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One of Australia’s largest exports is coal, the burning of which emits significant amounts of carbon dioxide. Using the economic concepts and models introduced in this unit, explain the key differences between a carbon tax and an emissions trading scheme.Critically evaluate the key arguments for and against the carbon tax. Using demand and supply analysis Illustrate how a carbon tax is expected to impact on the market price and quantity traded for a product that creates significant pollution during production





Carbon tax is a tax that is levied on the carbon content of the fuels. It is considered as a form of carbon pricing. The green house gases emissions is caused by the combustion of the fossil fuels since it is closely related to the carbon content of the fuels. A tax is levied on these emissions in order to tax the carbon content of the fossil fuels at the time of the product cycle of the fuel.

The key arguments for and against carbon tax

  • In Favor of carbon tax

The main reason behind the implementation of carbon tax is the reduction of carbon pollution. After implementation of the carbon tax, the total carbon pollution that occurs from consumption of electricity in the national energy market has reduced by 5.3 million tons in the 12 months to May 2014. Australia is one of the largest emitter of carbon pollution and the largest per capita. The reduction of the release of carbon has measurable impact on the carbon pollution in the atmosphere. The carbon intensive industries create negative externalities because the external cost of the emission of carbon is ignored. Carbon tax will put a limit to the emissions cost. The carbon tax will enable the business organizations and the consumers to plan their spending of energy and it will provide greater certainty in the investment decisions. The efficiency of the business organizations will increase. The large initial cost of investment can be saved. Carbon tax will be a source of revenue for the Government. If the carbon tax is implemented then the government can reduce the other taxes. The carbon tax will be redirected to the most affected to ensure that the introduction of carbon tax will be revenue neutral.

  • Against carbon tax

It is argued that the carbon tax will not reduce the emission of the harmful toxic gases. The implementation of the carbon tax will not affect the carbon consumption. Thus the carbon tax will not have an favorable impact on the economy (, 2011). The level at which the tax will result in favorable outcome is yet not known. Thus the carbon tax will through various changes. This will create political issues in the country. The implementation of flat carbon tax will affect the low income families. The low income households will have to pay a higher tax rate. The implementation of carbon tax by a specific political party will create political vulnerability (, 2015).

Affect of carbon tax on the demand and supply

The industries releasing green house gases will be affected by the implementation of the carbon tax. With the implementation of the carbon tax, the cost of production of the industry will increase. With the rise in the cost of production the company has to increase the price of the product. The rise in the price of the product will reduce the demand for the product as the consumers will search for alternatives. This will reduce the supply of the product and the quantity produced will decline. The demand and supply curve will show the effect of carbon tax implementation.

The difference between carbon tax and emission trading scheme

Since July 2012, Australia has had set up its carbon estimating plan. It is normally alluded to as a "carbon tax", additionally as an "Emission Trading Scheme (ETS) with a settled cost". Also the arrangement is to move to an ETS with a skimming cost.

An ETS lives up to expectations by setting a cap on emanations and obliging emitters to hold a license for every ton of Coâ‚‚ that they radiate. The level of the cap decides the quantity of grants accessible. In the event that emitters don't as of now hold a grant, they should either reduce their emanations or purchase a license from an alternate emitter, who should then curtail. This implies that an expense is forced on outflows, equivalent to the cost of purchasing or offering a license. Yet critically it’s not really the value that causes the general cuts in emanations. The cap decides the level of outflows, and the obliged cuts in discharges cause the cost (Kreiser, Duff, Milne & Ashiabor, n.d.). That is, grants have a worth on the grounds that they permit you to abstain from making cuts in emissions. A carbon assessment is kind of the inverse. An expense is added to all outflows, equivalent to the level of the duty, and these reasons individuals to decrease. There is no cap on discharges in an expense based framework. Individuals are allowed to radiate as much or as meager as they like, yet in the event that they do transmit, they must pay the assessment. Not at all like an ETS, under a carbon charge is it the value that decides the level of outflow (Stern, 2007).

Economists contend that, if the business is left to work without any restrictions, green house gas emissions will be extreme; following there is lacking motivation for firms and families to diminish discharges. All things considered, they suggest applying the polluter pays rule and putting a cost on carbon dioxide and other nursery gasses (Sinclair, 2011). This can be actualized either through a carbon charge (known as a value instrument) or a top and-exchange conspire (a purported amount instrument).

