“c05AggregateSupplyPolicies_PrintPDF” — 2022/6/14 — 4:32 — page 451 — #67
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Fairly recently in late 2021, the Australian government committed to zero net emissions by 2050 where economic activities that discharge greenhouse gasses, are offset by other activities that reduce these emissions. But the big question is, how might this target be reached and what are some of the policy options available? So, in the final section of this topic, our attention turns to see how one market-based, environmental policy can be used to affect aggregate supply in a way that improves intertemporal efficiency, ultimately sustaining better living standards into the future.
5.6.1 The need for an environmental policy as a measure to affect aggregate supply
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Other than the spread of COVID-19, perhaps the next biggest worry of people around the world, is the climate crisis. For instance, in 2021, around 74% of Australians viewed climate change as a critical threat. This problem is linked to greenhouse gas emissions that economists see as a negative environmental externality or cost for third parties resulting from economic activities. Climate change threatens our wellbeing in many ways: • global warming of around 2 degrees since 1880 • melting of the polar ice caps rising sea levels (by between 0.5 and 1 metre), displacing island and coastal communities • destruction of the ozone layer which protects us all from harmful rays (from the sun) • the doubling of the frequency of extreme weather events over the last 20 years in comparison to the previous two decades at the end of the twentieth century (e.g. more severe drought, floods, cyclones, and bushfires that cause the loss of life, and the destruction of business and infrastructure) • acid rain (where carbon and other emissions in the atmosphere cause rain to become dangerously acidic) • deteriorating air quality leading to illnesses • toxic substances entering our food chain • the spread of diseases connected with climate change • waste disposal issues for most of our cities • deforestation and the loss of space for recreation • the general lack of healthy environmental river flows to maintain important ecosystems • destruction of biodiversity (where some plant and animal species have become extinct) • disrupted economic activity following severe weather events that weaken the government’s financial position (with lower tax revenue collected and the need for higher government outlays for restoration).
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Climate change is seen as a less favourable aggregate supply factor limiting our economic capacity and ultimately, wellbeing. Much evidence now exists about the impact of human-induced climate change. For instance, figure 5.25 part 1 shows the acceleration of CO2 emissions, mostly associated with rising economic activity. As a result of growing greenhouse gas emissions, part 2 of figure 5.25 shows that there has been a rise in average global temperatures by around 2 degrees since 1880, with further rises expected by 2050. This is linked to a doubling of the frequency of severe weather events over the last 50 years. Part 3 of figure 5.25 shows that while Australia emits just 1.5 per cent of global emissions, on a per capita basis our carbon footprint is the biggest of all countries, with over 27.3 metric tonnes per person per year (relative to USA 23.4, Japan 10.5, and Italy 2.6). This suggests that as a country, we need to pull our weight and do far more to reduce carbon emissions. Part 4 breaks down the current sources of Australia’s emissions by sector. Notice that as a proportion of our total emissions, electricity, transport and agriculture are the main areas that need to be targeted by policy makers. Finally, part 5 highlights some of the negative impacts of climate change for Australia, on a state-by-state basis.
TOPIC 5 Aggregate Supply Policies
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