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8.7 The responses by economic agents to improve environmental sustainability
– Kenneth Boulding, economist
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As consumers, all of us affect the environment by what we buy, how we use it and the way we dispose of it when it is no longer useful. On a national level, the Australian Consumers’ Association acts as a pressure group by raising environmental issues. For example, in its magazine, Choice, articles have been run about product durability, energy efficiency, and so-called ‘green products’ sold by some manufacturers. These are areas of concern which impact on the demand for non-renewable resources and the disposal of waste. Over recent years, there has been a massive shift in consumer support for improving environmental sustainability. This is shown in the two graphs making up Figure 8.17. For instance, between 2013 and 2020 believers in climate change have increased from 20 per cent to nearly 80 per cent of Australians surveyed, and the proportion noticing a lot of impacts of climate change has risen from around 33 per cent to about 48 per cent. It is this change in consumer attitudes that can drive climate action.
FIGURE 8.17 The change in Australian consumer attitudes towards environmental sustainability Per cent of ‘yes’ responses 20% 0% 2013 2014 2015 2016 2017 2018 2019 2020
Do you believe that climate change is occurring? How much are you experiencing the impacts of climate change? 80%
50%60%
40% 40% 30% 20% 10% 0% 2016 2017 2018 2019 2020
“A lot” “Not very much” Source: ABC, ‘Climate change worrying more Australians than ever before, Australia Institute report reveals’, see https://www.abc.net.au/news/2020-10-28/australia-institute-2020-climate-change-report-concern-growing/12764874. In another survey, over 91 per cent of both households and businesses were concerned about the environment and environmental sustainability, and more than 70 per cent said they were prepared to pay extra for products that were sustainable (see HP Australia and Planet Ark, October 2021, see https://breakdownthebeast.com/ report.pdf). To some extent, the change in consumer’s attitudes towards the environment has been a key in shifting opinion amongst other economic agents. Starting with protests amongst a few dedicated activists, concern and information about this issue have grown. Increasingly, better knowledge has helped reduce market failure and change consumer behaviour, by encouraging people to make better choices when buying products. 8.6.2 A business viewpoint on environmental sustainability UNCORRECTED PAGE PROOFS Until recently, many businesses tended to downplay negative externalities and environmental concerns associated with market failure. This was probably because to do otherwise would have meant higher costs and lower profits. Some attempted to reassure both governments and the community that their activities were not creating significant damage. They also tended to reject the need for direct government environmental
regulations or intervention in the market, instead promoting commercial interests through organisations such as the Australian Mining Council, the Forest and Forest Products Industry Council, the Business Council of Australia. For instance, the forest industries group conducted a campaign to extend logging licences in state forests, whilst the miners pushed for an additional uranium mine and operations in Kakadu National Park. But what a difference a few years can make. Recently, things have changed. Look at the following statement from the Business Council of Australia (BCA). The momentum for change is overwhelming. The BCA believes that the momentum for moving towards net zero by 2050 is unstoppable. The pace and scale of change is accelerating globally. Australia is at a crossroads: we can either embrace decarbonization and seize a competitive advantage in developing new technologies and export industries; or be left behind and pay the price. The case for Australia to achieve net zero emissions by 2050 is compelling: • The science tells us the climate is changing at an unprecedented rate. We must limit global average warming to as close to 1.5°C by 2050 and below 2°C, in alignment with current Paris Agreement objectives. Unchecked climate change over the next 50 years to 2070 would amount to a $3.4 trillion loss to Australia’s GDP (net present value).1 The recent IPCC report underscored the urgency of action to limit temperature rises and increasingly frequent and extreme weather events. • The economic cost of inaction is significant. The Technology Investment Roadmap estimates that low emissions technologies could deliver $30 billion a year of new export revenue from energy-intensive, low emissions products by 2040. To capture this economic opportunity, Australia must act now to invest in the development and deployment of these new technologies and become a world leader. • Demand for our exports at risk. Australia’s major trading partners are reorientating their economies and shifting demand away from carbon-intensive imports. Fourteen of Australia’s largest 20 trading partners — including the United States, United Kingdom, Japan and South Korea — have committed to achieving net zero emissions by around mid-century. This covers over 70 per cent of our two-way trade and 83 per cent of our exports. Our trading partners are also substantially increasing their 2030 ambitions, with the United States adopting a 50 to 52 per cent reduction on 2005 levels by 2030. • Capital markets are moving. Former Bank of England governor Mark Carney recently warned that banks and asset managers controlling $120 trillion worth of balance sheets wanted disclosure of investments in fossil fuels. In meetings with shareholders, BCA members report that environmental, social and governance (ESG) and specifically decarbonisation plans are no UNCORRECTED PAGE PROOFS longer a separate or side issue but have become core to investors’ portfolio allocation decisions. • Net zero from the bottom up. All states and territories have signed on to the 2050 target and are taking decisive actions such as increasing their interim targets, implementing electric vehicle policies, and creating renewable energy zones.
