Causes of Climate Change

Questions:

1. What is Climate Change and what types of economic activities create greenhouse gases? What range of policy options is available to address climate change? Identify the types of government policies adopted by Australia, US, China and Europe and the timelines involved.

2. Which industries are likely to be directly affected both positively and adversely by the policy options adopted in China, the US and Australia? Explain your answers. What factors determine how these industries will respond to the new policy options adopted by countries in this case study in the short and long term?

3. Choose an industry in Australia, the US or China that will be directly affected by their country’s climate change policy and use economic theory to explain the impact in terms of equilibrium price and quantity traded.

4. Identify industries likely to be indirectly affected by climate change policies adopted in Australia, the US, or China. Explain why you chose these industries.

5. Discuss the strengths and weaknesses of economic theory to address global problems like climate change and identify the range of opportunities and threats from policies adopted in China, US, Australia and Europe. Explain your answer in terms of theoretical assumptions and welfare outcomes.

6. Reflecting back on the entire ECON11026 course this term, which topic did you find the most interesting or relevant? Explain your choice. What was the most important thing you learned about economics during this term? 

In recent economic times, the level of competition among the industries and the business units are extensive. The interconnectedness among various economies and countries are higher. The interrelatedness has increased due to increased transfer of goods and services from one economy to another. The financial resources have also transferred from one economy to another in terms of foreign direct investment. Thus in such a competitive industries, various business units try to gain core competencies and the competitive advantage that can help the business units in establishing themselves in the industry. It is known that the business units tend to deplete the natural resources and environment in order to gain the competitive advantage and that can create issues in the future and it can also compromise the sustainability of the society and the economy. Thus in recent years environmental responsibilities are taken into consideration and measures are also taken for addressing the issues (Woodward, 2008). The main aim of this essay is to illustrate on the climate change and reflecting on the policies and procedures that are implemented in the economies.

1. Climate change can be referred as the change in statistical distribution of the patterns of weather for a certain period of time. It can be stated as the change in the average weather condition that usually prevailed in a particular time period. It is known that such climatic changes can lead to various consequences especially on the living creatures on earth and the flora and the fauna.

There are various causes of the changes in the climate. The greenhouse gas emission is considered as one of the most significant causes of climate change in recent years. Here it can be said that there are various economic activities that are responsible for the greenhouse gas emission and thus climate change of economies (Epa.gov, 2015). The greenhouse gases basically affect the amount of heat that are absorbed and retained by the Earth. As the greenhouse gases have increased thus the absorption of heat has increased and that impacts the overall temperature of the Earth which is increasing continuously (Woodward, 2008). Here it can be said that in manufacturing units, various chemicals and substances can be used that can emit greenhouse gases like carbon dioxide (CO₂), methane (CH₄), CFCs, nitrous oxide (N₂O) etc. Thus the production units can be responsible for greenhouse gas emission and thus the climate change.

Policies to Address Climate Change

There are various policies that can be undertaken by the government in order to address the climate change issues. The government can impose quantitative restrictions on the business units restricting the amount of carbon that will be emitted by the business unit. On the other hand the government also impose tariff restrictions by imposing carbon tax on the amount of carbon emission by the business units. Both the measures can be effective in addressing the issues of climate change (C2es.org, 2015).

There are various measures and policies that are adopted by the government of Australia, US, China and Europe. A landmark climate change deal is struck between the US and China. They intend to cut down the pollution. China has made the commitment to put a cap on the carbon emission. The US president Barack Obama has targeted to lower the carbon emission from 26% to 28% by 2025. Chinese leaders have intended to cut their carbon emission to 20% by 2030. Australia has also taken measures for reducing the carbon emission. Australia has imposed carbon tax and it has targeted to lower the carbon emission in the economy by 5% by 2020. European Union has also committed to lower it carbon emission to 20% by 2020 (Ec.europa.eu, 2015).

2. Here it can be said that the policies that are implemented by the governments of China, Australia and the US can significantly affect various industries in the economy. It is known that the governments in these economies have adopted the quantitative restriction policy and the carbon tax measures in order to reduce the carbon emission in these economies (Climate Etc., 2013). Here it can be said that such measures have affected various industries positively as well as negatively. In the case study it is seen that the US and China has been involved in a deal to cut down pollution in their economies. In such context it can be said that the positive impact will be on the society and the economy whereas the industries that emits carbon extensively will have to face severe consequences. It is evident that the cost structure of the manufacturing and other industries like coal and petroleum will increase significantly and thus the price of the products will increase as well. It can also be viewed that high quality coal is demanded so that the carbon emission can be reduced in the boilers of the buildings and the small manufacturing plants.

