1. Comparison of Labour Government’s Carbon Tax Policy and ERF

The carbon tax policy and the Emissions Reduction Fund (ERF) have several similarities: one, they encourage innovation in low carbon technology through discouraging companies from using carbon-intensive commodities [ CITATION Aus16 l 1033 ]. Both carbon taxation and ERF involve adjustments in the amount of carbon emissions to the environment. The same happens for carbon trading where the quantity of carbon is fixed and the price fluctuates. In contrast, taxation sets a fixed price for carbon thus making the quantity to fluctuate and when the tax is raised, the quantity consumed reduces [CITATION Hum14 l 1033 ].

In both approaches, there is reduction in demand for carbon as fixing the quantity of carbon through carbon trading affects the production of carbon products as the output will reduce increasing us of low-carbon products while taxation increases the cost of production of the carbon products due to high prices that will be imposed.

The carbon tax policy contributes in generating revenue for the country through taxes paid by individuals and businesses using carbon-intensive commodities. ERF on the other hand does not contribute to revenue collection but instead increases public expenditure as the government purchases the carbon credit units.

In carbon taxation, less costs are incurred but huge costs are involved such as compliance costs, approval costs, and negotiation and insurance costs. Also, the money raised from polluters is used to subsidize the winners for their production costs [CITATION Hum14 l 1033 ].

  1. a) motivation for linking an ETS

  • The need to get more allowances especially from external sources drives for creation of linkages with external ETS. This improves the liquidity of the entities as there would be a larger market with many participants who control the market prices eliminating the tendency by larger entities to manipulate the prices.

  • Linking of ETS will help reduce carbon leakages as all the countries will be having a common price floor which will be used in making investment decisions. When competing industries are subjected to same price for polluting, they will settle for a common market price and thus eliminating leakages[ CITATION Kac15 l 1033 ].

Net buyers of emission permits gain when the initial price is higher in the EU ETS. This is because the the NZ ETS will pay for the extra fee to regardless of the market price for the emission [CITATION Rek15 l 1033 ]. The extra cost is incurred by the buyer whereas the seller sells it at a profit

EU ETS sellers of emission permits loss as the buyer pays for more than the market price. Burns (2014), stated that firms should buy foreign carbon credits when they are cheaper than the domestic units. This is because when reselling the credits, the domestic floor price will determine the price.

Reference List

Australian Government, 2016. Emissions Reduction Fund, s.l.: Commonwealth ofAustalia.

Humphreys, J., 2014. Exploring a Carbon Tax for Australia. Perspectives on Tax Reforms, Issue 23.

Kachi, A. et al., 2015. Linking Emissions Trading Systems: A summary of Current Reseach, Berlin: International Carbon Action Partnership.

Reklev, S., 2014. Carbon market Australia-New Zealand. Point Carbon, 7(1).