• Business is leading. Domestic and international companies are rapidly adopting net zero and ambitious internal decarbonisation targets. Net zero commitments made by ASX200 companies more than tripled in the past year. A quarter of ASX200 companies or 50 per cent of the collective ASX200 market capitalisation is now covered by net zero commitments. A recent survey by KPMG found that 84 per cent of Australian CEOs believe the upcoming 26th UN
Climate Change Conference of the Parties (COP26) in Glasgow meeting must inject necessary urgency into the climate debate.
Source: Business Council of Australia (BCA), ‘Achieving a net zero economy’, October 2021, https://d3n8a8pro7vhmx. cloudfront.net/bca/pages/6612/attachments/original/1633693581/BCA_Achieving_a_net_zero_economy_-_9_October_ 2021.pdf?1633693581. Business action on climate and the environment is more than just talk. Some firms have taken it upon themselves to become more environmentally sustainable by making changes to the way they operate and investing in technological solutions to reduce emissions. For example: • In wine production, Australian companies like Tahbilk, Tulloch, and Ross Hill produce carbon neutral wine. • In power generation, there has been the accelerated closure of some coal-fired power stations by key local companies including Engie (Hazelwood Power station, 2017), AGL Energy Ltd (Bayswater by 2025 and Liddell by 2023) and a switch in investment towards renewables. • In aviation, Qantas has purchased newer, more fuel-efficient aircraft and have capped its net emissions from 2020, so new flying becomes carbon neutral. • Australia Post has invested in electric bikes. • Aldi’s local supermarkets operate with 100 per cent renewable power. • In vehicle production, key players (e.g. Hyundai, Toyota) have invested millions of dollars into developing electric and hydrogen-powered cars. • In agriculture, red meat production will become carbon neutral by 2030 and some firms like Five Founders, Flinders and Company, and Arcadian Organic and Natural Meat Company already claim to have net zero emissions. 8.6.3 A union viewpoint on environmental sustainability The union movement, including the Australian Council of Trade Unions (ACTU), has sometimes extended its concerns to include the environment. During the past 30 years, notable instances comprise their opposition to asbestos and uranium mining where production caused serious health and environmental concerns. More recently, there have been quotes attributed to the President of the ACTU that include the following statements relating to environmental sustainability and the union movement’s viewpoint: • The global shift towards net zero emissions presents huge opportunities to create new, secure jobs for workers across Australia, but we need to act decisively to secure these industries. • We need leadership from the federal Government to develop a national clean exports strategy with clear targets and credible policies. • Australian workers know that our future lies in producing the clean products and services needed in a net-zero emissions world but the nations that benefit most from this transition will be those on the front foot. • It’s not a choice between jobs and the environment, it’s a responsibility to act on both. • Australian workers on the end of a hose fighting bushfires, treating patients from heat exhaustion in hospitals and manufacturing wind turbine towers know that climate change is a UNCORRECTED PAGE PROOFS workers issue. • An economy-wide plan to tackle climate change is essential to maintaining and growing jobs and avoiding even higher rates of underemployment, unemployment and youth unemployment than we have already seen under this Government.
