IB Economics Commentary - Australia MPs Pass Carbon Tax

The Australian federal government will generate one of the world's greatest carbon emissions trading schemes after MPs passed 2 costs by senators that are anticipated to vote into law in November.

A carbon tax is an environmental tax imposed on the carbon material of fuels. An unfavorable externality of production happens when the production of a good or service develops external expenses that are harming to 3rd parties. This is generally related to the ecological issues.

Figure 1. Negative Externality of Production for Carbon Emission

Figure 1 reveals if the federal government is not stepping in and the market is identified by only supply and demand, referred to as free enterprise, the marginal personal expenses of the firm are below the limited social expense due to the fact that there is an additional expense to society triggered by contamination.

Pollution includes boost in fossil fuel burning, which would release CO2 into the atmosphere and the loss of carbon sinks.

Also, it is stated that CO2 emissions harm ocean's capability to soak up carbon.

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The company will only be worried with its personal expenses and will produce at Q1. It is not producing at the socially effective output, where the minimal social expense is equal to the minimal social advantage. This suggests that at a rate of p * from figure 1 would produce Q *. The neighborhood surplus is not made the most of due to the impacts of contamination, considering that it is triggering a negative effect.

One method federal government policies may counter the issue is to tax the firm in order to increase the firm's personal expenses.

The carbon tax aims to cut Australia's emissions by 5% from year 2000 levels by the year 2020, and bring emissions down 80% by 2050. The tax needs the nation's 500 biggest polluters to pay A$ 23 per tonne for their carbon emissions.

Figure 2: Taxing a Negative Externality of Production for Carbon Emission

Figure 2 programs when the federal government chose to tax that will help the economy, there is still a well-being lose, however it is less than under the free enterprise with no government intervention. The pink color shading shows the well-being loss prior to the tax and the red color shading reveals the welfare loss after taxing, which plainly shows it would reduce the deadweight concern, but not remove it totally.

It is suggested that government should counter the externality to increase welfare. In this case, stakeholders include firms, labors, and households. Firms are the increase cost, labors refer to the consideration of losing job and households refer to the price level that is rising. If government chose not to tax, the economy would most likely to run in a short term, since there is too much welfare loss. However, government chose to tax the negative externality of production, which the economy could run in long-term. The higher the government tax, the less welfare loss will result. Also, households will be compensated for rising prices due to the carbon tax.

The government concluded with the plan to turn the economy into a tradable emission permits schemes. However, this is certainly not the best choice since it doesn't lead to the reduction of pollution once allowable limit has been set and government might not have the data of the total level of pollution and it is very difficult to measure a firm's pollution output.

To conclude my evaluation, apply taxation added to the economy is the most suitable choice government should make. It is suggested in the article, however, not their final decision. Firms are the increase cost, labors refer to the consideration of losing job and households might consider rearranging the price level and firms should consider about increasing cost, which not a lot of people could afford. The other choices take time to plan and have to consider a lot of consequences. However, taxing is not easy as well. It could be difficult to measure accurately the pollution created, but it does help reduce the welfare loss, which already is improving.

Peter Hoeller and Markku Walli, Autumn 1991, Energy Prices, Taxes and Carbon Dioxide Emissions [online] OECD Economic Studies No. 17. Available at: <http://www.oecd.org/dataoecd/33/26/34258255.pdf>

Tom Marshall, February 3 2009, CO2 Emissions harm Ocean's ability to absorb carbon [online] Natural Environment Research Council. Available at: <http://planetearth.nerc.ac.uk/news/story.aspx?id=311>