Climate change is a common issue that has been discussed in many countries in the world.

The cause of climate change is the heavy use of energy resources that are harmful for the environment. These resources are typically mining products, such as coal, oil or gas. As a result of the usage of these resources, pollution exists, and even worse, it arises the issue of global warming.

If the pollution is not reduced, the world will face severe impact on climate change. An increase in global temperature and the acidity of the worlds ocean, extreme global events and change is rainfall patterns are some of the consequences of climate change. In the more extreme case, it is not only the environment injured by the climate change, living creature are also threatened by this situation (cleanenergyfuture.gov.au, 2011).

In order to reduce pollution and hence slow the process of global warming, many countries, especially developed countries have introduced policies on carbon pollution that is created by emitters. For instance, Finland, Sweden and New Zealand have introduced carbon tax, while the United Kingdom has established climate change levy in showing their contribution in reducing the global emission (carbontax.org, 2011).

Australia is developed country that is considered as a heavy emitter of carbon dioxide since it heavily relies on the coal energy power. As a response to climate change, Australia follows countries mentioned above to bring into public the carbon tax. Carbon tax is a tax on pollution, in particular, the carbon pollution, that is emitted from energy sources (aph.gov.au, 2010). The purpose of carbon tax is to lessen the emissions of carbon dioxide so that the global warming will slow down. This tax is planned to become operational in Australia from 1st July 2012. Starting from this date, approximately 500 of the biggest polluters have to pay a $23 tax on every tonne of carbon they release. The price of this tax will keep increasing until 2015, where the market will determine the cost via a cap and trade emission trading scheme (bigpondmoney.com.au, 2011).

Carbon tax will apply to industries such as mining, electricity generation, stationary energy producers, business transport, waste and industrial processes. The tax will not apply to fuel for households and businesses. Industries such as agriculture, forestry and fisheries also will not be affected by the tax on fuel for onroad and off-road light transport (bigpondmoney.com.au, 2011).

The proceeds from this tax will go to businesses and households. This tax will lead to higher cost for business. To cut this cost, they need to pass it on to customers. The government will give assistance to businesses that meet difficulties in doing that (cleanenergyfuture.gov.au, 2011). Another assistance for businesses is job support to mining industry and investment and innovation support to steel manufacturing industries (bdo.com.au, 2011).

Price on carbon means higher energy costs and also higher cost of living for households. The treasury predicts that the average living costs (CPI) will increase by 0.7% or about $9.90 per week for average households. By acknowledging this, the government made a commitment that more than 50% of the revenue from the carbon tax mechanism will be used to provide tax cuts to households, higher family payments and increase in pensions. This support is permanent and is targeted to the middle and low-income households. The government will also provide additional cash assistance to households with concession cardholders who have a medical condition as a result of a higher price of electricity (acoss.org.au, 2011).

By introducing this tax, businesses in the economy will be encouraged to reduce the pollution that is created from their production activities, and they will do it in the cheapest possible ways. This is true since the smaller the amount of pollution that a business creates, the lower the carbon costs it bears. Further, economists believe that companies, researchers, investors and innovators will have competitive advantages as they can operate their businesses in cleaner ways

(cleanenergyfuture.gov.au, 2011).

Carbon tax is a good action in order to create a better environment. However, the introduction of this tax brings to a great debate in the society. Some groups support the carbon scheme and some others are against it. The purpose of this essay is 2

to analyse the efficiency of carbon tax. This paper will discuss cases for and against the carbon tax. These cases will be examined based on the theory of social responsibility, which will be divided into shareholder and stakeholder theory, and some theories about regulation. At the end of this paper, I will provide the conclusion and recommendation based on what have been discussed. Due to the word limit, this paper may not provide full information, and the discussion may be somewhat limited.

Cases for Carbon Tax

Stakeholder View

Corporate social responsibility has two models: shareholder model and stakeholder model (week 4, 2011). First, the stakeholder model will be discussed as it supports the establishment of carbon tax.

Stakeholder view is introduced by Freeman (week 4, 2011). According to Goodpaster (1991), ethically responsible management is management that considers the importance of not only stockholders but also stakeholders in the process of decision-making. In this context, Freeman (Pitman 1984, as cited in Goodpaster, 1991) interpreted as a group or individual who can affect or is affected when an organisation is achieving its objectives, such as employees, suppliers, customers, government and communities.

Freeman suggests that companies are responsible to protect communities from hazard in the form of pollution, toxic waste, etc. The reason behind this argument is community has an important role when the business is creating the value for its stakeholders. So, in return, the company is expected to work with the local community to reduce any negative impact, as far as possible (Beauchamp, Bowie & Arnold, 2009).

