Synoptic Revision - Micro and Macro Effects of Carbon Trading

Vietnam is introducing a carbon trading scheme as part of a move to a low carbon development model. This short revision video looks at some of the possible micro and macro aspects.

Context

Vietnam’s rapid economic growth and its increasing energy demand have led to an increase in greenhouse gas emissions, leaving the country with the second highest air pollution levels in Southeast Asia in 2019.

To meet its development and climate change goals, a new domestic carbon emission trading scheme is being established. Vietnam’s national carbon intensity per GDP increased 48 percent between 2000 and 2010. Between 2010 to 2020, the CO2 emissions nearly quadrupled, largely from coal-based power generation, industrial expansion, and a growing transport sector. Rising air pollution levels amounted to over 60,000 deaths in 2017. Reducing emissions would therefore save thousands of lives in Vietnam.

The adoption of carbon pricing is hoped to support Vietnam's transition to a low-carbon development model and also protect exports to regions such as the European Union that are proposing a carbon border tax for imports with a high carbon footprint.

Question

Evaluate the likely microeconomic and macroeconomic effects of a country such as Vietnam introducing a system of carbon trading (25)

Micro Aspects

• Impact on high carbon emitting firms such as airlines, steel plants
• Impact on low-carbon businesses such as renewable suppliers
• Impact on consumers (households) – possible rise in prices – consider effects on consumer surplus – possible regressive impact
• Impact on market failures due to externalities – helping move towards a socially-optimal output where MSB=MSC
  Impact on economic efficiency (allocative, productive, dynamic)
• Probably easier to focus on impact on producers – using cost and revenue analysis – but externalities / market failure approach is also relevant – link back to aspect of Vietnamese growth & development

Macro Aspects

• Impact on investment (domestic and FDI) – carbon trading might initially cause a fall in capital investment since production costs would be higher – but in the long run, putting a price on carbon can stimulate investment in low-carbon technologies such as onshore & offshore wind power & more energy-efficient aircraft which can then increase LRAS and potential economic growth
• Unemployment – risk of some job losses in high-carbon sectors especially if they experience a fall in export sales to countries without carbon taxes and carbon trading. However, new jobs likely in the transition to other sectors including renewables
• Might also analyse trade balance / competitiveness / inflation as macro aspects for Vietnam

Evaluation perspectives

Which of the effects – micro and macro are likely to be most significant and why?

• Micro impact – sectors such as coal are likely to face sharp rise in operating costs. Impact depends on extent to which firms can fund investment in areas such as clean-coal technologies (carbon capture and storage) or diversify into renewables.
  

• Macro impact – Vietnam is a fast-growing economy so demand for carbon permits likely to rise each year. Much depends on extent to which emissions permit supply falls each year which will impact on carbon price – and also the relative price of carbon permits in Vietnam compared to other countries such as China.