• Together, ACF, WWF-Australia, ACTU and BCA are today releasing Sunshot: Australia’s opportunity to create 395,000 clean export jobs, charting a path for the country through the global transition to net-zero that delivers new jobs. • The report finds that Australia’s largest clean export opportunities are in renewable hydrogen and ammonia, green metals, critical minerals, battery manufacturing, education and training and engineering, ICT and consulting services. • These industries offer the opportunity to create tens of thousands of well-paid jobs, mostly in regional areas and accessible by workers across all levels of skill and education. Reaping the benefits of this change will require bold, co-ordinated action and investment and the development of a national clean exports strategy. Sources: ACTU, including https://www.actu.org.au/actu-media/media-releases/2021/clean-exports-could-deliver395-000-new-jobs; https://www.actu.org.au/actu-media/media-releases/2019/australia-falling-behind-the-rest-of-theworld-thanks-to-absent-morrison-climate-action-plan. Even so, the environment still presents a tricky issue for the ACTU. For example, some union members work for coal mining companies and fear that the closure of coal-fired power stations in Victoria, NSW and Queensland, the switch to renewable sources of electricity, the commitment to net zero carbon emissions by 2050, and reductions to coal exports due to the forecast fall in global demand will mean massive job losses. 8.6.4 Government viewpoints on environmental sustainability As economic agents, federal, state, and local governments have a significant impact on the environment and how resources are used. This often occurs through decisions related to the location of rubbish tips, zoning of land use, the position that is adopted on international treaties (e.g. about fishing, greenhouse emissions, world heritage area listings, defence treaties), policies related to indirect taxation on goods and budget allocations towards the support of public transport. More specifically, over the last 12 years, the views of the Australian government on environmental sustainability and climate have altered, largely driven by the change in voter attitudes, national politics, and international pressure. • Initially, there was denial of a climate issue and a hope that the problem would go away. • In 2007, Australia signed up to the Kyoto protocol target to cut its emissions to 108 per cent of 1990 levels. • Next came the start of the carbon tax in 2012. • In 2014, the carbon tax was abolished and replaced with a policy called Direct Action. • Australia ratified the Paris Climate Agreement in 2016 to reduce its emissions by 2030, to between 26–28 per cent of 2005 levels. • Most recently, the Australian government made a commitment at the UN Glasgow Climate Pact or CoP26 (2021) to work towards net zero emissions for the Australian economy by 2050. However, some commentators feel that, despite much talk, there has been a lack of real action with few concrete measures. One reason why some governments have not been enthusiastic about promoting environmental sustainability is the fear of a trade-off between protecting the environment and rapid economic growth — a belief that action would lead to a loss of jobs and lower incomes. However, the reality is that doing nothing is no longer an option and that there are actually employment, export and income opportunities created by a switch to a cleaner, greener economy.UNCORRECTED PAGE PROOFS Shortly, we will investigate further government policies and actions by others, designed to improve environmental sustainability.
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Track your results and progress Find all this and MORE in jacPLUS 8.6 Exercise 8.6 Quick quiz 8.6 Exercise 1. Outline how the Australian government’s viewpoint about environmental sustainability and climate issues has changed over the last decade and a half. Suggest one reason for this change in attitude. (3 marks) 2. The view of business towards the environment has changed dramatically in recent times. Explain. (2 marks) 3. Explain how consumer attitudes about the environment have changed, and how this is helping to improve sustainability. (2 marks) 4. Outline why some workers in the coal industry worry about the phasing out of coal-fired power stations both here and around the world. (2 marks) Fully worked solutions and sample responses are available in your digital formats. 8.7 The responses by economic agents to improve environmental sustainability KEY KNOWLEDGE • the economic responses undertaken by relevant economic agents at a local, national and international level, to address the economic issue, including government policies Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. Economic agents have important roles to play in responding to the challenges posed by climate change environmental damage. • Consumers, for instance, need to have better product information and, possibly, incentives to influence their buying decisions. • Businesses need to be able to see that caring for the environment can produce financial benefits and improve their profits or bottom line. Again, market-based and government financial incentives can help change business behaviour. UNCORRECTED PAGE PROOFS • Governments also have a key role to play. They need to lead the way and become a catalyst for change, perhaps through the use of incentives, international agreements, laws, and informative advertising so that people are made more aware of the need to change. Here are a few of the responses to climate change and environmental issues, some of which have been used here and in other countries around the world.