It is also evident that the climate change policies of Australia are questioned and the attitude of the Abbott government regarding the carbon emission is criticised. Due to the energy policies the industries that are likely to be negatively affected are national defence, coal, oil, electricity, telecom, airlines and marine shipping for the China, US and Australia. On the other hand the industries that will ne benefitted positively due to the policy implementation are environmental protection and energy saving industry, high-end manufacturing, biotechnology, next generation information technology, new and alternative power and energy sector like wind, water, solar and nuclear power sector, clean energy vehicles etc. So, these industries will be benefitted or will be negatively affected due to the energy saving policy as new industries will emerge in response to the policy and some of the industries will have to make changes which can increase their cost structure in the economy (C2es.org, 2015).

Policies in Australia, US, China, and Europe

There are various factors that can determine how the industries will respond to the new policies adopted by the countries in the case study. The response of the industries will be affected significantly by the options that are given by the government. If there is no scope for the industry to reduce the carbon emission then they need to take extensive measures in reducing the carbon emission and it may not be effective for the business unit. The industries that are big enough to bear the cost of such measure will survive in the short-run and they will gain the sustainability in the long run. Some of the industries will be unable to bear the cost and they will collapse in the short-run.

3. Here it can be said that there are various industries that are directly affected by the climate change policies that are implemented by the government of those economies. Here the impact of the carbon reduction policy that is implemented by the government in the United Stated can be discussed in the United States. It is known that Barack Obama has taken the initiative to reduce the carbon emission in the industry. This policy has affected various industries especially the carbon emitting industries. Here it is can be said that the most of the manufacturing industries are the main sources of carbon emission (Forbes, 2014). The manufacturing industries can include the construction, food, textile, refining, fertiliser manufacturing, and coal. Here it can be said that due to the carbon reduction policy the petroleum and coal industry has been the mostly affected industries in the United States. It is known that coal emits the carbon dioxide gas in extensive nature and thus the carbon emission could be reduced if the coal use is reduced. Thus after the implementation of the policy the consumption of coal and petroleum as fuel has been reduced excessively. So, it can be said that there has been a reduction in the demand of coal and petroleum. In the following diagram the impact of the reduction in demand is shown.

In the above diagram, the impact of the fall in demand of coal is shown. The price of coal as well as the equilibrium quantity of coal will fall in the market. It is also evident that during the global recession of 2008-09 the price of coal and other fossil fuels had increased by nearly 30% in the economy (Climate Etc., 2013).

                                                                               Source: (U.S. CHAMBER OF COMMERCE, 2014)

After the global recession the demand for coal and petroleum dropped significantly in the industry. Coal and petroleum were replaced by advanced and renewable energy in the industry. Coal was switched by a cleaner and efficient natural gas. There was an increase in the energy efficiency (Ho, Morgenstern and Shih, 2008). There were increase in the building insulation, electronics and major appliances. In most of the end-use sector the discretionary power demand and consumption was reduced along with the manufacturing demand for the durable goods. During 2007-12, coal and petroleum were replaced by the renewable energies like hydroelectric power and wind energy. The contribution of the solar power is very small in recent times and the contribution of wind power is most significant today (Climate Etc., 2013).

Effect of Policies on Industries

                                                                              Source: (U.S. CHAMBER OF COMMERCE, 2014)

                                                                            Source: (U.S. CHAMBER OF COMMERCE, 2014)

4. It has been identified that there are various industries that are directly affected by the country’s climate change policy if the government. But there are certain industries that can be indirectly affected by the country’s climate change policy (Krugman and Wells, 2013). It is known that the demand for coal and petroleum has been affected in the in the US economy. After the government has implemented the carbon reduction policies in the economy, the demand for coal and petroleum has reduced significantly as they are replaced by other renewable energy sectors. Here it can be said that the industries which uses coal in the industries are indirectly affected. In the US, the steel industry can be considered as one of the industries that are indirectly affected by the climate change policy (The White House, 2015).

It is known that the demand of steel is not singularly dependant on the steel price but it is also dependant on the price of plastic. It was seen that the increased price of the energy sector in the economy increased the price of steel as well. It is known that various types of energy are required in the manufacturing of steel (Ho, Morgenstern and Shih, 2008). Thus the increased price of these intermediate products increased the price of the final product. Thus the price of final good that is steel increased in the industry and the demand for the good decreased. The in addition the demand for plastic and steel both lowered in the chemical industry due to increased price of the products. Thus the cost of the production increased leading to increased price but the lower demand in the market led to lower profit levels in the industry.

In the above diagram the decrease in demand for steel can be seen. Due to the increased cost of coal and plastic the price of steel had increased and after the increase in the price the demand curve has shifted in the industry that lead to lower equilibrium price and quantity in the economy.

Here the steel industry has been chosen as the steel industry represents the indirect impact of the carbon reduction policy and it is seen that the profitability of the industry has been significantly affected by the carbon reduction policy.

5. Here it can be said that there are certain strengths and weaknesses of the economic theories to address the global problems like the climate change policies that are adopted in Australia, US and China. Here the strengths and weaknesses of the economic theories can be discussed.

