Carbon Tax Essay

The introduction of the carbon tax in Australia. Recently, the carbon tax issue has been gaining increasing attention in Australia due to its function of reducing greenhouse gas as well as its extensive economic impacts on a range of industries, such as tourism and hospitality. The conceptual meaning of the carbon tax is “a levy applied to various operations that generate carbon dioxide” (Covey, 2009, p. 329). Such a tax is introduced to achieve a desired national emission target (Covey, 2009).The introduction of the carbon tax in Australia is derived from the serious environmental issue of climate change.

According to The Economist (2011), Australia’s emissions measured on a per capita basis are the largest of any developed country, mostly because Australia produces approximately 80% of its electricity from coal which is one of the sources of energy directly measured by greenhouse gas emissions. Therefore, considering the adverse consequence of climate change, an effective long-term solution is required to achieve fundamental shifts in consumer and business behaviours (Hoque et al. 2010). The increasing concerns about the carbon tax can also be attributed to its profound impacts on the market in which individuals and businesses are involved. Clarke (2011) claimed that the carbon tax will have significant effects on markets for goods involving carbon intensive inputs as well as on the actual markets for these inputs and for their substitutes and complements. Also, it cannot be neglected that the introduction of the carbon tax as a climate change policy is a reflection of the Australian Government’s objective to cut greenhouse gas emissions.

Specifically, the Australian Government has raised its progressive target to cut its carbon emissions by 80% of their 2000 levels by 2050 (The Economist, 2011). This report investigates the above mentioned introduction of the carbon tax in Australia as closely interconnected to with the dominant environmental issue, the dynamic market and the governmental objective to limit emissions. The predicted impacts of the carbon tax will be examined in this report in relation to economic theories and assessment models.This report will further address the implications of the carbon tax for the tourism industry and its consumers in the short and long term.

2. 0. Predicted economic impacts of the carbon tax and methods for impacts assessment. 2.

1. Future economic impacts. The carbon tax as a climate change policy will exert extensive economic impacts on the market. The simplest manifestation is that the consumption of carbon-intensive products will decline and their price will rise.

This phenomenon reflects one of the key functions of the tax which is “to raise price to discourage consumption of demerit goods or goods with harmful environmental impact” (Tribe, 2011, p. 424). From this perspective, the carbon tax can be viewed as a form of market intervention to address the climate change issue by discouraging consumption of carbon-intensive goods through high price. On the other hand, the future economic impact of consumption decline and price rise can also be predicted based on the interrelationships of the supply and demand of goods and their relative market price.Businesses will reduce their output when the carbon tax payment and their abatement expenditure increase the marginal cost (Amin, 2009). This effect shifts the supply curve to the left and equilibrium price rises (Tribe, 2011). Consequently, as in their market price increases, the consumption of carbon-intensive products will decline (Tribe, 2011). For example, with the imposition of the carbon tax, tourism businesses dependent on aircraft will face fuel excise costs going up by more than 150 per cent, which will escalate the price for consumers (Felicia, 2011).

Another future impact of the carbon tax is that the price of the substitutes for carbon-based resources will rise and the price of the complements of carbon-intensive resources will decrease. This prediction is built on the theory that a rise in the price of one good will lead to a rise in the demand for its substitutes and that an increase in price of one good will lead to a fall in the demand for another if they are in joint demand (Tribe, 2011). It is important to focus on such inter-sectoral effects when examining the impacts of the carbon tax in an open-economy context.This is because “the higher price in the environment-intensive industry will induce spillovers to other markets and industries which produce substitutes or complements” (Amin, 2009, p. 333). For example, the carbon tax will impact on the natural resource market through effects on the demand for substitute resources such as solar power and nuclear fuel. Similarly, the carbon tax will reduce demand for inputs which are complementary to the burning of carbon-intensive energy, such as fossil fuels (Clarke, 2011).

2. 2.Assessment model. In order to assess the future economic impacts of the carbon tax, the CGE model (Computable General Equilibrium models) can be introduced.

This model is widely used as a standard tool for the quantitative analysis of environmental policies, such as the carbon tax, in terms of their costs and benefits (Loschel, 2006). This is because the CGE model can “provide answers on the economic effects of changes of the introduction of new taxes or subsidies in a coherent and consistent way” (Amin, 2009, p. 334).Based on the general equilibrium theory, CGE model is a standard tool to assess the future impacts of the carbon tax since any implied change in relative market prices will induce general equilibrium effects throughout the whole economy (Amin, 2009).