A carbon tax puts a price or cost on carbon pollution. It changes an external environmental cost into an internal cost shared by producers and consumers of goods and services with high carbon emissions. In so doing, it helps to reduce negative externalities otherwise paid by innocent third parties adversely affected by climate change.
In other words, over time a carbon tax can help to change the behaviour of both producers and consumers: • Producers will be incentivised to develop more profitable substitute goods using cleaner production methods with lower emissions. • Consumers will notice that the tax has led to higher prices. The rise in price will contract demand as people look for cheaper and cleaner substitutes. Again, pollution is reduced. The effects of using a carbon tax on the market for high-emissions goods can be illustrated hypothetically using the demand–supply diagram. This is shown in Figure 8.18. Here, the imposition of the tax makes supply conditions less favourable for producers that are selling the high-emissions good. As a result, firms will reduce the quantity of the product supplied at a given price from S1 to S2. This would create a temporary market shortage driving up the market equilibrium price paid by consumers of this product, from P1 to P2. Eventually, demand and supply will again be in equilibrium, but there would be a lower quantity of the dirty good being traded (i.e. the fall from Q1 to Q2).
FIGURE 8.18 The impact of a carbon tax on the market for a product with high emissions Price of polluting good per unit ($) New higher price paid by consumers (Pe2) Original market price or cost (Pe1) = $100 New lower price received by seller (P3) New smaller equilibrium quantity traded (Q2)
E2 E1
D1 = demand for polluting good Original equilibrium quantity traded (Q1) Quantity of permits traded
S2 = new supply of polluting good after the carbon tax is imposed S1 = original supply of polluting good before the carbon tax is imposed The increase in the unit price of the good is due to the carbon tax ($) whose level is set to reflect the negative externality or wider social cost of pollution. • The behaviour of producers in this market for the high emission product has been altered. One reason for the decrease in the quantity supplied at a given price (i.e. the fall from S1 to S2) was that, following the imposition of the tax, supply conditions became less favourable. For each unit sold, part of the higher unit selling price (i.e. P2), must go to paying the carbon tax. After subtracting the value of tax, the producer only gets to keep the lower, less profitable unit price of P3. This repels resources (see the fall from Q1 to Q2), discourages production of this high-emissions good, and creates an incentive for firms to switch production to greener alternatives. Negative externalities and climate change are reduced. • Looking at the behaviour of consumers in this market, as the price rises towards P2 notice that the demand for this high-emissions product contracts. So, the tax has positively changed behaviour. With a contraction in the number of consumers, there will be lower emissions, slowing climate change. UNCORRECTED PAGE PROOFS The effectiveness of a carbon tax in changing the goods and services supplied, depends partly on the amount of tax levied per tonne of carbon emissions. If this is too low, perhaps just $10 per tonne of carbon, it may have little effect on consumers who will simply pay the higher price without much contraction of demand or reduction in total level of global pollution. On the other hand, if the tax is too high, say $80 per tonne, consumers may import products from overseas where there is no carbon tax, and the policy would do little to solve this global problem. In addition, an excessively high level of tax could be disastrous for Australia’s
industries. With higher prices, they would be unable to compete against imports and may close down. Here, GDP, employment, incomes and living standards would be likely to suffer.
Today, around 30 countries (e.g. including those in the European Union, Canada, China, Denmark, Japan, Korea, New Zealand, Norway, Sweden, and the UK) have a carbon tax designed to reduce emissions and climate change. In Australia, the Gillard Labor government also enacted a carbon tax in 2012 (until it was later abandoned in 2014). Here, the carbon price or tax started at $23 per tonne of CO2 and was to gradually rise each year by 2.5 per cent (before a planned transition in 2015 to an emissions scheme that involves the sale of pollution permits). The tax drove up electricity charges and the price of transport and food, causing business closures and the loss of some jobs, so the government decided to compensate low-income earners and some polluting businesses using the $7 billion collected annually in tax revenue. However, this reduced the effectiveness of the tax in changing the behaviour of households and businesses. The incoming Coalition government in 2014 ditched the carbon tax and replaced it with a policy called Direct Action on climate change with its Emissions Reduction Fund. Here, firms could bid for financial support in a reverse auction arrangement, where the government money went to those promising the biggest reduction for the lowest cost. Whilst the carbon tax had its flaws, some commentators feel the current scheme may fail to reduce emissions sufficiently to achieve our international commitments and targets.
