Environmental Economics Online Tutoring

Climate Change is one of the prime issues the countries are facing right now along with trying to find ways to combat the problem and introduce changes in their current economic systems. When waste, which includes carbon dioxide, poisonous gases such as methane etc. or even toxins in the sewage, flow into the natural environment, this creates an issue as Earth’s ability to absorb these toxins is limited (the core team, 2018).One major reason why this problem requires such urgency is that it is irreversible and can lead to long lasting implications for the upcoming generations (the core team, 2018).

The field of Environmental Economics strives to search for ways through which economic tools can be used to minimize or even internalize these problems. Two major ways by which Carbon emissions can be decreased are, Taxes on Emissions and Cap and Trade Systems. While, Emission charges uses taxes as a way to alter the behavior of firms and individuals, The Cap and Trade model sets a cap or limit on emissions, which can then be traded in its market. In doing so, the Cap and Trade model establishes the right to emit and then be able to trade it.

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Figure 1 shows how an emission tax or in our case a Carbon tax works. A per unit tax on units of emissions is levied and where tax rate and marginal abatement costs (MAC) intersect represent the efficient level of emissions. As long as tax is more than MAC, a firm is better off abating the units of emission. Hence, at E* marginal benefit and cost are equalized. This method is regarded by economists as being both cost effective and efficient, as MAC are equalized across firms and they chose this point by equating their respective MAC with taxes. If firms invest in better technology to combat pollution and their MAC curve shifts down to MAC2, they not only save in terms of abatement costs but also in terms of taxes, hence this method incentivizes firms to invest in greener technology and also allow the government to generate tax revenue in the process. Consequently, choosing the appropriate amount of tax could be taxing on the regulators part and may require some trial and error.

In a Cap and trade system, a cap in set by the government on levels of emission, after which permits are issued to the firms and based on their emissions, they can choose to trade it in the market. Hence, the permit becomes a tradable commodity and price established in the market is known as the Carbon Price. China is trying to actively use the Cap and Trade approach to control their emission levels where the cap is decided based on the firm’s production volume (Jotzo, Karplus, Grubb, Löschel, Neuhoff, Wu, & Teng, 2018). The issue that can possibly arise with this approach is that it is a market solution to an environmental problem and hence may not result in an efficient outcome, even if it is cost effective.

 

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In Australia, the implementation of the carbon pricing policy did manage to achieve its main target of reduction in emissions as an article pointed out that during the first two years of using the carbon price, carbon emissions decreased by 29 million tons or by 8.2% in comparison with the previous two years (Jotzo, 2014). The issue came with the absence of a stable framework of policy and lack of incentives for the producers to cut back on emissions, which undermined the affect the policy could have had (Jotzo, 2014). In an opinion piece in the New York times, the writer proposes a plan for the government of USA to counter climate change by using taxes as a way to signal to the firms and consumers to actively decrease their emissions and then return the revenue collected from the taxes to the people in the form of dividends (feldstein, 2017). The government would also adopt policies in international trade, as imports from countries without comparable carbon price would be charged a fee, therefore, punishing the countries that do not adopt this carbon pricing mechanism (feldstein, 2017). The article also highlights how political agendas and stance have led to and could potentially lead to the ineffectiveness of such policies, which are then buried.

A research points out how important ‘surface transportation’ sector has been in the reduction of emissions following lockdown due to Covid’19, and has been responsible for nearly half the decrease (Quéré et al., 2020). This indicates that, in Australia, the transportation industry needs to be targeted regarding emission reduction. Levying Carbon taxes on car manufacturers, taxes on consumers of petrol or alternate fuel and even on excessive car use, can to some extent encourage people to seek for greener options or adopt alternate modes of transport.

 

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