A carbon tax forces an expense on every unit of green house gas discharges and gives firms (and families, contingent upon the extension) a motivation to decrease contamination at whatever point doing so would cost short of what paying the assessment. Thus, the amount of contamination diminished relies on upon the level of tax paid. The expense is calculated by evaluating the expense or harm connected with every unit of contamination and the expenses connected with controlling that contamination. Getting the duty level right is key: excessively low and firms and family units are prone to select paying the assessment and keeping on polluting, well beyond what is ideal for society. Excessively high and the expenses will climb higher than would normally be appropriate to lessen discharges, affecting on benefits, occupations and end shoppers (Zhang, Zhang & Zhang, 2013).

By complexity, a cap and trade system sets a greatest level of contamination, a cap, and disperses emanations licenses among firms that create discharges. Organizations must have a grant to cover every unit of contamination they create, and they can acquire these licenses either through a starting allotment or closeout, or through exchanging with different firms. Since a few firms inescapably discover it simpler or less expensive to decrease contamination than others, exchanging happens. Whilst the greatest contamination amount is situated ahead of time, the exchanging cost of licenses vacillates, getting to be more costly when interest is high in respect to supply (for instance when the economy is developing) and less expensive when interest is lower (for instance in a retreat). A cost on contamination is subsequently made as a consequence of setting a roof on the general amount of discharges. In certain glorified circumstances, carbon expenses and cap and trade have precisely the same results, since they are both approaches to value carbon. Nonetheless, truly they vary from numerous points of view (ABC News, 2011).


One distinction is the way the two approaches convey the expense of diminishing contamination. With cap and trade, it has frequently been the situation that allows is given out free of charge at first (known as "grandfathering"). This implies less expensive agreeability for industry in the early phases of the plan, on the grounds that they pay for any additional licenses purchased from different firms – not for the starting tranche of grants given to them to cover the greater part of their outflows under 'the same old thing'. This methodology is clearly well known with industry and clarifies why grandfathering has been utilized, since it causes get firms to acknowledge controls on emanations in any case (Rückert, 2015). By complexity, with an assessment there is a prompt expense for organizations to pay on every unit of nursery gas delivered, so there is a greater introductory hit to the asset report. Anyway while grandfathering is better for close term business gainfulness, it is not so much the best result for society. Surely, it denies the administration of important incomes, which it could bring up in selling the licenses at first, and which could be utilized to lessen different expenses.

What this implies for environmental change approach is wrangled about. In the short term, most economists concur that instability alone contends for an assessment. Environmental change relies on upon the load of nursery gasses in the climate, and in every year the increment in that stock because of new discharges is little, so the earth is most likely not that delicate to the vulnerability about the level of emanations realized by picking an expense, at minimum over a year or two. On the opposite side of the record, the expense of decreasing contamination is very touchy to changes in emanations, since it can be lavish to organizations to change their generation techniques suddenly. In the long haul, be that as it may, it is less clear whether an assessment is best, on the grounds that enormous changes in the load of nursery gasses in the climate may cause considerable natural harm. A few economists prescribe a cross breed model that may offer the best of both planets (The Conversation, 2011). This has a tendency to include a top on discharges (to control the amount of contamination), yet with modification systems, for example, a carbon value floor or roof, to keep the cost of a license inside satisfactory limits. Mixture plans have their own particular issues, in any case, for example, more prominent many-sided quality and more intercession by the controller in the license market. Whichever of these arrangements is favored to place a cost on carbon, they speak to only one of various approaches expected to cut nursery gas discharge (the Guardian, 2013)


Carbon tax and emission trading scheme are two ways of reducing the carbon emissions. This will prevent the formation of the green house gases which has adverse effects on the environment. The implementation of carbon tax will have negative impact on the production of certain products but it will protect the economy on a larger scale.


ABC News,. (2011). Explained: Carbon taxes, emissions trading and direct action.,. (2015). Carbon taxes – Parliament of Australia.


Kreiser, L., Duff, D., Milne, J., & Ashiabor, H. Market based instruments.

Rückert, K. (2015). Longlife: Development of standards, criteria, specifications (pp. 260-300).

Sinclair, M. (2011). Let them eat carbon. London: Biteback.

Stern, N. (2007). The economics of climate change. Cambridge, UK: Cambridge University Press.

The Conversation,. (2011). Explainer: The difference between a carbon tax and an ETS.

the Guardian,. (2013). Carbon tax v cap-and-trade: which is better?.,. (2011). The Impact of a Carbon Tax on the Australian Economy: Results from a CGE Model*.

Zhang, R., Zhang, Z., & Zhang, J. (2013). LISS 2012. Berlin: Springer.


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