8.7.2 An emissions trading scheme puts a price on emissions An emissions trading scheme (ETS) is another market based, environmental policy that puts a price on carbon emissions by the sale of tradeable pollution permits or offsets. Like the carbon tax, it makes pollution less profitable and, therefore, helps to change producer and consumer behaviour, reducing emissions levels. As in all markets, there are buyers and sellers who negotiate a price or, in this case, determine the cost of environmental damage to be paid internally by the firm, rather than externally by some third party. • On one side of the market, the buyers or demanders of these pollution permits or offsets are businesses. To produce and hence pollute at a certain level, firms must own or purchase the required number of permits (each permit allowing the release of one tonne of CO2). • On the other side of the market, the initial seller or supplier of permits (i.e. the supply of pollution permits or offsets — S) is usually the government. In the first instance, it could distribute these free to firms or auction them off. The government would ‘cap’ the number of permits it issued at a certain level, so that a given emissions reduction target can be achieved. Under this so called, ‘cap-and-trade system’ the market price of permits would move up and down. This would create market signals or incentives that help to change behaviour and the allocation of resources between competing uses. Here, changes in the cost of pollution would reflect the conditions of demand for pollution permits relative to their supply. UNCORRECTED PAGE PROOFS For instance, the price of carbon offsets or permits could be driven up if the economy was growing rapidly because it is likely there would be a stronger demand relative to the fixed or capped supply. In this situation, pollution would become more expensive. This would incentivise the supply of cleaner products and the use of production technologies with lower emissions. In addition, market failure would be reduced and costs that were
previously external and paid by third parties and future generations would now be internalised. Polluters would at last pay!
The operation of an ETS can be illustrated, hypothetically, using the demand–supply diagram shown in Figure 8.19. Under this system, polluting firms with high emissions are required to have or purchase sufficient carbon pollution permits or offsets to cover their reported level of CO2 emissions (measured in tonnes). This creates a demand for permits (shown initially as D1). On the other side of the market, the number or supply of permits is initially capped at a given level, hence the vertical supply line (shown here as S1). Together, the operation of the market establishes the price or cost of carbon emissions (shown initially as P1).
Once there is a limit or cap in supply, it is mostly new conditions of demand by polluting firms that cause the price of permits to move up and down. For example, if the economy is booming and output is growing quickly, it is likely there will a rise in the demand for permits (shown as a rise from D1 to D2). Initially, a need to increase pollution to allow for higher output temporarily causes a market shortage of permits at the original price, P1. The shortage (i.e. the demand at P1 exceeds the supply) then pushes the price up towards P2. In the process, a new market equilibrium is finally established (at E2, P2 and Q2). Here, the quantity of pollution permits demanded again exactly equals the quantity supplied, except that the cost of pollution will be more expensive (P2 not P1). This acts as an incentive not to pollute and helps to achieve the required emissions reduction target.
