ECON1101 Hand in Question 5 by Kelvin Duong

1. How does a carbon pollution permit scheme work?

The government sets a cap on total emissions and issues permits to
businesses allowing them to emit up to a certain amount. If a business
does not use up its quota for emissions, it can be resold to other
businesses. With only a limited number of permits available, firms will bid
for the permits. Gradually the number of permits will be reduced thus
leading to a large decrease in emission levels over the long term.
2. Why did the former Australian government introduce a carbon tax?
The carbon tax is part of the Green Energy Plan which aims to reduce
carbon emission levels to 5% below 2000 levels by 2020. By setting a
price on carbon, it increases the costs paid by businesses for the
production of goods and utilities. As a result, businesses will increase the
price of products which will prevent excess consumption as costs for
consumption are increased. Firms can also develop new ways for reducing
the amount of carbon emissions, thus reducing the tax paid. This will lead
to an overall decrease in carbon emissions in the country.
3. Explain how the carbon tax pricing currently works in Australia and why
the Federal Government plans to remove the tax.
The current carbon price is as follows:
Entities that release over 25,000 tonnes of carbon dioxide or equivalent
greenhouse gases are required to pay $25.40 per tonne.
The Federal government plans to remove the tax because it will lower the
cost of living from consumers. It will also increase the prices of exports
and will result in Australian products such as coal being less competitive
on the international market.
4. Compare the advantages of the carbon tax with the carbon permit scheme
Advantages
Carbon Tax
Encourages firms to look for
alternative and more efficient
methods for production that will
reduce carbon emissions
Raises revenue for the government

It prevents consumers from excess

consumption as they are required to
pay the social cost.
Simpler than permit scheme, not
subject to strategic behaviour
between firms and the government to
drive up the prices of permits.
Can be applied to individual
consumers whereas the permit
scheme can only be applied to firms.

Carbon permit Scheme

Places a limit on carbon emissions for
the entire nation

Firms have a choice of whether to

develop new technologies, or to
purchase additional permits.
The gradual decrease of permits will
lead to a guaranteed lower emission
level.
Firms can profit by selling their excess
greenhouse gas allowance