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Growth of Australia’s greenhouse gas (GHG) emissions is largely driven by the structure and growth of Australia’s economy, which is 5% less energy intensive that the world average (Garnaut, 2012). To avoid consequences of the negative externalities of carbon emissions, Australia’s government decided imposing carbon tax in order to control and access those externalities (Mollross, 2010; Jordan & Zähres, 2011). Hybrid carbon price is proposed before switching to the emissions trading scheme, which should be preferred over the carbon tax (Jordan & Zähres, 2011). However, the approach designated to deal with pollution by issuing tradable emission permits, burdens intensive industries with significant increase in production costs comparing with their trading partners (Splash & Lo, 2012; World Bank, 2008). Therefore, subsidizing one industry with lower emission technologies is taxing another (Mollross, 2010).
Overview of Australia’s Emissions
According to Garnaut, in 2006 Australia’s per capita ‘emissions reached 28,1 tons of carbon dioxide equivalent (CO2 -e) per person’(Garnaut, 2012, p. 153). Moreover, carbon emissions index is 3,4 million tons higher than it was in June 2011 and exceeded the lowest point for the past 5 years by 5 million tones, which is an equivalent to an annual growth rate of about 2 per cent (Saddler & Anderson, 2012). The main sources of emissions attributed to Australian industry by sector can be seen in the following figure:
Growth in emissions from the stationary energy sector is largely driven by the fuel mix in electricity generation (Garnaut, 2012). At a time when other developed countries have shifted to lower-emissions sources, the increasing emissions intensity of Australia’s primary energy supply is largely due to its reliance on coal for electricity generation (Garnaut, 2012). International combustion engine type and petroleum as a fuel type dominate transport emissions (Garnaut, 2012).
Anthropogenic climate change is seen as negative externality and price setting on carbon is assumed to improve overall social welfare (Jordan & Zähres, 2011).
In the case of carbon emissions a negative externality exists, because the cost of carbon dioxide, produced by the petrol, is not included in its price (Mollross, 2010). However, it is impossible to convert effect of climate change on the social welfare, because cause-effect relationship occurs in the future and cannot longer be attributed to the externalities of carbon emissions (Splash & Lo, 2012).
In order to protect the profit of polluters, who face increase in production costs, because of imposed carbon tax, Australia’s government issues tradable emission permits in some determined quantity (Mollross, 2010; World Bank, 2008; Jordan & Zähres, 2011). Emissions’ trading is based on the elements of the Coase theorem, which describes economics outcomes in the presence of externalities and is based on the “cap and trade system”, which allows companies to sell their surplus emissions allowance and be rewarded for having reduced emissions (Jordan & Zähres, 2011). Sater-Swan model is used to capture macroeconomic processes of this system and explains why huge increase in the prices of carbon-using goods entail industry’s overproduction on the grounds of internising taxes (Mollross, 2010; FAO of UN, 2010; Perry, 2012). See the Figure 2:
Any combination below curve line, which demonstrates correlation between total industry output and unit labour requirement for each plant, means that production resources are not fully used and that economy does not fully realizes its potential (Jordan & Zähres, 2011; FAO of UN, 2010). The price depends on the operational costs and unit total costs, and reflects industry productivity when older plants obsolescence due to technological development (Jordan & Zähres, 2011).
Australia’s Clean Energy Future Policy (CEFP) aims to reduce emissions to 5% below 2000 levels by 2020 and 80% below the same level by 2050 equitable of 159 mega tones from the projected 690 (Perry, 2012). However, pricing mechanism of Australia’s government has failed to take into account all of the costs to society by using traditional economic system, when market sorts out how much negative externalities cost (Mollross, 2010; ‘Carbon tax increases’, 2012). Therefore, according to the policy, firms, whose intensive industrial activities have shifted costs onto society should pay for the damage they cause (Splash & Lo, 2012). Polluters do not pay for the GHGs emitting into the atmosphere and therefore, to correct this market failure, their taxation marks the value of social damages internal to the firms’ decisions (Splash & Lo, 2012).
