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Climate change has become a topic of intense public discussion in recent years. Scientists, government leaders, legislators, regulators, businesses, including insurance companies, investors, analysts and the public at large have expressed heightened interest in climate change. International accords, and state and local laws and regulations in the Australia address concerns about the effects of greenhouse gas emissions on our environment, and international efforts to address the concerns on a global basis continue (Bacchus 2004). Due to these climate changes the environment protection act was introduced with the aim of regulating against putting pollution into the air and water. These environmental protection acts also controls how waste is stored, collected, transported and treated. These meant that if the business is caught polluting the environment, the government can issue fines and other controls (Bennett 2005).
The major environmental regulations that have been enacted in Australia include The National Pollutant Inventory (NPI) the National Greenhouse Energy Reporting act (NGER) and the Carbon Tax. The main purpose of this paper is to evaluate the potential effects of the introduction of the environmental legislation using the free-market and pro-regulatory approach to regulation. The paper focuses on the accounting side in relation to these regulations. There is also the opinion of the writer regarding whether he supports such regulations". The use free-market approach to regulation means the market without intervention by governments, other than for the enforcement of contracts and ownership rights. A free-market approach is one in which all markets are unregulated by any parties other than the participants, and government plays a neutral role.
2.0 Evaluate the potential effects of the introduction of the environmental legislation using the free-market and pro-regulatory approach to regulation.
Once federal action is deemed necessary to address an environmental problem, policy makers have a number of options at their disposal to influence pollution levels. In deciding which approach to implement, policy makers must be cognizant of constraints and limitations of each approach in addressing specific environmental problems. It is important to account for how political and information constraints, imperfect competition, or pre-existing market distortions interact with various policy options (Bennett, M 2005).
The introduction of National Pollutant Inventory has lead to economic efficiency. It provides the community, industry and government with free information about substance emissions in Australia. It has emission estimates for 93 toxic substances and the source and location of these emissions (Gibbons 2012). The socially optimal level is determined by reducing emissions until the benefit of abating one more unit of pollution that is the marginal abatement benefit measured as a reduction in damage is equal to the cost of abating one additional unit that is the marginal abatement cost. In the simplest case, when each polluter chooses the level at which to emit according to this decision rule that is produce at a level at which the marginal abatement benefit is equal to the marginal abatement cost, an efficient aggregate level of emissions is achieved when the cost of abating one more unit of pollution is equal across all polluters. Any other level of emissions would result in a reduction in net benefits (Bennett 2005).
National pollution inventory policy has also lead to technological standard. A technology or design standard, mandates the specific control technologies or production processes that an individual pollution source must use to meet the emissions standard. This type of standard constrains plant behavior by mandating how a source must meet the standard, regardless of whether such an action is cost-effective. Technology standards may be particularly useful in cases where the costs of emissions monitoring are high but determining whether a particular technology or production process has been put in place to meet a standard is relatively easy (Janek 2012). However, since these types of standards specify the abatement technology required to reduce emissions, sources do not have an incentive to invest in more cost effective methods of abatement or to explore new and innovative abatement strategies or production processes that are not permitted by regulation.
The introduction of environmental legislature in Australia lead to performance based standard. A performance-based standard requires that polluters meet a source-level emissions standard, but allows a polluter to choose among available methods to comply with the standard.
At times, the available methods are constrained by additional criteria specified in a regulation. Performance-based standards that are technology based do not specify a particular technology, but rather consider what is possible for available and affordable technology to achieve when establishing a limit on emissions. In the case of a performance-based standard, the level of flexibility a source has in meeting the standard depends on whether the standard specifies an emission level or emission rate emissions per unit of output or input. A standard that specifies an emission level allows a source to choose to implement an appropriate technology, change its input mix, or reduce output to meet the standard. An emission rate, on the other hand, may be more restrictive depending on how it is defined.
The flexibility of performance-based standards encourages firms to innovate to the extent that they allow firms to explore cheaper ways to meet the standard; however, they generally do not provide incentives for firms to reduce pollution beyond what is required to reach compliance. For emissions that fall below the amount allowed under the standard, the firm faces a zero marginal abatement cost since the firm is already in compliance
It also leads to cost effectiveness. The efficiency of a policy option differs from its cost-effectiveness. A policy is cost-effective if it meets a given goal at least cost, but cost effectiveness does not encompass an evaluation of whether that goal has been set appropriately to maximize social welfare. All efficient policies are cost-effective, but it is not necessarily true that all cost-effective policies are efficient. A policy is considered cost-effective when marginal abatement costs are equal across all polluters. In other words, for any level of total abatement, each polluter has the same cost for their last unit abated.