Factors Determining Industry Response to Policies

The main strengths of the economic theory in addressing the global problems can include the contribution of the overall idea for the event and how the market will be affected in terms of certain situation and action. The economic theories provide us the general idea pr knowledge regarding certain variables, their relations and how these can react to various stimuli like price change or the future expectation regarding the price change and how the global demand and supply will be affected as a result of the situation. Thus it can help in implementing policies and actions on the basis of the theoretical implications (Pindyck and Rubinfeld, 2013).

There are certain weaknesses of the economic theories as well in addressing the global problems like the climate change. The main weakness of the economic theories includes the uncertainly in terms of the situation. It is known that after globalisation the interconnectedness among the economies has increased significantly and thus there can be various external factors that may also affect the market conditions but they cannot be predicted or explained by the economic theories. Thus the economic theories also pose weaknesses.

Here the opportunities and threats of the policies adopted in China, US and Australia can be discussed as well. By implementing the policies in the economy they can gain the opportunity of better and improved energy sector like the renewable energy sector. This can increase the welfare of the society and the firms may have to bear some initial costs but they will be benefitted in the long-run. But the policies also pose some threats for the industries and the economy (Pindyck and Rubinfeld, 2013). It is evident that the carbon emission policies can significantly pose threats to some small firms and it can also drive them out of the industry if they are unable to continue with the high cost structure. This can lead to welfare loss in terms of the producers. On the other hand if the cost is shifted to consumers then it can lead to welfare loss due to the loss in consumer surplus. So these are the opportunities and threats that can occur in this case.

6. In the economics course study, the topic that I found most interesting was the topic of welfare economics and how the presence of externalities can affect the welfare of the producers and the consumers. The externalities are referred as the cost or the benefits that impacts the third party when the third party was not directly involved in the economic activity. The externalities can be two types. When certain economic activity results in the benefit of the third party then it is referred as positive externality (Krugman and Wells, 2013). On the other hand when the economic activity results in a harmful situation for the third party then it is referred as the negative externality. It is also evident that in the presence of externality, it can lead to market failure. It is very interesting to know the impact of these externalities and their impact on the welfare of the society.

The most important thing that I learned in the module is how to internalise the externalities in the economy and diminish the ill effects of the negative externalities. It is known that in the presence of external cost the social cost differs from the private cost and thus it is very important to maintain the equilibrium between the social and private cost and benefits in the economy for maximising the social welfare.

References

C2es.org, (2015). Energy and Climate Goals of China’s 12th Five-Year Plan | Center for Climate and Energy Solutions. [online] Available at: https://www.c2es.org/international/key-country-policies/china/energy-climate-goals-twelfth-five-year-plan [Accessed 28 Jan. 2015].

Climate Etc., (2013). What are the factors contributing to the reduction in U.S. carbon emissions?. [online] Available at: https://judithcurry.com/2013/04/21/what-are-the-factors-contributing-to-the-reduction-in-u-s-carbon-emissions/ [Accessed 29 Jan. 2015].

Ec.europa.eu, (2015). EU action on climate – European Commission. [online] Available at: https://ec.europa.eu/clima/policies/brief/eu/ [Accessed 28 Jan. 2015].

Epa.gov, (2015). Causes of Climate Change | Climate Change | US EPA. [online] Available at: https://www.epa.gov/climatechange/science/causes.html [Accessed 28 Jan. 2015].

Forbes, (2014). Obama EPA Issues Coal-Killing Rules To Cut Carbon Emissions 30 Percent. [online] Available at: https://www.forbes.com/sites/christopherhelman/2014/06/02/obama-epa-issues-coal-killing-rules-to-cut-carbon-emissions-30-percent/ [Accessed 29 Jan. 2015].

Ho, M., Morgenstern, R. and Shih, J. (2008). Impact of Carbon Price Policies on U.S. Industry. 1st ed. [ebook] Available at: https://www.rff.org/documents/RFF-DP-08-37.pdf [Accessed 29 Jan. 2015].

Krugman, P. and Wells, R. (2013). Microeconomics. New York, NY: Worth Publishers.

Pindyck, R. and Rubinfeld, D. (2013). Microeconomics. Boston: Pearson.

The White House, (2015). Climate Change. [online] Available at: https://www.whitehouse.gov/climate-change [Accessed 29 Jan. 2015].

U.S. CHAMBER OF COMMERCE, (2014). Assessing the Impact of Potential New Carbon Regulations in the United States. 1st ed. [ebook] Available at: https://www.energyxxi.org/sites/default/files/file-tool/Assessing_the_Impact_of_Potential_New_Carbon_Regulations_in_the_United_States.pdf [Accessed 29 Jan. 2015].

Woodward, J. (2008). Climate change. New York, N.Y.: DK Publishing.