1. How does a carbon pollution permit scheme work?The government sets a cap on total emissions and issues permits to businesses allowing them to emit up to a certain amount. If a business does not use up its quota for emissions, it can be resold to other businesses. With only a limited number of permits available, firms will bid for the permits. Gradually the number of permits will be reduced thus leading to a large decrease in emission levels over the long term.

2. Why did the former Australian government introduce a carbon tax?The carbon tax is part of the Green Energy Plan which aims to reduce carbon emission levels to 5% below 2000 levels by 2020. By setting a price on carbon, it increases the costs paid by businesses for the production of goods and utilities. As a result, businesses will increase the price of products which will prevent excess consumption as costs for consumption are increased. Firms can also develop new ways for reducing the amount of carbon emissions, thus reducing the tax paid. This will lead to an overall decrease in carbon emissions in the country.

3. Explain how the carbon tax pricing currently works in Australia and why the Federal Government plans to remove the tax.The current carbon price is as follows:Entities that release over 25,000 tonnes of carbon dioxide or equivalent greenhouse gases are required to pay $25.40 per tonne.The Federal government plans to remove the tax because it will lower the cost of living from consumers. It will also increase the prices of exports and will result in Australian products such as coal being less competitive on the international market.

4. Compare the advantages of the carbon tax with the carbon permit schemeAdvantages

Carbon Tax Carbon permit SchemeEncourages firms to look for alternative and more efficient methods for production that will reduce carbon emissions

Places a limit on carbon emissions for the entire nation

Raises revenue for the government Firms have a choice of whether to develop new technologies, or to purchase additional permits.

It prevents consumers from excess consumption as they are required to pay the social cost.

The gradual decrease of permits will lead to a guaranteed lower emission level.

Simpler than permit scheme, not subject to strategic behaviour between firms and the government to drive up the prices of permits.

Firms can profit by selling their excess greenhouse gas allowance

Can be applied to individual consumers whereas the permit scheme can only be applied to firms.