Many environmental regulations in the Australia are prescriptive in nature and are often referred to as command-and-control regulations. A prescriptive regulation can be defined as a policy that prescribes how much pollution an individual source or plant is allowed to emit and/or what types of control equipment it must use to meet such requirements. Such a standard is often defined in terms of a source-level emissions rate. Despite the introduction of potentially more cost effective methods for regulating emissions, this type of regulation is still commonly used and is sometimes statutorily required. It is almost always available as a "backstop" if other approaches do not achieve desired pollution limits. Because a prescriptive standard is commonly defined in terms of an emissions rate, it does not directly control the aggregate emission level. In such cases, aggregate emissions will depend on the number of polluters and the output of each polluter.
3.0 Market based approach
Market based approach create an incentive for the private sector to incorporate pollution abatement into production or consumption decisions and to innovate in such a way as to continually search for the least costly method of abatement. Market-oriented approaches can differ from more traditional regulatory methods in terms of economic efficiency or cost-effectiveness and the distribution of benefits and costs (Dagwell 2007).
Because market-based approaches do not mandate that each polluter meet a given emissions standard, they typically allow firms more flexibility than more traditional regulations and capitalize on the heterogeneity of abatement costs across polluters to reduce aggregate pollution efficiently. Environmental economists generally favor market-based policies because they tend to be least costly, they place lower information burden on the regulator, and they provide incentives for technological advances.
The introduction of legislature leads to cap and trade system. In a cap-and-trade system the government sets the level of aggregate emissions, emission allowances are distributed to polluters and a market is established in which allowances may be bought or sold. The price of emission allowances is allowed to vary. Because different polluters incur different private abatement costs to control emissions, they are willing to pay different amounts for allowances. Therefore, a cap-and-trade system allows polluters who face high marginal abatement costs to purchase allowances from polluters with low marginal abatement costs, instead of installing expensive pollution control equipment or using more costly inputs. Cap-and-trade systems also differ from command-and-control regulations in that they aim to limit the aggregate emission level over a compliance period rather than establish an emissions rate.
If the cap is set appropriately, then the equilibrium price of allowances, in theory, adjusts so that it equals the marginal external damages from a unit of pollution. This equivalency implies that any externality associated with emissions is completely internalized by the firm. For polluters with marginal abatement costs greater than the allowance price, the cheapest option is to purchase additional units and continue to emit. For polluters with marginal abatement costs less than the allowance price, the cheapest option is to reduce emissions and sell their permits.
Allowances may also be allocated to polluters according to a specified rule. This represents a transfer from the government to polluting firms, some of which may find that the value of allowances received exceeds the firm's aggregate abatement costs.
The establishment of environment legislature leads to introduction of rate based trading system. Rather than establish an emissions cap, the regulatory authority under a rate-based trading program, establishes a performance standard or emissions rate. Sources with emission rates below the performance standard can earn credits and sell them to sources with emission rates above the standard. As with the other trading systems, sources able to improve their emissions rate at low cost have an incentive to do so since they can sell the resulting credits to those sources facing higher costs of abatement. However, emissions may increase under these programs if sources increase their utilization or if new sources enter the market.
Therefore, the regulating authority may need to periodically impose new rate standards to achieve and maintain the desired emission target, which in turn may lead to uncertainty in the long term for the regulated sources.
In addition the establishment of legislature leads to imposition of emission taxes. Emissions taxes are exacted per unit of pollution emitted and induce a polluter to take into account the external cost of its emissions. Under an emissions tax, the polluter will abate emissions up to the point where the additional cost of abating one more unit of pollution is equal to the tax, and the tax will result in an efficient outcome if it is set equal to the additional external damage caused by the last unit of pollution emitted.
As an example of how an emissions tax works, suppose that emissions of a toxic substance are subject to an environmental charge based on the damages the emissions cause. To avoid the emissions tax, polluters find the cheapest way to reduce pollution. This may involve a reduction in output, a change in inputs to production, the installation of pollution control equipment, or a process change that prevents the creation of pollution. Polluters decide individually how much to control their emissions, based on the costs of control and the magnitude of the tax (Hoque 2005).
