Australia instituted a carbon tax approach in 2012, where all large firms were required to pay a price for each ton of carbon emissions they generate. The government of Australia set the carbon tax at $20 per ton in 2012, and large electricity producing firms comprised the bulk of firms participating in this carbon market. In 2014, the government of Australia repealed the carbon tax (i.e. they set it to $0). Using two different graphs of the market for carbon emissions and the market for electricity, illustrate the effects of repealing the Australian carbon tax on i) carbon emissions in Australia, and ii) the price of electricity that Australian consumers pay. (Note: Draw separate graphs for the carbon market and the electricity market)
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The Market for Carbon Emissions: Before the repeal of the carbon tax, the demand curve for carbon emissions was downward sloping, indicating that firms would emit less carbon as the price of carbon emissions increased. The supply curve was vertical, indicating Show more…
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Economic theory from this unit suggests that national governments can achieve a target level of carbon emissions by setting a carbon tax (per unit of CO2) at the appropriate level. In line with this theory, between 2012 and 2014, Australia introduced a carbon tax starting at 23 AUD/tonne of CO2, with the intention of increasing it over time until reaching the desired level of carbon emissions. Following the introduction of the policy, the most affected industries in Australia lobbied on the grounds that the added pressure on their profit would force them to shut down with consequences for unemployment. In response, the Federal government decided to compensate the most affected industries with lump-sum subsidies that were funded with revenue from the tax on carbon emission levels. Considering this background, do you consider this statement to be true or false: "At the end of the day, nothing changes with the introduction of the carbon tax. Because the industry receives back the money that they pay, they will continue to emit the same level of CO2." True or False
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Emissions Tax One action that government could take to reduce carbon emissions into the atmosphere is to levy a tax on fossil fuel. This tax would be based on the amount of carbon dioxide emitted into the air when the fuel is burned. The cost-benefit equation $$\ln (1-P)=-0.0034-0.0053 T$$ models the approximate relationship between a tax of $T$ dollars per ton of carbon and the corresponding percent reduction $P$ (in decimal form) of emissions of carbon dioxide. (Source: Nordhause, W., "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Yale University, New Haven, Connecticut.) (a) Write $P$ as a function of $T$. (b) Graph $P$ for $0 \leq T \leq 1000 .$ Discuss the benefit of continuing to raise taxes on carbon (c) Determine $P$ when $T=60$ dollars, and interpret this result. (d) What value of $T$ will give a $50 \%$ reduction in carbon emissions?
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Carbon dioxide emissions have been linked to global warming. The following table lists some possible public policies aimed at reducing the amount of carbon dioxide in the air: For each policy listed, identify whether it is a command-and-control policy (regulation), tradable permit system, corrective subsidy, or corrective tax: Policy Type 1. Command and Control Policy 2. Tradable Permit System 3. Corrective Subsidy 4. Corrective Tax Public Policy 1. Trees take carbon dioxide out of the air and convert it to oxygen, so the government funds a tree-planting initiative by offering $400 to any citizen who plants a tree. 2. The government orders every factory to adopt new technology that reduces carbon dioxide emissions into the atmosphere. 3. The government limits total carbon dioxide emissions by all factories to 150,000 tons per year. Each individual factory is given the right to emit 180 tons of carbon dioxide, and factories may buy and sell these rights in the marketplace. 4. The government charges factories $400 for every ton of carbon dioxide they emit.
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