Do we have a responsibility to reduce carbon emmissions?

In his press briefing in Australia on the 16^th of November 2011, Mr. Barack Obama; president of United States, showed his support for the Australian Carbon tax pronouncing it a bold strategy and expressed his concern for climate change stating that ‘human activity was contributing to it and that we have a responsibility to reduce our carbon emissions’.

Global warming and climate change has become one of the most widely talked about topics in the past few years and many believe that increased carbon emissions through human activity causes the temperatures to rise and could have a negative impact on our environment. Since 1970s, human activities such burning fuel, gas, coal; has caused average temperature to rise by 0.4c with the carbon dioxide level at 386 ppm (parts per million) now, and if it continues to rise at the present rate, it could cause sea levels to rise, affecting agriculture and water availability adversely and destroying the habitat of animals and plants. As Mr. Obama said in his speech we are responsible to reduce these emissions, if we were to sustain the current environment, thus governments need to intervene and adopt the most efficient means to combat climate change and reduce carbon emissions.

One way in which carbon emissions could be reduced is by adopting an environment tax. Definitions of green taxes include Pigouvian and indirect taxes, on goods whose use can damage the environment such as excise taxes on gasoline; and environmental related provisions in other taxes. Indirect taxes aim to reduce carbon emissions by increasing the cost of production and raising the price, thereby reducing the supply and usage of the good detrimental to the environment. Pigouvian taxes set rates according to the amount of greenhouse gasses emitted, which are negative externalities:(third party effects or spillover effects), and aims to internalize the externality by increasing the firm’s marginal private cost until it equates with the marginal social cost.

The diagram above illustrates how a Pigouvian tax such as carbon taxes reduces the usage of goods that are harmful to the environment and leads to the socially optimal level of output. In the free market without the tax, the firms would be producing an output of Qp at the market price where their marginal private cost equals marginal private benefit. But at this output, pollution exists to an extent that is not socially favorable. Thus, governments should levy a tax, which increases the first firm’s marginal private cost to the marginal social cost. This would reduce the quantity traded to Qs, the socially optimal level of trade and increase the price to the optimum price, thereby making the polluter pay.

The greatest advantage of taxes is that, encourages firms to find cleaner ways of production. As the cost of production rises and ultimately the price of their products rise, firms would see a decrease in the quantity demanded, and firms who wish to be competitive would need to find more environmentally friendly ways of production. Whistle’s Meadow Park in Canada, installed solar panel and a geo exchange system because of the carbon tax, and this has greatly reduced propane consumption in their community center.

Despite Mr. Obama advocating the Australian carbon tax, it comes at a cost to both the consumers and producers. The environment taxes have the disadvantage of reducing consumer welfare. This is because producers are able to pass the tax on to the consumer depending on the price elasticity of demand, which would result in the consumers having to pay a higher price.

Also, the raised prices could mean the producers lose competitiveness to those who do not have a carbon taxes imposed up on them. The Australian car industry forecasts the carbon tax would increase their production cost by $412 per vehicle and would undermine further investment and their ability to sustain jobs. This could even lead to a decline in exports and increase in imports of cars.

We also need to take into account that setting a tax in such a way that marginal private cost equal to the marginal social cost is going to be difficult. Government bodies that set the tax may not know what the optimal social cost should be.

Another policy as Mr.Obama mentioned, which could be used to reduce carbon emissions, is the cap and trade system or the carbon trading system. Under this system, an emission limit is fixed and then individual companies/countries are given/or has to purchase carbon credits which allows them to emit certain levels of carbon dioxide. The EU Emissions Trading System(EU  ETS) is the biggest such scheme in the world covering 30 countries and 11000 power stations. This system is efficient because, it allows companies who fall short of their carbon cap to sell their carbon credits to those companies who exceed their limits. This could encourage companies to be more environmentally conscious and reduce their carbon footprint just so that they could sell these permits to those companies who have trouble keeping carbon emission levels below the cap.

But this system has its limitations because setting a carbon cap at the optimum level would be difficult. If the cap were set too high, it wouldn’t encourage producers to finder cleaner ways of production. And if it was set too low it could hinder economic growth. The EU ETS, has gathered a lot of criticism because; many believe that in some industries there are too many allowances and companies are able to sell their carbon credits for a great profit, also the price of carbon credits dropped to 0 during 2006 and it is likely to happen again, and companies in the energy intensive sectors have moved out of Europe to avoid these carbon limits (Carbon Retirement n.d), these factors would affect Eurozone growth rates.

The factors above would help to curb carbon emissions to some extent but a better suited long-term strategy to address climate change would be a strategy such as the one which Americans have adopted, investing in clean energy research such renewable energy sources which emit little or no carbon. This is because the both environment taxes and, cap and trade systems, still emit carbon into the atmosphere contributing to climate change whereas the renewable sources are more environmentally friendly.

There are other methods too to reduce our carbon emissions, such as carbon offsetting planting trees to offset the carbon emitted but many see this as an approach to not change our ways. Carbon Capture and Storage whereby carbon emissions are captured in the plants and stored underground is also one strategy, which we could adopt, but this strategy is expensive.

It is also worth pondering on Mr. Obama’s accusation that human activity is contributing to climate change. A research observed climate changes since 1850 is linked to predictable and cyclical, naturally occurring events in Earth’s solar system with little or no help from us. Thus, carbon emissions into the air may have a far less impact on climate change than what most people believe.