Taxation on coal instead of taxation on emissions from fired power stations seems to be justified, because several different carbon emissions contribute to the problem (Splash & Lo, 2012). To convert into monetary costs the correspondence of CO2 emissions during and after operating process, calculation of fossil fuel combustion and emissions after it are required (Splash & Lo, 2012). Production of some gases that have greater impact on climate change than CO2 are relatively small and artificially constructed that is why their taxation has an impact on economic system disruption (Splash & LO, 2012; Master Builders Australia (MBA), 2011).
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Some individuals and industries, who are affected by the carbon price, receive the compensation package, which designation is to transmit the cost of the carbon price through the economy by recycling revenue, with which the money is completely returned to the economy (Splash & Lo, 2012; MBA, 2011). Since this compensation package includes free allocation of required permits, thereby reduction of emissions (abatement) is balanced against the carbon price, which is redistributed to the households and trade exposed activities in form of permit price revenue through the government subsidizing (Splash & Lo, 2012; MBA, 2011). To achieve political acceptability, carbon price revenues should be stable or rising to sustain reduction of other tax revenues (Splash & Lo, 2012). Moreover, carbon price revenue is received by selling no longer needed permits (Mollross, 2010). To reduce the risk of industrial production moving from Australia to countries where carbon is not priced, large number of allowances at no cost to producers is planned to be allocated by the authorities (Jordan & Zähres, 2011). Such trade-exposed outputs allowances for cement, steel, aluminum, coal and liquefied natural gas (LNG) are to be allocated to shield them from full impact on carbon price (Jordan & Zähres, 2011). This condition will increase profit of the domestic polluters (Perry, 2012). However, Australia’s industry is assumed to remain competitive even when paying carbon costs and will maintain sustained profit margins (Perry, 2012). Increased risk with profit increasing procures external financing because provides source for it (Perry, 2012)
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Assistance will be provided for the most emission intensive activities that are also trade exposed and will conclude either 94,5% or 66% shielding, depending on the level of that intensity (Nelson, 2011; White, 2010). Therefore, companies that perform above the industries average benchmark could receive permits and assistance will cover all their obligations, while the ones that do not reach the mentioned benchmark will receive less than the abovementioned shielding (Nelson, 2011). Therefore, activities that are considered eligible for assistance are the following: a) production of glass containers and bulk flat glass, methanol, LNG, copper, lime, clinker, ethane; b) refining of petroleum and alumina; c) smelting of aluminum and zinc; d) manufacturing of newsprint, industrial paper and packaging (Nelson, 2011). In order to encourage carbon efficiency opportunities the amount of assistance for all emission-intensive trade exposed (EITE) activities will be reduced by 1,3% per annum (Nelson, 2011). Government has provided generous levels of assistance valued at 9,2 billion dollars for EITE industries over three years under the CEFP establishment (Perry, 2012).
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Australia’s greenhouse gas emissions are the highest among the OECD countries, because its economy is the eighth most energy intensive among these countries and largely relays on the coal for stationary energy generation. Carbon tax imposing is designed to improve overall social welfare by making polluters pay for the damage they cause. Macroeconomic process of the carbon tax system includes correspondence of the quantity and price for the supply of pollution rights and predetermines further emission trading on the grounds of issued permits. If supply line falls below the total industry output and unit labor requirement, then it means that the plant is facing the edge of obsolescence by losing profits. Australia’s CEFP is aimed to reduced emissions rates, but their monetary costs are impossible to be converted, because of the different emissions’ contribution to the problem of CO2 emissions. Industries and individual affected by the carbon price receive compensation package on the grounds of its stable or rising revenues. Moreover, CEFP provides assistance to the EITE industries of the most emission intensive activities, the amount of which will be reduced by 1,3% per annum in order to encourage carbon-efficiency opportunities.