FIGURE 8.19 The operation of a carbon market involving an emission ‘cap-and-trade’ scheme where there is a rise in the demand for pollution permits by polluters wanting to increase their production Market for carbon pollution permits Price of carbon pollution permit per tonne of CO ($) New higher market price or cost (P2 (pollution and externalities are reduced)
S1 = the initial capped supply of pollution permits E2 E1 D2 = new higher demand for pollution permits as the economy expands D1 = original demand for pollution permits Q1 = equilibrium quantity of pollution permits circulating is capped Quantity of permits traded (millions of permits) Original market price or cost (P1) = $25 $0 The advantage of an ETS like this, as opposed to a carbon tax, is that the agreed emissions target (e.g. net zero emissions by 2050) can be achieved with a fair degree of certainty, by appropriately capping the initial supply of permits and monitoring emissions. By comparison, there is greater uncertainty about the level of emissions reductions when relying on a carbon tax. In addition, over time, the emissions target for the ETS can even be changed to meet new circumstances or targets. However, a disadvantage of the ETS for businesses is that the price of pollution is uncertain. This is because the price of pollution permits can potentially fluctuate markedly from day to day. It makes it trickier for businesses and consumers to plan ahead. In contrast, there is a greater degree of certainty about the cost of pollution if a carbon tax were to be used. 2 UNCORRECTED PAGE PROOFS Currently, over 35 countries use an ETS. The biggest scheme is that for the European Union (EU), but even New Zealand (NZ) has one. Australia has a trading scheme that is a bit different. Ours is a largely voluntary and quite a limited arrangement that involves the production, buying and selling of Australian Carbon Credit Units (ACCUs). These credits are produced through various projects such as land restoration and revegetation to pull CO2 out of the atmosphere. Some schemes are funded by the government through its Emissions Reduction Fund
(ERF). Carbon credits from these projects are mostly sold to the Australian government in a reverse auction (those projects that offer the biggest reduction in carbon emissions for the lowest cost can get government funding to incentivise quality projects). Here, the Clean Energy Regulator (CER) oversees and controls the issue of ACCUs (carbon credits). Firms that exceed certain threshold levels of emissions are required to purchase permits from the CER, competing in the carbon market against other polluters to determine the price or cost of carbon credits.
As shown in Figure 8.20, the market price of our ACCUs is far lower than those for NZ or EU permits, showing the more limited nature and weaker effectiveness of our current scheme. This is one reason why critics feel that changes are needed to deliver the emissions reductions we now seek.
FIGURE 8.20 Recent changes in the price (measured in A$ per tonne of CO2) of carbon pollution for selected countries or areas (Australia — ACCCs, NZ, EU) 0.00 Nov-19Dec-19Jan-20Feb-20Mar-20Apr-20May-20Jun-20Jul-20Aug-20Sep-20Oct-20Nov-20Dec-20Jan-21Feb-21Mar-21Apr-21May-21Jun-21Jul-21Aug-21Sep-21Oct-21Nov-21 20.00 ACCU (AUD) NZU (AUD) EUA (AUD) ERF Auction (Average Price - AUD) 40.00 60.00 80.00 100.00 Carbon Closing Prices - AUD Source: ACCUs.com.au; CommTrade.co.nz; Refinitiv; Clean Energy Regulator Another element of Australia’s environmental policy that may help us reach our target is our Renewable Energy Target (currently 500 Gigawatts by 2030 — a sector that is growing quickly in size). 8.7.3 Pay subsidies to consumers and producers can change behaviour Subsidies are financial incentives provided by the government. They represent another market-based environmental policy designed to help reduce carbon emissions by rewarding producers or consumers who change their behaviour and lower their emissions. These government subsidies can take different forms and involve:UNCORRECTED PAGE PROOFS • the payment of cash grants to reduce the cost to firms of production, or those for households that consume fewer polluting goods • tax concessions, allowing the deductibility of costs of materials and equipment associated with cutting pollution, and may include tax-free holidays for firms ‘greening’ their operations • low interest loans to businesses when producing, or provided to consumers when buying goods, with lower emissions.
Essentially, subsidies are the opposite to having a tax or price on carbon that relies on a negative financial incentive that are designed to punish polluters.
Figure 8.21 uses a demand–supply diagram to hypothetically illustrate the effect of paying a government subsidy to encourage businesses to produce a cleaner, less environmentally damaging product. Notice that following the introduction of a subsidy, there is an increase in the quantity of the desired good supplied at a given price (the increase from S1 to S2). This is because supply conditions have become more favourable and profitable for sellers. Initially, this creates a market glut, forcing the equilibrium price paid by consumers downwards (the drop from P1 to P2). As the market price of this more environmentally friendly good falls, equilibrium is gradually restored (the move from E1 to E2).