The polluting firm reduces emissions to the point where the cost of reducing one more unit of emissions is just equal to the tax per unit of emissions. For any remaining emissions, the polluter prefers to pay the tax rather than to abate further. In addition, the government earns revenue that it may use to reduce other pollution or reduce other taxes, or may redistribute to finance other public services. While difficult to implement in cases where there is temporal and/or spatial variation in emissions, policy makers can more closely approximate the ambient impact of emissions by incorporating adjustment factors for seasonal or daily fluctuations or individual transfer coefficients in the tax.
Economic efficiency can be defined as the maximization of social welfare. An efficient market is one that allows society to maximize the net present value of benefits: the difference between a stream of social benefits and social costs over time (Comisari 2011). The efficient level of production is referred to as Pareto optimal because there is no way to rearrange production or reallocate goods in such a way that someone is better off without making someone else worse off in the process (Burritt 2011).
Taxes and charges facilitate environmental improvements similar to those that result from marketable permit systems. Rather than specifying the total quantity of emissions, however, taxes, fees, and charges specify the effective price of emitting pollutants (Burritt 2000).
Environment legislature also leads to environmental subsidies. Subsidies paid by the government to firms or consumers for per unit reductions in pollution create the same abatement incentives as emission taxes or charges. If the government subsidizes the use of a cleaner fuel or the purchase of a particular control technology, firms will switch from the dirtier fuel or install the control technology to reduce emissions up to the point where the private costs of control are equal to the subsidy. It is important to keep in mind that an environmental subsidy is designed to correct for an externality not already taken into account by firms when making production decisions.
Environment legislature also leads to environmental subsidies. Subsidies paid by the government to firms or consumers for per unit reductions in pollution create the same abatement incentives as emission taxes or charges. If the government subsidizes the use of a cleaner fuel or the purchase of a particular control technology, firms will switch from the dirtier fuel or install the control technology to reduce emissions up to the point where the private costs of control are equal to the subsidy. It is important to keep in mind that an environmental subsidy is designed to correct for an externality not already taken into account by firms when making production decisions
It is possible to minimize the entry and exit of firms resulting from subsidies by redefining the subsidy as a partial repayment of verified abatement costs, instead of defining it as a per unit payment for emissions reductions relative to a baseline. Under this definition, the subsidy now only relates to abatement costs incurred and does not shift the total or average cost curves, thereby leaving the entry and exit decisions of firms unaffected (Burritt 2011).
Environmental legislature leads to tax- subsidy combination. Emission taxes and environmental subsidies can also be combined to achieve the same level of abatement as achieved when the tax and subsidy instruments are used separately. One example of this type of instrument is referred to as a deposit refund system in which the deposit operates as a tax and the refund serves as a partially offsetting subsidy. As with the other market instruments already discussed, a deposit-refund system creates economic incentives to return a product for reuse or proper disposal, or to use a particular input in production, provided that the deposit exceeds the private cost of returning the product or switching inputs (Burritt 2000).
Under the deposit-refund system, the deposit is applied to either output or consumption, under the presumption that all production processes of the firm pollute or that all consumption goods become waste. A refund is then provided to the extent that the firm or consumer provides proof of the use of a cleaner form of production or of proper disposal (Burritt 2011).
Another effect is information disclosure. Requiring disclosure of environmental information has been increasingly used as a method of environmental regulation. Disclosure strategies are most likely to work when there is a link between the polluting firm and affected parties such as consumers and workers (Keil 2004). Disclosure requirements attempt to minimize inefficiencies in regulation associated with asymmetric information, such as when a firm has more and better information on what and how much it pollutes than is available to the government or the public. By collecting and making such information publicly available, firms, government agencies, and consumers can become better informed about the environmental and human health consequences of their production and consumption decisions (Burritt 2000).
Another effect of environmental legislature is the introduction of liability rules. Liability rules are legal tools of environmental policy that can be used by victims or the government to force polluters to pay for environmental damages after they occur. Liability rules can serve as an incentive to polluters. To the extent that polluters are aware that they will be held liable before the polluting event occurs, they may minimize or prevent involvement in activities that inflict damages on others.
The environmental goals are achieved at a minimum cost where consumers, producers and government are being involved in the implementation of the legislature. These means that it is cost effectiveness
There is whole participation of the implementation of environmental legislature due to the initiative given to the producer by the government for example Emission taxes and environmental subsidies. Emissions taxes are exacted per unit of pollution emitted and induce a polluter to take into account the external cost of its emissions.
There is also the creation of the awareness where by every party are aware of the penalty for the breach of the law. Every participant is liable for not following the law to the letter. These is achieved though the introduction of liability rules. Liability rules are legal tools of environmental policy that can be used by victims or the government to force polluters to pay for environmental damages after they occur
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