UNIB10007 Lecture Notes - Lecture 11: Ecotax, Sony Max, Externality
16 May 2018
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TOPIC 11: MITIGATION POLICY INTERVENTIONS
• Government policy options to reduce CO2 emissions
o Both place a price on pollution to internalise the external cost, add to MPC
• Aus GHG’s: 33% electricity, 18% agri, 16% stationary energy, 16% transport, other industrial 6%
o Trying to find policy options to reduce pollution at lowest cost
• Decision points: can be done in businesses + households, rather than just energy production, + in carbon
capture + storage
Policy Interventions to Reduce GHG Emissions
• Taxes – carbon tax, tax on petrol
• Tradable permits – set max pollution quantity (less than Qbau) + allow trade of pollution permits
o Gift Permits: gift to existing polluters (original Europe, now China)
o Auction Permits: have to buy permits Europe now
• Regulations - renewable energy targets, max quantity of electricity, type + use of car
• Subsidies – for renewable energy, carbon farming
Most countries use a mix of the above
Criteria to Evaluate Policy Options
• Efficiency:
o A pollution reduction close to where MAC = MEC to maximise social welfare
o Minimise cost per unity of pollution reduction
• Distribution of costs between households, businesses + government (equity)
o Statutory incidence
o Economic or final incidence
• Simplicity + cost of operation
Putting a Price on Pollution
• Aims to internalise the external cost in private market decisions
• Increases relative cost of pollution intensive production methods
• Increases relative cost of pollution intensive goods + services
• Encourages + rewards projects reducing pollution
Carbon or Emissions Tax - Australia
• July 2012-July 2014, Cost $23 per tonne of CO2 for 370 large firm polluters – fossil fuel, gas,
manufacturers – fell on 60% of pollution
• Collected $8 billion in tax/year – half recycled to households in form of income to offset 0.7% increase in
average consumer prices
• Both creates (renewables) + destroys (coal) jobs
• Resulted in quantity of pollution falling, however consumers have to pay for pollution + change decisions –
yet results in global gain
• Enables us to find cheapest way to produce pollution – only instrument that does this
Emissions Trading Scheme
• Quantity of pollution falls, permit price depends on quantity of pollution + slope of MAC
Effects of Tax or Tradable Permit Scheme on Desired Products
• Putting price on pollution – cost of production increases
• Supply curve shifts to S’ (S’ = S+ C (cost is extra cost for pollution tax or permit)
• Output of desired product + pollution reduces to Q’
• Consumer price rises (incentive to be more efficient) + net producer return falls
• Producers either: reduce pollution methods, or purchase tax/permits – or both
Comparison of Tax + Tradable Permit