FIGURE 8.21 The impact on the market of a government subsidy paid to businesses to encourage the production of a cleaner, less environmentally damaging product The market for a greener product before and after the introduction of a subsidy
Price of cleaner good per unit ($) D1 = demand for polluting good S2 = new increased supply of the cleaner good after the subsidy is paid S1 = original supply of polluting good before the subsidy New subsidised price received by seller (P3) Original price paid by consumers (Pe1) = $120 New lower market price or cost (Pe2) Original equilibrium quantity traded (Q1) New higher equilibrium quantity traded (Q2) E1 E2 Quantity of permits traded
The effect on the price of a subsidy paid to a producer of a cleaner, socially beneficial product where emissions are lower. To recap, subsidies can be used as a positive financial incentive to reward economic agents who change their behaviour in a beneficial way for the environment. • Firstly, the addition of subsidies has made the production of this environmentally friendly good more attractive and profitable. This is because firms now receive the new higher price (P3 — that is not an equilibrium price) for each unit sold that is equal in value to the new equilibrium price, Pe2, plus the top-up subsidy. Firms respond to this positive market signal by allocating more resources and lifting their production and the quantity traded (the rise from Qe1 to Qe2). • Secondly, consumer behaviour has been changed. Following the subsidy, the market price falls towards Pe2. As it drops, consumer demand for this lower-emissions product expands (at the same time as the demand for the now more expensive dirty substitute product falls). Because of changed behaviour, CO2 emissions levels are down, improving environmental sustainability for current and future generations. Governments around the world now use subsidies as one way to encourage the production and consumption of environmentally friendly goods. For example, the rapid growth of the Chinese economy has involved environmental trade-offs including smog and deteriorating air quality. This has endangered the health of tens of millions. As a response in 2016, the government decided (amongst other measures) to use subsidies (including tax concessions and a policy of priority procurement for the firms involved) to help make enterprises more enthusiastic about reducing their CO2. Their target was to cut emissions for each unit of GDP produced by UNCORRECTED PAGE PROOFS 60–65 per cent by 2030, against 2005 levels.
Australia also uses subsidies. For instance, subsidies are provided through the government’s Emissions Reduction Fund. They incentivise firms with projects that can deliver the maximum reduction in CO2 at the lowest cost per tonne. Subsidies are also provided for the installation of solar panels to reduce dependence on high-emission, coal-fired electricity. Indeed, 25 per cent of Australian homes now have solar panels, and $20 billion has been committed by the government for encouraging low emissions technology. In 2022, the Australian Labour Party promised to introduce subsidies to make electric vehicles cheaper and change consumer behaviour. However, subsidies need to be used carefully. For example, it seems contradictory that the Australian government has a long-standing policy that heavily subsidises the coal industry and hence encourages the burning of fossil fuels. Surely this would seem to undermine the effectiveness of our other environmental policies! Instead, perhaps the gradual withdrawal of fossil-fuel subsidies could help to accelerate technical research and innovation, create business opportunities for new firms, and help to clean up the environment. 8.7.4 Government laws or regulations can change behaviour Often, governments prefer to use market-based policies (e.g. a carbon tax, an emissions trading scheme, the payment of subsidies) to help improve environmental outcomes. This intervention works by changing the behaviour of consumers and producers to either encourage beneficial activities or discourage harmful economic production. However, most governments also find they need to have regulations backed up by laws, and penalties for those that fail to comply. One example of legislation was the Clean Energy Act 2011. This allowed the government to introduce the Carbon Tax (although along with the tax, the law was repealed in 2014). In Australia today, the main piece of federal legislation is the Environment Protection and Biodiversity Conservation Act. This covers a range of areas: • the Great Barrier Reef Marine Park • listed threatened species and ecological communities • Commonwealth marine areas • national heritage places • wetlands of international importance (listed under the Ramsar Convention) • migratory species protected under international agreements UNCORRECTED PAGE PROOFS • world heritage properties • nuclear actions (this includes uranium mines).
State governments also have environment protection acts that include sections on waste management. These are enforced by the Environmental Protection Authority (EPA).
