Environmental Economics and Taxation

QUESTION:

Preserving the environment is high on the agenda for both governments and society. Governments around the world are using a variety of instruments to change environmentally harmful 

1. Identify a current or proposed Australian tax that has aspects of an environmental tax. Explain your choice.

2. Explain how environmental taxes can correct for externalities.

3. Discuss whether the environmental tax you identified in (i) is a fair tax. 

ANSWER:

As environmental issues are considerable nowadays, governments among nations are implementing variety of instruments to protect and improve the environment. In particular, Australian Government has many interventions to prevent environmental negative behaviour; those include market based instrument, command and control policies, and tax system. However, this essay will only focus on carbon tax which is known as an Australian environmental tax as well as how it correct for externalities. It will also examine whether the tax is fair or not.

Most of environmental problems including air pollution are caused by environmental externality. According to Frijters, Dulleck and Torgler (2008, 234) environmental externalities is a source of market failure which often arises in environmental issues because it is very difficult to exclude individuals from using environmental resources or from polluting a common resource. To correct this externality and limit environmental deterioration, D’Ascenzo (2003) states that tax system could reduce different types of environmental expenditure by providing an incentive to undertaken that expenditure. For instance, Australian Government has used a carbon tax to maintain the level of carbon dioxide emissions in nation (Cornwell 2006, 65). Humphreys (2007, 2) explains that carbon tax involves manipulating the price and quantity of carbon released into in the atmosphere from human activity as it sets a fixed price of carbon and allows the quantity emitted to fluctuate. The carbon tax has helped to reduce emissions of 20% of 1988 levels by 2005 (Cornwell, and Creedy ). Cornwell and Creedy (2006) explains that the carbon tax can reduce carbon dioxide emissions because the carbon tax would increase the price of fossil fuels and thus consumer prices, both directly for fuels and indirectly for manufactured goods. These price changes would reduce the levels of final demands, and therefore fossil fuel use and aggregate carbon dioxide emissions.

Also, the following graph can explain how the tax can correct for externalities thoughtfully.

Tax

Assuming that there is a polluter A; in figure 1, MC_p is the private marginal cost curve for polluter A; MC_s is the social marginal cost curve made by polluter A; and D is the social demand curve.

If there is no outside control, the polluter A will produce the product with quantity Q_m to gain maximum profit, which is an “efficient quantity” only for the polluter A rather than the whole society. If put the social cost into polluter A, it will effective for the whole society. Therefore, the quality of polluter A should be in the intersection between social cost and social demand which means firm A should produce the products with Q*. To change polluter A’s producing quantity from Q_m to Q*, it is effective that add an extra cost which is tax into the private marginal cost of polluter A. From the figure 1, a new marginal cost curve appeared which are MC_p, and the vertical distance between A and P* will be the externality tax.

Carbon tax is a fair tax as it brings many benefits to the environment and society….states that with a $30 per tonne carbon tax could be used to replace the current fuel taxes with little or no economic cost.  This has an effective reduction of 75% in the fuel levy, which would lead to a reduction in petrol prices by about 30 cents per litre, and help to offset recent high petrol prices (Humphreys 2007, 6). In addition, the carbon tax can encourage technology transfers and reduce the tension between environment protection and poverty alleviation (Shinji, and Jin 2009). Furthermore, with a $30 per tonne carbon tax, the government could lift the income-tax-free threshold to $15,000 (Humphreys 2007, 6). As a result, the carbon tax could improve the environment, technology, and people’s living standard.

As this essay has showed, a carbon tax was introduced to protect the environment from damage as it can reduce carbon dioxide emissions. It also contributes to the government tax revenues and improves people’s living standard by reducing income tax and replacing fuel taxes. Moreover, the carbon tax has improved the technology and created better perspectives between environment protection and poverty mitigation. Therefore, the carbon tax is an effective method used to prevent environmental harmful behaviours as well as increase people’s living standard within environmental aspect.