"the governments Carbon pollution reduction scheme (CPRS) policy and whether it will a) reduce CO2 emissions considering expanding economy, etc and b) will it be financially viable and sustainable.."
I am definitely, not am expert on climate change economics, however I tried to tell him something ... basically whatever conclusions I could draw based on my knowledge of basis facts in economics... here is what I told him...
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CPRS: As described on Governments climate change website (http://www.climatechange.gov.au/government/initiatives/cprs.aspx)
Under the CPRS, the government will set an annual limit (or cap) on the total amount of carbon pollution that can be emitted under the scheme, within Australia. The cap will be gradually lowered, reducing the level of carbon pollution we produce each year. Voluntary action can contribute to lowering Australia’s emissions cap in a variety of ways.
Companies or other groups within Australia that need to emit carbon to do business will need to purchase permits (or may be issued with permits) that represent the right to emit a specific amount of carbon pollution. The total amount of permits issued overall cannot exceed the government-set cap. Businesses can trade permits among themselves if they find they have more than they need - or if they don't have enough – ensuring that abatement (reducing emissions) occurs at least cost.
A Simple approach to study the ramifications of this scheme.
Carbon emission, just like any other form of pollution is a negative externality.
An externality refers to the uncompensated impact of one person’s actions on the wellbeing of a bystander. If the impact on the bystander is adverse, the externality is called a negative externality. In this case, the emitter is any Australian business and the bystander is society.
Negative externalities lead markets to produce a larger quantity than is socially desirable. The simple logic behind this phenomenon is that emitters (firms) do not have to pay for the full social cost of their actions (pollution).
As the diagram above shows , the private cost is less than social cost and hence the pollution amount of goods produced by market/firms (Q market in diagram) is higher than the socially optimal level.
Now, what will CPRS do to solve this problem? CPRS is going to impose an extra cost on businesses thereby shifting the private cost line to match with the social cost line (the red line), which will lead the firms to produce socially optimum (Qoptimum) amount .
This all sounds perfect in theory, however implementing this in reality has the following issues:
- Generally, the private cost and social cost curves are not observable with 100% accuracy in the real world. So if you do not observe these curves, how to decide how much cost to impose on businesses. If you got this cost wrong than it can be bad for economy. For Example if government ends up overestimating this cost than the market will produce less than socially optimum (imagine a line left of red line), which will increase cost and make people worse off.
- The cost of reducing pollution is not same for all businesses. Less carbon intensive industries will reduce pollutions and sell their permits to more intensive ones. Now, imagine if there are more carbon intensive businesses than there will be a shortage of permits and hence the permit prices will shoot up. This will lead to complete collapse of some businesses. So, in the short run there will be issues of business failures and unemployment in some sectors of economy.
- The third and most important thing is, what others (Australia’s main trading partners) are going to do? If Australia only puts a price on the carbon and its export partners don’t put a price than Australian export will be expensive compared to its competitors exports in the international market. In this case Australian businesses loose and society on general doesn’t get any better, as the carbon emission leading to climate change is a global phenomena (which will continue as other countries will keep on emitting).
I will like to add another point in the last section.
ReplyDelete4. As private companies generally transfer this increased cost of production over consumers, simply by increasing the output price, what happens if the company is a monopoly or an oligopoly with high market power? The product will become inelastic and consumers have less choices but to consume that product at higher price. This leads to lower consumer surplus.
Completely agree !!
ReplyDeleteI guess the main point here is that, the CPRS will impose costs to the businesses, which will (depending upon the demand elasticity of the product)be passed on to consumers in varying proportions. In fact some firms might incorporate their share of costs into reduced wages of their workers and/or reduced employment (lay-offs).
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