Additionally, the CGE model “focuses on traditional economic performance indicators and environmental impacts in terms of emissions from fossil fuel combustion, most notably CO2” (Amin, 2009, p. 334). Therefore, it is helpful to evaluate the effects of environmental policies, such as the carbon tax within the framework of the CGE model.In addition to the CGE model, the impact of the carbon tax can also be assessed with Keynesian theory, monetaristic approaches, supply side models, and dynamic input-output models (Amin, 2009). These macroeconomic models focus on the impact of environmental policy on unemployment, inflation, disequilibrium in markets, cyclical developments, convergence and stability, long-run growth and forecasting (Amin, 2009).

3. 0. The implications of the carbon tax for tourism industry and its consumers. 3. 1.

Short-term implications.In the short term, the introduction of the carbon tax will have three main dimensions of implications for tourism industry, which are the inbound tourism market, small tourism businesses, and influence on consumers in the tourism market. Carbon taxes will unavoidably impact on Australia’s inbound tourism in the short term. This is due to the assumption that if a destination imposes climate change policies such as the carbon tax, which raise the cost of inbound tourism, tourists will tend to substitute for competitor destinations (Hoque et al. , 2010, p. 45).

In addition, as tourism operators are faced with the challenges of a high Australian dollar, the carbon tax will make an Australian holiday even less price competitive (Needham, 2011). Declining inbound tourism will hurt the many regional communities that rely on the tourism dollar (Needham, 2011). Secondly, it cannot be neglected that, faced with the carbon tax, many small tourism businesses will have little capacity to engage more energy efficient systems in order to find savings (Felicia, 2011). The profit margins of these tourism operators are so low that any increase in operating costs will push them over the edge (Felicia, 2011).Thirdly, for customers in tourism market, the carbon tax will hit the poor more than the rich. This is due to the fact that “monopolists in tourism industry subject to the carbon tax tend to produce less than the socially desired output and charge a socially excessive price” (Clarke, 2011, p. 127).

For example, since major airline companies in Australia will face increased costs because of the carbon tax, they will pass the costs to consumers in their ticket prices, which means more impacts on price-sensitive consumers (Ferguson, 2011).In addition, as the carbon tax is potentially regressive, the impact of a flat carbon tax will be highest on the lowest income households. However, this effect can be offset to some extent by the greater consumption of higher income households (Nielson, 2010). Furthermore, the carbon tax will affect consumer confidence because the uncertainty will lead to less spending on discretionary items, such as holidays (Bartlett, 2011). 3. 2. Long-term implications. The long-term implications of the carbon tax for the tourism industry focus on economy adjustment, the quality of tourist resources, and influence on consumer decision-making.

Firstly, the supply adjustment and demand shift stemming from the involvement of carbon taxes in the market will adjust the economy away from carbon-intensive technology (Clarke, 2011). According to The Economist (2011), the Australian Government claimed that 40% of revenue from carbon tax will help businesses and industry to switch to cleaner forms of energy. In addition, the carbon tax will stimulate the building of eco-hotels and eco-tourism.

This is because the carbon tax mechanism can ncourage the hospitality industry to adopt solutions for the reduction of pollution (Roller ; Dombrovski, 2010). Secondly, the carbon tax will help to improve the quality of tourist resources and attractiveness of tourism destinations as tourism is closely dependent on and susceptible to climatic conditions and natural resources (Hernandez ; Ryan, 2011). Thirdly, the carbon tax will influence tourists’ opinion and decision-making in the long term with increased recognition of responsibility for climate change (Hernandez ; Ryan, 2011).

Although a price on carbon pollution will make carbon-intensive products more expensive, in the long term, it will make sustainable products cheaper and help consumers change to a different way of doing things with lower emissions (Kippen, 2011). 4. 0. Conclusion.

In conclusion, the introduction of the carbon tax in Australia is based on the current environmental issues, the market effect and the government’s objective to limit emissions. In terms of future economic impacts, the carbon tax will affect the consumption and the price of carbon-intensive products through the effect on the supply and demand in the market.Also, the carbon tax will influence the price of the substitutes and complements of carbon-intensive products and resources. These future impacts can be assessed with CGE models. In the short term, the carbon tax will influence the inbound tourism market, small tourism businesses, and consumers in the tourism market. In the long run, the carbon tax will help to adjust the economy, improve the quality of tourist resources, and achieve a reduction in emissions by influencing consumers’ decision-making.

(1680 words) 5. 0. Reference List Amin, A. (2009). Computable general equilibrium techniques for carbon tax modeling.

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