The stakeholder theory then was developed by Goodpaster. Goodpaster (1991) divides the stakeholder theory into two models: multifiduciary stakeholder model and strategic stakeholder model. The first model suggests that all stakeholders have the same important interests, so they have to be treated equally. The latter model argues 3

that the goal of a business is to maximise the benefits and minimise the cost of its stockholders in short-term and long-term period, and the business has to pay attention to other stakeholders interests that have a potential to achieve that objective. In other words, strategic model is a shareholder model that recognises the need to manage the non-shareholding stakeholders (week 4, 2011). Freemans stakeholder model is supported by some communities. From the ethical perspective, the goal of carbon tax is to protect innocent from harm caused by pollution whenever it is possible and compensate them when it is not (theconversation.edu.au, 2011). Since it becomes the duty for businesses, the action on climate change should be executed immediately, even when the cost of reducing pollution exceeds the cost of suffering for polluters. Further, Fiona Amstrong, the Covenor of the national coalition of health groups, the Climate and Health Alliance (CAHA), stated that carbon tax is essential in developing responsibility to reduce global emission since it will impact the health and wellbeing of Australia and worldwide society. Amstrong also expressed that it is a moral obligation of Australia make sure that the economic condition is protected in the future (ethicalliving.com.au, 2011).

Carbon tax is established in order to reduce the global emission. This tax provides benefits to many sectors. Business will get assistance in managing their costs, households will get tax cuts and family payments, and jobs and innovation in particular industries are supported. These advantages show that all stakeholders will receive treatments that are in their interests. So, the theory of Goodpaster applies.

Institutionalisation

The invisible hand theory is also supported by Arrow. In addition, Arrow (1972) argues that there are circumstances where the economic agent should give up its profits in order to accomplish some social goals, specifically to avoid causing harm to other individuals. One of the circumstances is when the business produces pollution.

Pollution makes profit maximisation undesirable to the society. The reason is, the firm does not pay for the harm it imposes to others. There is no beneficial exchange between the firm and others when pollution is created. Because the pollution that the firm imposes to its neighborhood is not paid for, the likelihood that the firm will pollute more is high. As a result, the benefit that the firm or its customers get from the expanded activity is not as great as the cost that is imposed to the society. Nevertheless, since the firm does not pay the cost, the incentive for making profit will continue (Arrow, 1972).

Further, Arrow (1972) explains that institutionalisation is needed to ensure that firms have social responsibility. There are four types of institutionalisation: regulation, taxation, legal liability and ethical codes. In the case of pollution, regulation can play a role in setting maximum standards of emissions or determining the kind of burning that may occur. However, regulation is not flexible enough to meet different situations and may take a long time to be implemented. Arrow (1972) suggests that taxation is probably the most appropriate tool in order to handle pollution since it is more flexible than regulation. By imposing tax, the company can freely determine its own way of minimising the tax burden and find the cheapest way to solve the pollution problem. When demand for the product is high, the company can decide to keep polluting but as a consequences, it will charge higher prices to its customers. This decision tests whether it is worth polluting because as a result, the consumers will pay the pollution they induce. Thus, the violations are paid by the violators themselves.

In Australia, carbon tax will apply for about three years before the economy enters into a regulation system, the Emission Trading Scheme (ETS). Compared to ETS, carbon tax is viewed to be simpler to execute. Also, it will provide an immediate market-based impact on the level of emissions since it designates the cost of pollution imposed on society by polluters. ETS, which set a maximum quantity of greenhouse gasses that can be generated, will create scarcity that leads to increase in prices (cpaaustralia.com, 2009).

A distinguishable advantage of carbon pricing instead of ETS is the carbon pricing generates revenues. The revenues, as have been explained before, are used to 5

provide compensation to businesses and households. Moreover, it is also used to support the innovation in industries that create low level of emissions and protected exporting companies from disadvantage against competitors from other countries (garnautreview.org,au, 2011).

Cases against Carbon Tax

Shareholder Theory

As has been stated above, there are two models introduced in social responsibility theory. The first model, the stakeholder theory, has been examined. Now, the second model will be looked at. The shareholder view is introduced by Friedman. This view suggests that the business is only responsible to maximise profits for its shareholders while operating within the law. According to this view, business has no responsibility to avoid pollution. The reason is, Friedman believes that the theory of invisible hand introduced by Adam Smith, where the general goods is best achieved by letting individuals to pursue their own interest, is justified (week 4, 2011).

