbon emission on effectiveness of one policy over the other were as a result of the territory under consideration. The labor party approach was based on a policy which relied on over 50 percent on the international reduction of carbon emission while the Liberal National Party approached was to be based on operating mechanisms within the Australian territory. The two approaches had an implication in terms of cost with the LNP’s approach expected to costs the economy more because it was limited to Australia only. With these divergent views in policy making to regulate the levels of carbon emission gave rise to the Direct Action plan which was later adopted in Australia.

The Carbon Tax Approach

The carbon tax which was introduced by the government of Australia in July 2012 is an emission trading scheme (ETS) with a fixed price. Within the tax mechanism, emitters are charged per ton of Carbon they emit in to the atmosphere leading to businesses reducing their Carbon emission with an aim of saving money.

The History of the Carbon Tax

The Carbon Tax campaign stated with the Prime Ministerial Tax Group on Emissions Trading (Shergold Report) in 2007. This task group advised on the global emission trading system in which Australia can be a party and in response, John Howard, the prime minister declared that the cap and trade system will be introduced in Australia. The recommendations of the report were justified by the fact that the market generates too large volume of carbon emissions to the atmosphere beyond the efficient levels which in return generates external costs. The basic argument of this report was to create artificial legal rights and obligations and allow those rights and obligations be traded within the economy and member economies. In this case, the Australian government can issue an aggregate number of permits which are tradable within firms of the economy so as to reduce the costs associated with large scale emissions of carbon. With regulation, firms would produce abatement and firms could reduce emissions on behalf of another in the mechanism of trading the permits. This type of policy is associated with transactional costs involved in acquiring the permits, verification of the permits, monitoring abatement activities and law enforcement hence reducing the effectiveness of the policy.

A report done by professor Garnaut argued that a well-designed trading system had far reaching advantages than other intervention mechanisms but a carbon tax mechanism would be better. The report recommended the adoption of a cap and trade scheme with a short transition phase with the government selling the permits at a fixed price rather than being traded freely.

In 2008 the government released guidelines on Carbon Pollution Reduction Scheme (Australian Low Pollution Future) which committed the government in reducing carbon emissions (reducing carbon emission by five percent the levels of 2000 by the year 2020 and a long term initiative of reducing emissions by sixty percent the levels of 2000 by the year 2050).

Within the carbon tax system, emitters were charged per ton the amount of carbon they emit to the atmosphere against a predetermined fixed price. In this system there was no limit to the amount of carbon a firm can emit because the emission was only based on the price. On the other hand the ETS system required a cap on the amount of carbon a firm can emit and emitters should acquire permits for any ton of carbon they emit. Therefore, the cap level determined the number of available permits with firms required to purchase a permit from another emitter if they don’t have one for the carbon emissions, who is then required to reduce level of carbon emission. The cost of emission in this model should be equal to the cost of selling or buying the permit. As opposed to the tax based system where the price was the determining factor of emissions, the ETS model used the cap to determine the level of carbon emissions. Permits allowed emitters to avoid emissions reduction.

The Australian government through the Clean Energy Act 2011 introduced the carbon tax in July 2012 to help in curbing emissions in the country. The drive of this incentive was that polluters would pay a certain amount of tax per ton of carbon they release to the atmosphere in order to reduce the hazards posed by the emission to climate and too reinforce its commitment to the climate challenge the country was a member to (Kyoto Protocol). Each firm was required to surrender one unit of emissions for each ton of carbon the produced yearly with these units available at the Clean Energy Regulator (CER) at a fixed price. The firms which didn’t surrender enough units incurred a shortfall charge thus the charge created an incentive to surrender more units instead of incurring the charge. This mechanism was later to transition to the cap and trade emissions trading scheme by 2015 which was the international carbon market approach. These regulations were intended to improve the economy as it cut pollution within the economy as much support and compensation went to

  • Contribution to pension schemes and other government beneficiaries such as jobseekers, self-funded retirees, students and eligible families.

  • 300 AUD million supported the steel industry

  • An Energy Security Fund which provided assistance to the most emission intensive core-fired generators and help transition to cleaner energy by supporting energy security

  • Support Climate change Authority which had been established to advise on matters of emission caps and climate change policies and support the legislation the Australian government had established to curb carbon emissions by 2050

  • Support Competitiveness Program which helped to establish the highly trade- exposed industries in terms of emissions and help them reduce their carbon and adopt cleaner energy

The regulations achieved results by reducing the emission of greenhouse gases by 1.4 percent in the second year since introduction which was the largest decrease from the last decade. However, these led to increased cost of electricity to households and businesses since it raised the costs by approximately 10 percent which led to closure of business which experienced hardships due to high cost of electricity.

