The industrial revolution ushered in a new phase in the history of mankind. Scientific inquiries have stimulated the development of new technologies, which in turn, have been utilized effectively by avid entrepreneurs for larger scale production of goods and service ostensibly to enrich the lives of people (Rao 2000). In spite of many breakdowns in the process of economic development, the living standard of the average person, at least one not residing in a despotic country, seems now to have reached an unprecedentedly high level (Rao 2000).
However, advanced technologies and their large scale applications, if not properly managed, tend to inflict intense and irrevocable damage to natural environments (Gaan 2008). The new technologies brought in by the industrial revolution are characterized by the massive consumption of fossil fuels, particularly coal and oil (Gaan 2008). An excess burning of fossil fuels will disturb the atmospheric equilibrium and will heat up earthâ€™s surface. The impact of global environmental degradation is most painfully felt by developing nations because agriculture and related sectors of the economy are the most sensitive to changes in climatic and ecological conditions due to global warming (Gaan 2008). Global warming also cause the horizontal line to go up, with the global temperature keep increasing, the ice from Antarctica and the arctic ocean will begin to melt, seawater is going to rise, follow by this matter, some of the small island will be inundated when times up (Gaan 2008).
Carbon tax policy and emissions trading system policy are two major policies to reduce the effect of environmental crisis.
Carbon taxes are one of several incentive-based instruments for reducing greenhouse gas emissions. They can be imposed on either the production or consumption of fossil fuels, in proportion to carbon content, and result in increases in their effective prices (Sanderson and Isiam 2007). Fuel users respond by substituting away from heavily taxed fossil energy sources to those with lower taxes, as well as to non-fossil energy sources (Sanderson and Isiam 2007). On a broader level, other aggregate inputs such as capital, labour and materials are substituted for energy. More indirectly, there is a shift away from fossil fuel intensive inputs and final goods and services. In the longer-run, carbon taxes may stimulate the development and adoption of technologies that reduce fossil fuel usage in capital goods and consumer goods (Sanderson and Isiam 2007). Most economic analyses of carbon taxes to date have been performed at the national or multi-country level.
However, there is danger in preceding with analyses this broad. Both economic and environmental impacts of carbon taxes are likely to vary significantly by region, and national or multi-country averages belie the extremes at the regional level both positive and negative (Rainish, Adam and David 1999). A full understanding of the impacts of carbon taxes thus requires that the national and multi-country models be supplemented with regional-level models (Rainish, Adam and David 1999). Any public policies to cushion or adjust the burden from carbon taxes can be much more effectively targeted if it is known which sectors in which regions are likely to be the most adversely affected.
A carbon tax can be implemented in the form of an ad valorem tax on the production or consumption of fossil fuels, with the tax rate typically based on the carbon content of fossil fuels (Rainish, Adam and David 1999). Impacts across countries are expected to different significantly between these two alternatives. A national production tax collected by the countries producing fossil fuels would be more beneficial to them than a consumption tax collected by importing countries (Rainish, Adam and David 1999). This is because the prices, net of a consumption tax, that exporting countries world receives would be much lower than if the tax were collected by exporting countries (Rainish, Adam and David 1999). Furthermore, Impacts would also differ depending on the ownership of those resources in the exporting country. If the resource is owned by foreign companies, a producer tax will continue to provide revenues to the government, with the foreign companies bearing a major share of the loss in revenue due the decrease in prices (Rainish, Adam and David 1999).
The revenues that gain from carbon tax, with regard to use of these revenues, the options are either for the government to retain them reduce the government debt, or for them to be recycled into the economy by offsetting reductions in order taxes (Paul 1994). The former option, as with any deflationary economics shock, could be expected to reduce GDP substantially (Paul 1994).
Emissions trading system is also another policy that are being used by governments to reduce greenhouse gas emissions. Under this policy, the government will set a limit on the level or quantity of greenhouse gas emissions based on the amount of pollution that the environment can sustain (Caney 2010). Companies with lower greenhouse gas emissions are legally to trade their carbon credits to other companies that excess their carbon emission limits.
Some have proposed a scheme in which persons have individual permits which allow them a certain amount of greenhouse gas emissions. Under an Emissions trading system each person should be allocated a permit (Caney 2010). However, by contrast with the individual carbon permit system, permit holders do not need to use these in order to engage in activities which involve the emissions of greenhouse gases (Caney 2010). Rather the proposal is that firms are required to purchase enough permits to cover their own greenhouse gas emissions. Under this system, individuals will then sell their permits to intermediary institutions such as banks and post offices, and firms purchase the permits they require from these intermediaries (Caney 2010). Firms might increase their prices to cover the extra cost but individuals benefit from the money generated by the sale of their permits. The emissions permits can be traded by auctioning or be given away freely by government (Caney 2010). Companies can optimize these processes, buy or sell permits until the marginal cost of lowering their emission equals to the market clearing price for permits (Caney 2010). Furthermore, credit supply is fixed and therefore, the prices float according to the excess quota for another company (Caney 2010). Those companies that wish to reduce their emissions can profit by selling their credit to other companies that have more emissions to release.
On the other hand, fixed level of carbon emissions is a major weakness of cap-and-trade policies because of large uncertainties about the costs and benefits of emissions reductions (Caney 2010). Cost of the emissions will make financial hardship and if the cap is setting too low it will certainly brings many negative feedbacks to the entire economy. However, higher cap will lose out on an environmental benefit due to low abatement costs (Caney 2010). If the cap is being set at a high level, the cap and trade system will be become inefficient. Meanwhile, if the cap is being set too low, it will also cause the big negative impact with economy.
Emissions trading help achieve maximum greenhouse gas reductions at minimum cost (Kneteman 2010). Without a carbon market, greenhouse gas emissions like most forms of pollution are production externalities that are all too easily ignored by emitters (Kneteman 2010). This creates a situation of market failure whereby companies are rewarded financially for maximizing externalities in order to minimize costs. Emissions trading correct this failure by placing a monetary value on greenhouse gas emissions and forcing emitters to incorporate the cost of carbon emissions into the cost of production (Kneteman 2010). Emissions trading also provide flexibility to market participants. Emitters can decide which option is the most cost-efficient way to reduce their emissions, purchase excess allowances from others with cheaper abatement options or invest in offset projects (Kneteman 2010).
In an emissions trading system, emission reductions can be achieved at the lowest possible cost to participants in the system. For example, the U.S. Acid Rain Program employed an emissions trading system to reduce sulfur dioxide and nitrogen oxides emissions from power plants (Kneteman 2010). Emissions were reduced 40 per cent at an estimated cost savings of $20 billion, which was a 57 per cent cost reduction below command-and-control alternatives (Kneteman 2010). The advantages of forming a North American emissions trading system will include lower overall costs and less carbon leakage (Kneteman 2010). The theory of emissions trading rests on the assumption that larger markets are better able to lower the overall cost of compliance. As a result, isolated state-level trading regimes will pay a higher price for compliance than if they are joined in a larger market. Carbon leakage occurs when energy-intensive industries relocate from regions with carbon controls to those without and then export their carbon-intensive products back to regulated countries (Kneteman 2010). Leakage hurts the economies of the states with emission regulation and undermines attempts to reduce net greenhouse gas emissions. Although creating a North American emissions trading system will not reduce the risk of international leakage, it will reduce leakage concerns among continental competitors (Kneteman 2010).