Environmental economics Essay Example

Carbon Tax Regulation

Abstract:

This report is going to evaluate the usefulness and issues concerning the Carbon Tax Act 2011 as a means of reducing greenhouse gas. This paper will explain that although the carbon tax regulation has been faced with its challenges, it has led to the reduction of greenhouse emissions.

Introduction:

Carbon tax regulations have been in existence internationally for more than 20 years. Carbon tax was implemented in the European countries in the 1990s as a means to reduce the environmental impacts of carbon emissions. Interests in carbon policy has recently increased in Australia, Sweden, Denmark and the United States (Nordhaus, 2007). There has been debate revolving around the issue of carbon tax with some economics saying that it generates economic efficiency and more net benefits than other carbon policies. However, others say that carbon tax is less politically acceptable and do not ensure substantial level of carbon reductions. It is therefore important to discuss the concept of carbon tax and determine its effectiveness in reducing carbon emission (Nordhaus, 2007). This paper will review different literatures and discuss experiences of implementing carbon taxes domestically and internationally. The essay will also offer a description of the issues facing the policy using data from different sources. And at the end, the paper will offer some recommendations based on the analysis provided.

Literature Review

Today, carbon emissions have been widespread due to the increasing use of coal, oil as well as fossil fuel. The consumption of these fuels has contributed to severe air pollution and a huge accumulation of carbon dioxide which is the primary cause of global warming. According to Hassett, Mathur and Metcalf (2009), the amount of carbon dioxide in the atmosphere will double by around 2065. This increase would bring severe climate change which will vary across countries. Global warming causes desertification which will affect agricultural production. Nordhaus (2007) cited in reports that the increase in carbon dioxide will result in the rise in sea level causing increase in economic costs. Global warming also causes environmental events such as
the loss of forests, water shortage, air and water pollution and health challenges such as respiratory diseases.

In an attempt to control global warming, different countries have established environmental policies providing a stepping stone for addressing climate change. UK Department of Energy and Climate Change (UKDECC)
(2009) recognized six greenhouse gases- CO₂, methane, NO_2, and three halocarbons which constitute for ozone-damaging Chlorofluorocarbons. The reduction of carbon dioxide is possible through different mechanisms. Among such mechanisms, economic instruments such as carbon taxes play an important role in reaching environmental goals. The World Bank Group (2016) argues that there are more than 16 jurisdictions that have implemented the direct carbon taxes. According to Nordhaus (2007), a carbon tax is considered a carbon pricing mechanism to limit the amount of emissions. Since greenhouse emissions are linked to carbon content, a tax of such emissions is levied by taxing the carbon levels in fuels. Abboud (2008) considers carbon tax as an instrument that increases revenue without necessarily affecting the economy while facilitating the goals of climate change policy. The United Nations has reported that the main goal of the carbon tax is to reduce the unfavorable levels of greenhouse gas in the atmosphere.

Carbon taxes bargain a cost-effective way of reducing environmental impacts of carbon dioxide. Carbon taxes take the form of pigovian tax. Pigovian taxes are meant to “internalize externalities” by being added to the price of products to cater for social costs of consumptions. They help in addressing the challenge of greenhouse gases facing many countries today. Abboud (2008) argues that carbon tax has been more effective than direct regulations. Nevertheless, Hassett, Mathur and Metcalf (2009) have highlighted the uncertainty in the estimation of the social cost of carbon emission. Many countries have faced the challenge of estimating the complex assumptions about the trajectory of carbon emissions. Also, carbon taxes face less public acceptance. According to Kallbekken, Kroll and Cherry (2011), the redistribution of the revenues from pigovian instrument like the carbon tax is critical in obtaining public acceptance.

Microeconomic Analysis

Numerous arguments have been raised concerning the effectiveness of the carbon tax regulation. Numerous jurisdictions such as Finland, Sweden, Australia and United Kingdom have come up with ways to determine the emissions benefits of pigovian instruments. One way to determine the effectiveness of carbon tax is to use the greenhouse gas emissions inventories. Countries that use such inventories are able to evaluate whether the pigovian instrument meets the overall reduction in emission. Tol (2005) argues that the inspection of the effects of carbon tax offers a precise estimation of its effectiveness. The table below summarized the impacts of carbon tax that countries have conducted to examine its effectiveness. It shows how the instrument has effectively reduced the amount of emissions in different countries.

Figure 1. The effects of carbon taxes in different jurisdictions

Although it is hard to establish the social cost of carbon, different countries have different carbon tax rates. Higher tax rates are considered effective since they signal consumes to change their ways. On the other hand, although lower rates do little to change the behavior of consumers, they offer capital needed for carbon alleviation programs (Kallbekken, Kroll and Cherry, 2011). Countries such as Sweden and Europe have the highest carbon tax rates and their impacts can be seen from their change in emissions.

Figure 2. Carbon tax rates in different countries

Although carbon taxes are effective in preventing global warming, it is limited to certain sectors. For instance, in countries like Sweden, carbon taxes only apply to the energy and transport sector (Sumner, Bird and Smith, 2009). Therefore, it is apparent that the effectiveness of carbon taxes is limited and may be unable to entirely reduce overall greenhouse gas emissions.

Figure 3. The major tax base sectors

Discussion and Recommendations

From the analysis conducted above, it is clear that countries have recognized the impacts of carbon emissions on the environment and have come up with ways to prevent further destructions by adopting carbon tax regulations. Different countries have designed different carbon tax and rates to encourage changes in consumer behaviours. Although carbon taxes have been effective in reducing greenhouse gas emissions, they are limited in scope. In order to achieve greenhouse gas emission throughout the economy, it is important for governments to use a carbon tax mechanism in conjunction with other complementary policies such as the cap and trade. Carbon taxes are very effective in addressing emissions from sectors that cannot be addressed using other trade policies. While carbon taxes have been recognized as ways of meeting emission goals, few countries are yet to implement such practices. One main challenge that prevents jurisdictions from taking on these practices is political difficulties. Nevertheless, designing taxes with distributional equity can enhance their acceptability and effectiveness.

Conclusions

This paper was meant to determine the usefulness and issues concerning the carbon tax regulation. From the analysis, it is apparent that many countries have benefitted from such a policy in terms of protection of the environment. The carbon tax policy has met its main goal of reducing greenhouse gas at a national and international level. Although this policy has proved to be effective, it is faced with numerous challenges. It is limited to certain sectors and cannot achieve greenhouse gas emission in the entire economy. Governments should introduce the carbon tax in conjunction with other carbon polices to better address emission challenges. Such a strategy in mind promises a better way of achieving greenhouse gas reduction goals.