Explainer: Carbon tax or ETS?

Jennifer ZhaoThere are two main approaches governments around the world take to lower carbon emissions: carbon tax and emissions trading scheme (ETS).Since July 2012, Australia has had its carbon tax scheme in place. Last week, Prime Minister Kevin Rudd announced that he would axe the carbon tax next July in favor of an ETS. And the plan is to move to an ETS with a floating price. This makes the transition one year earlier than originally planned.So what are the differences between these two types of schemes, and how they affect households?With a carbon tax, big business pay a set cost for all carbon emissions, and this may encourage them, and their consumers, to cut back. In an ETS with a fixed price, the government caps the total amount of emissions and issues permits with a pre-determined price, granting businesses a right to a certain amount of emissions. In comparison, an ETS with a floating rate allows the permit price to fluctuate, so the market decides the price of carbon emissions.Carbon tax revenue goes straight to government, which government uses to compensate groups who are adversely affected by the tax. Revenue from an ETS could go to government too, but due to the tradable feature of the permits, revenue goes to the subsequent sellers, not the government.The other difference lies in the transaction cost. Because of the higher level of transactions between businesses with an ETS, it is reasonable to argue that a carbon tax carries a relatively low cost.Whichever scheme Australia ultimately carries out, the impact on households is always a concerning issue. Households may not have to pay for the permits directly, but they do so indirectly as businesses pass on some or all of their costs. Jennifer Zhao is a reporter fot Panorama and SYN News. She studies Journalism at RMIT and her interests are piano, languages and cycling.

July 23rd 2013
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