Climate Change Economics and Policy Essay Example

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Climate Change Economics and Policy

Climate Change Economics and Policy


Climate change has become a global environmental problem that affects the entire plant. Scientists estimates that that planet’s average temperatures have increased significantly over the past few decades. The problem of climate change and the global warming effect is linked mainly to the excessive emission of greenhouse gases into the atmosphere. For many years, the world has been heavily dependent on fossil fuel as the primary source of energy. Australia is one of the countries that still depend heavily on fossil fuel as the primary source of energy at 93.4% in 2015, according to the World Bank (2017) report. However, as part of the country’s strategy to mitigate climate change, Australia has set an emission reduction target of 26-28% below the 2005 level by 2030 (Australian Government 2016). This emission reduction target accounts for about 50-52% emission reduction per capita and 64-65% reduction in the emissions intensity from 2005-2030 (Australian Government 2017). To achieve this emission reduction target, the Australian government has proposed two competing policies that include the 2012 Carbon Tax, which has since been replaced by a Direct Action Plan. However, a debate has been ongoing among scientists and economists as to which of the two policies is best in addressing climate change. This essay begins by discussing the rationale and theoretical underpinnings of a Carbon Tax and the Direct Action Plan. The essay will also identify which of the two policies is better for addressing climate change. Lastly, the essay will propose an alternative climate change policy to Carbon Tax and Direct Action Plan.

Carbon Tax Policy vs. Direct Action Plan

Australia is one of the developed countries with high carbon emission levels. However, as part of the country’s strategy to mitigate climate change and global warming effect, the Australian government did introduce the carbon tax system in 2012. The carbon tax policy set a carbon tax at A$24.15 (US$22.00) per ton of carbon dioxide equivalent emitted (Australian Government 2017). The carbon tax system has been introduced mainly with the aim of discouraging households and businesses from emitting large amounts of carbon into the atmosphere. Under the carbon tax system, households and businesses that emit more than the limit set is expected to pay heavy taxes, which depend on the emission produced into the atmosphere.

The theory behind carbon tax is that taxing carbon discourages households and consumers for emitting large amount of carbon, thus resulting in a reduction in the emission of greenhouse gasses into the atmosphere. Proponent of carbon tax policy argues that no business is prepared to incur high costs in the form of taxes on carbon as this affects their bottom line. For this reason, by taxing carbon emitted above the normal limit, this discourages companies from emitting more, and creating the incentives for the businesses to mitigate their emission levels by creating environment friendly production process (Stern 2007, p. 54). According to Robson (2013), carbon tax is an effective policy initiative that had the potential of helping address emission in the country, arguing that since the law came into effect in 2012, Australian businesses have had to become smarter by making their processes more sustainable so as to avoid the risk of being fined. Indeed, a study conducted in Australia confirms that many Australia companies introduced sustainable processes and operations immediately the law came into effect so as to minimize emission with the aim of avoiding the heavy fines that awaited them in the event that they emitted above the limit set and this had a trickle effect in the sense that it helped reduce the amount of carbon being emitted by businesses. Although carbon tax policy helped discourage Australian businesses from emitting excessive carbon, Ergas and Robson (2012, p. 13) argue that the $24.15 (US$22.00) per ton of carbon dioxide equivalent emitted is low and that, for the policy to be effective, the fines on carbon needs to be higher so as to discourage companies from emitting excessive carbon by investing in sustainable processes.

Like businesses, carbon tax policy works on the same principles on households placing fines on households and this discourage households from emitting carbon above the limit set. One of the direct impacts of carbon tax on households has been a substantial increase in electricity prices. Studies conducted in Australia after the carbon tax policy came into effect shows that the household electricity prices have increased by at least 10% (Ergas & Robson 2012, p. 11). One such study is that conducted by TD Securities Melbourne Institute and published in July 2012, just few months after the law came into effect that found that the prices for household electricity had risen by about 14.9%. it is this increases in the cost of electricity that economists argue, creates the incentive not just for businesses to mitigate their levels of emission, but also force households also to reduce their emissions so as to avoid the fines and to keep their cost of electricity down.