Carbon tax receive some criticisms, one of them is from the mining industry. This industry is considered as the one that will suffer the most from the formation of carbon tax since Australia relies heavily on this sector. It is believed that profits of Australian mining companies will decrease as a result of carbon tax. Of course, this is not desirable to their shareholders, as they are looking for profits by investing in companies. Rio Tinto, a giant mining company, believed that carbon tax would lead to losses in their market shares (theaustralian.com.au, 2011). However, according to Citigroup, the finance company, those who suffer the most are the pure play coal miners such as New Hope, Whitehaven and Coal and Allied. The net profit of huge mining companies, such as BHP Billiton and Rio Tinto will only fall by a little (energybusinessnews.com.au, 2011). Given by this information, eventhough it is most likely that the mining industry will suffer, there is still uncertainty which company will suffer more as a result of carbon tax.

Self-regulation

According to Maitland (1985), there is some situation where social responsibility cannot be regulated by law, especially in a liberal democracy. Here, the concept of self-regulation exist. The idea of self-regulation is firms regulate their behaviour by themselves. However, the concept of self-regulation has some limitations.

Maitland (1985) argues that the problem of self-regulation arises from the difference in interests of the firm when it acts as a competitor in a marketplace and when it takes part of the wider group. According to Olson (1965, as cited in Maitland, 1985), firm as a wider group tend to be interested in providing goods that are available to all firms regardless of whether they have contributed to their maintenance or refrained from exploiting them, or as known as public goods. Because the availability of these goods is not affected by the contribution of the firms, each firm can have an incentive to free-ride. This is the interest of the firm as a competitor. Firms want to minimise its pollution abatement costs where the broader group are interested in a cleaner environment. Thus, self-interested firms will not act to achieve the interests of the group. Prisoners Dilemma Another problem of self-regulation is prisoners dilemma in the game theory. According to Hardin (1971, as cited in Maitland, 1985), the theory of collective action is related to prisoners dilemma in the game theory. Firms that do not contribute in the availability of public goods will always be better of, so this strategy dominates another one.

Another important issue of self-regulation is assurance problem. According to Runge (1984, following A.K. Sen, as cited in Maitland, 1985), this problem is similar to prisoners dilemma problem. The difference is, assurance problem argues that firms prefer fair shares. Firms withhold its contribution in public goods because they cannot 7

obtain guarantee that others contribute their fair shares. In other words, corporations can be expected to regulate their own behaviour so long as they are assured that others are doing so. However in the economy, it is hard to predict the behaviour of other corporations. Thus, firm is less likely to engage in self-regulation since there is no guarantee that other competitors also interpret their obligations as strict as it does.

In the action of reducing the global emission, Australia and other countries face conflicting incentives. On the one hand each country will get benefit from the reduction in emission, but on the other hand, they also bear costs by acting so. In this situation, countries may have problem in deciding whether or not to incur the costs. Here, Maitland theory that self-regulation may result in prisoners dilemma problem is relevant. In this situation, it is best for all countries to cooperate. However, it is not easy to trust each other because one wants to gain more than others do. So, each country is facing substantial risk that others will defect and it will be worse off as a result (abc.net.au, 2011).

By imposing carbon tax, Australia is facing this risk that it will be worse off as a result of defect of others. Australia plans that it will reduce its carbon emissions, which be done at an economic cost of $3.2 billion over four years. By doing so, it is believed in 2020 Australia will achieved its target to reduce carbon emission of approximately 530 million tonnes. According to the plan, Australia will still be competitive while reducing 5% of emission, avoided billions of tax and still in a good position to assess the way forward from there if at that time there is still no global agreement (abc.net.au, 2011). Based on this fact, it is clear that Australia faces a great risk because we are not sure if other countries will contribute in reducing the global emission.

Conclusion and Recommendations Carbon tax is Australias way to contribute to ease the bad impact on climate change. This tax will require the biggest 500 polluters to pay for pollution they release to the atmosphere. This tax will start to apply in July 2012 for three years. After that,

Australia will move to the Emission Trading Scheme. Under this scheme, the price of pollution will be set by the market.

From the discussion above, it can be seen that carbon tax will face a serious debate once it is implemented. Although it gives advantages to the society, such as to businesses and households, it is also viewed that some groups may suffer as a consequence. However, given by those criticisms, I believe this program will bring Australia as a whole society to a better environment, as the main goal of this scheme suggests. Everyone in this world wants clean and healthy environment, and this mechanism help Australia achieve that. The government may need to look at some issues that have been discussed above more deeply. I would recommend the government to reconsider the compensation and support given to businesses and some industries since this faces many criticisms. Also, controlling the process of how the tax work is an essential part in order to make this program successful. Finally, through support from the society itself, the goal of this program can be accomplished.

Words count: 2893

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