The Direct Approach

The Australian government abandoned the carbon tax in July 2014 for the Direct Action approach so as to continue with their efforts to reduce carbon emissions. The department of the Environment and Energy published that in order the government to effectively and efficiently reach its emission reduction targets and improve the environment they must repeal the carbon tax approach and adopt the direct action approach. The direct plan was implemented through the Emission Reduction Fund which was at the center of the government’s climate change policy.

The Emission Reduction Fund is a voluntary scheme which provides incentives to famers and land owners to adopt better methods and technologies to reduce emission of carbon emissions. The fund will assists community and businesses to enjoy the fruits of economic growth, and clean environment. The policy aimed at reducing greenhouse gases emissions at low costs without transferring the costs to households and businesses by rewarding businesses for their positive contributions towards emissions reduction. The emission reduction fund will help reduce to reduce the emissions while delivering benefits to businesses and households.

The Underpinning Principles of the Emission Reduction Fund

The main objective of the fund was to reduce carbon emissions and attain the Australia’s emission reduction target by the year 2020 at the lowest costs possible. In the policy of the fund the government committed a total of 1.55 billion dollars with extension to 2.55 billion dollars for future budgets with the funds being allocated over time depending on the projects commitments.

Three principles guided the establishment of the Emission Reduction Fund

  • Lowest cost emissions reductions- the key responsibility of the fund is to identify and buy emissions reductions at lowest costs.

  • Genuine emission reductions- the fund will only buy emissions which make true contribution to reducing the economies carbon emissions.

  • Streamlining administration- the fund had a responsibility to make it possible for business to contribute.

Within the regulations there were other establishments which were created by law such as Emission Reduction Assurance Committee to support activities of the fund to ensure that the government meets its objectives efficiently.

The use of coal by firms in the economy as a source of energy helped the economy underpin economic growth and propensity. This availability of cheap energy was created competitive advantage for the economy to compete in the global market effectively. The challenge was to achieve economic development by safeguarding their competitive advantage while reducing the emissions which mostly were as a result of use of core in their plants.

Projections in emissions showed that emissions from use of Liquefied Petroleum Gases, transport and industrial processes and waste sector will rise by 2020 while the emissions will be reduced by reforestation in the same period.

In my view, the Carbon Tax was more efficient as compared to the Direct Action because the direct action plan didn’t achieve long term impact as it was expected during the repealing of the carbon tax. The carbon tax pricing mechanism exerted pressure on companies to take actions to reduce emission of greenhouse gases to the atmosphere. The financial proceed had beneficial impacts to the general public and supported initiatives to which contributed to the general welfare of the public. Also there is a possibility that firms production costs will increase as a result of adoption of direct action since there is no trading of the permits as in the case of carbon tax. The agencies under the direct action only required companies to report their emission doesn’t provide the incentive since there is no financial burden to such companies. After the carbon tax was repealed some companies abandoned the emission reduction projects they had supported leaving a vacuum in emission reduction management in the economy. During the period when carbon tax was in place companies used to set targets for reducing emissions so as to meet the requirements of the regulations and save money. This was no longer important since the push was not there under the new policy hence most companies focused on other aspects instead of committing their time and resources in reducing emissions. Also the financial pressure under the old policy was so high that companies had to have actions in place to ensure there is sufficient emission management as opposed to the direct action plan.

Alternative Policy

The United Nations operates an incentive-based measure called Clean Development Mechanism. This is a baseline and credit scheme. This policy allows developing economies to earn certified emission reduction credits equal to one ton of Carbon (IV) oxide by implementing projects geared at reducing carbon emission. These credits are tradable and can be used by industrialized economies to meet their emission reduction targets through the Kyoto Protocol. Through the establishment of Adaptation fund under the Kyoto Protocol, clean development mechanism became the main source of financial support to help in funding projects in the developing countries which are aimed at curbing emissions of greenhouse gases in to the atmosphere. The Adaptation Fund is financed by 2 percent levy on credit development mechanism. The issues within the policy include implication of inclusion of reforestation as part of the clean development mechanism, carbon capture and storage, market and non-market mechanisms and standardized baselines under the clean development mechanisms.


The issue of reducing greenhouse gases emission has been arguably the most politicized in Australia with opinions across the divide focusing on the short term benefits of the approach the advocate for. Rather, the long term benefits by any policy should be used as the point of comparison if the government has to meet its carbon reduction by 2020. Though the government has been in the fore front in advocating for effective carbon reduction policies, more needs to be done for the government to achieve desirable results in reducing carbon emissions.


Centre for Public Impact, (2017). The Carbon Tax in Australia. Retrieved from

Australian Government, (2014). Emissions Reduction Fund White Paper. Retrieved from

Alex. R, (2014). Australia’s Carbon Tax: An Economic Evaluation. Retrieved from