Stern (2007, p. 12) argues that carbon taxing is an effective policy for addressing climate change because it acts as a good source of revenue for the government that come in the forms of the carbon taxes, which are then used by the government to implement environment sustainable programs. It is believed that carbon taxing will generate a lot of revenue to the government in the excess of AU$10 billion every year that it can use to fund greener sources of energy to replace fossil fuel such as solar, wind, and hydro-electric power among other renewable sources of energy (Robson 2013).

Additionally, carbon tax policy has been proposed for use in addressing climate change problem in Australia on ground that taxing businesses for the amount of carbon they emit would enable the Australian government to abolish other costly schemes, such as renewable energy targets, efficiency standards and green subsidies (Stern 2007, p. 94). In this regard, proponents of carbon tax policy argue that because a taxation abates at least cost, thus resulting in emission diminution.

Just barely a years after the carbon tax policy came into, a coalition government led by Tony Abbott assumed power in 2013 and promised to scrap the ‘carbon tax’ and replace it with the so-called ‘Direct Action Plan’ (Wade & Hutchens 2013). Accordingly, in July 2014, the carbon taxing policy that had been introduced by the Gillard Government was scraped and replaced by the Direct Action Plan. The Direct Action Plan is a voluntary emission reduction mechanism, which differs from the carbon tax policy which is mandatory with failure by businesses or households to adhere to the stringent laws and regulations results in heavy fines. With Direct Action Plan, the government set the Emissions Reduction Fund (ERF) that came into effect on 13 December 2014. The ERF is designed to give incentives for greenhouse gas (GHG) emission reduction activities in the entire country. This implies that, under direct Action Plan, companies are given incentives from the ERF for voluntarily undertaking activities that are designed to reduce the amount of emission (Wade & Hutchens 2013). This is because, under ERF, the Australian government funds projects that reduce GHG emission at minimal cost. In this respect, it become clear that, unlike carbon tax that is based on fines, Direct Action Plan is inventive-based.

There are a wide variety of project for carbon dioxide reduction for which the government provide incentives and these include energy efficiency, re-forestation, cleaning up power stations and re-vegetation and improvement of soil carbon (Nordhaus 2007, p. 31). It is also important to note also that, under Direct Action Plan, fines are not placed on emission as is the case under carbon tax.

Proponents of Direct Action Plan argue that the policy is argue that, giving incentives to businesses for mitigating climate change is an effective approach to the problem because it encourages other companies to also adopt environment sustainable programs in order to take advantage of the incentives (Robson 2013). A report conducted in Australia since carbon tax policy was replaced by the Direct Action Plan shows that the incentives that the government provides to businesses for adopting environmentally sustainable programs have seen the number of businesses taking advantage of the government funds and incentives grow and that this would help mitigate climate change problem witnessed in Australia and help the country realize its emission reduction target of 26-28% by 2030.

Policy Evaluation

Although President Tony Abbott replaced carbon tax policy with the Direct Action Plan, there has been an ongoing debate regarding which of the two policies provides a better solution to the problem of climate change and is capable of enabling Australia achieve its 2013 emission reduction targets. From the comparison of principles of the two policies, it emerged that both are meat to achieve the same goal of mitigating greenhouse gas emission. However, carbon tax policy appears to be the best policy that Australia need to adopt to enable it realizes its emission reduction targets. Carbon tax policy is the best because it punishes businesses and individuals for emitting carbon beyond the allowable limit (Stern 2007, p. 65). Because emitting carbon in the excess of the limits accepted attracts a heavy fine of AU$24.15 per ton of carbon dioxide equivalent emitted, this creates the incentive for businesses to adopt sustainable business processes in order to avoid the hefty fines that the government imposes should the emission limit established be created. Because every company is interested in making good profits, no business could be willing to be fined every now and then for emitting large amount of gases (Robson 2013). Therefore, carbon taxing is the most appropriate because it creates greater incentive for businesses and individuals to implement programs that mitigate greenhouse emission compared to the Direct Action Plan.

Furthermore, the Direct Action Plan is fundamentally flawed it ignored the principle of ‘polluters pay and instead put a lot of burden on taxpayers who are forced to subsidize big polluters. The best way to address greenhouse emission is to ensure that polluters are made to pay as this discourages the habit rather than subsidize big polluters as Direct Action Plan presupposes (Wade & Hutchens 2013). Besides, the fact that Direct Action Plan provides for voluntary mitigation of greenhouse emission by firms does not provides guarantee that companies will take advantage of the subsidies and government funding to mitigate their emission levels (Williams 2011, p. 28). For this reason, carbon taxing is the only surest approach to the climate change problem though the effectiveness of this policy depends on the amount of fine imposed to the extent that the higher the fine, the greater the impact on addressing emission.

Explain an alternative policy to the Carbon Tax and Direct Action Plan

Other than carbon tax and the Direct Action Plan, the other alternative policy that the Australian government can consider is the Emission Trading Scheme (ETS). Under ETS policy, the government places a cap or a limit on the emission that businesses in a given industry can collectively release (Treasury 2011). Once the limit or cap has been set, the government then issues permit for each amount of greenhouse gas that is accepted under the cap, which are then given or sold to firm. Under this policy, a firm is expected to hold enough permits that are capable of covering the entire greenhouse gases it emits. In the event that a company does not hold enough, they may have to purchase more permits from other firms or be fined. On the other hand, if a firm reduces its emission level, it is allowed to trade or sell the excess permit it has to other firms for profit (Robson 2013). ETS policy like carbon tax policy is an effective policy approach for addressing climate change because it places price on carbon (Nordhaus 2007, p. 27). Accordingly, this provides individuals and companies with the incentive to cut their emissions and undertake sustainable initiatives to mitigate emission.


Climate change has become a global environmental problem. Australia is one of the leading emitters of greenhouse gasses responsible for the global warming effect. However, because Australia is among the worst affected countries by climate change, the government has set its emission reduction target of 26-28% below the 2005 level by 2030. Some the strategies that the government has tried to implement are the carbon tax and Direct Action Plan that replaced carbon tax in 2014. Although both policies seek to mitigate emission, the analysis shows that carbon tax is the best policy approach for tackling pollution as it places a price on greenhouse emission, which creates the incentives for individuals and companies to mitigate emission so as to avoid the fines. However, other than the two policies, the Australian government can also consider adopting the Emission Trading Scheme, which has approved effective in some parts of the world.


Australian Government 2016, Repeal of the carbon tax―how the carbon tax works, viewed 3 July 2017

Australian Government 2017, Repealing the carbon tax, viewed 3 July 2017

Ergas, H., & Robson, A 2012, ‘Modelling as Agit-prop: The treasury’s role in Australia’s carbon tax debate’, Agenda vol. 19, no. 2, pp. 9–21.

Nordhaus, W 2007, ‘To tax or not to tax: alternative approaches to slowing global warming’, Review of Environmental Economics and Policy, vol. 1, no. 1, pp. 26–44.

Robson, A 2013, Australia’s carbon tax: an economic evaluation, viewed 3 July 2017

Stern, N 2007, The economics of climate change: the stern review. Cambridge: Cambridge University Press.

The World Bank 2017, Fossil fuel energy consumption (% of total), viewed 3 July 2017

Treasury 2011, Strong growth, low pollution: Modelling a carbon price, viewed 3 July 2017’snewdirectactionscepticsolidated.pdf

Wade, M. & Hutchens, G 2013, ‘Tony Abbott’s new Direct Action skeptics’, Sydney Morning Herald, 28 October, viewed 3 July 2017

Williams, M 2011, ‘Why increasing the tax-free threshold is a bad idea’, IPA Review, vol. 63, no. 3, pp. 27–28.