Governments and businesses across the world have been trying to become more environmentally friendly, as everyone becomes more concerned with climate change and emissions. In the UK, incentives had been put in place to encourage large-scale organisations to reduce their consumption of gas and electricity. The Carbon Reduction Commitment Scheme began in April 2010, with companies and public-sector orgainisations required to record their energy consumption. Then in April 2011 it was planned that those consuming over 6000 MWh of electricity per year (about £500,000 worth) would be required to purchase ‘allowances’ of £12 for each tonne of carbon dioxide that is emitted by their use of fuel: electricity, gas, coal and other fuels. This would require the organisations working out their ‘carbon footprint’, using guidance from the Department of Energy and Climate Change. In the case of coal and gas, the emissions would be largely from burning the fuel. In the case of electricity it would be largely from generating it.
The government had intended to use the revenue received from the sale of allowances to pay subsidies to those firms which were the most successful in cutting their emissions.
By raising money from the largest emitters via a levy and giving it back as a ‘refund’ to those who cut their usage the most, the government would not have been able to raise any revenue, but it did tackle the core of the problem – reducing emissions. However, following the Spending Review, this scheme will now actually generate revenue for the government. Paragraph 2.108 on page 62 of the Spending Review states the following:
The CRC Energy Efficiency scheme will be simplified to reduce the burden on businesses,
with the first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2011. Revenues from allowance sales totalling £1 billion a year by 2014-15 will be used to support the public finances, including spending on the environment, rather than recycled to participants. Further decisions on allowance sales are a matter for the Budget process.
Over 5000 firms and other organisations will now find that their hard work in cutting usage and being more environmentally friendly will give them much less reward, as the revenue raised from the levy will remain in the Treasury. All that firms will now gain from cutting emissions is a reduction their levy bill. The extra £1bn or more raised each year from the scheme will undoubtedly be beneficial for tackling the budget deficit, but it will no longer provide subsidies to firms which reduce their emissions. Furthermore, PriceWaterhouseCooper estimates that it will cost businesses with an average gas and electricity bill of £1 million an extra £76,000 in the first year and this may increase to an additional cost of £114,000 per year by 2015.
It’s hardly surprising that businesses are angry, especially when this withdrawal of subsidy, which some have dubbed a ‘stealth tax’, was not mentioned in the Chancellor’s speech, but was left to the small print of the Spending Review announcement. The following articles look at this highly controversial plan.
Articles
Spending Review: Large firms ‘face green stealth tax’ BBC News (21/910/10)
Business lose out via £1bn-a-year green ‘stealth tax’ Management Today, Emma Haslett (21/10/10)
Fury over £1bn green stealth tax in spending review Telegraph, Rowena Mason (20/10/10)
Is ‘stealth’ tax a threat to UK economy going green? BBC News, Roger Harrabin (20/10/10)
Green spending review – it could have been a whole lot worse Business Green, James Murray (20/10/10)
Coalition hits big business with stealth carbon tax Business Green, James Murray (20/10/10)
UK government hits big businesses with stealth carbon tax Reuters, James Murray (20/10/10)
UK’s carbon tax bombshell takes business by surprise Reuters, Will Nichols and James Murray (21/10/10)
CRC allowances sting in UK Spending Review The Engineer, M&C Energy Group (22/10/10)
The CRC scheme
CRC Energy Efficiency Scheme Department of Energy and Climate Change
Questions
- How does a tax affect the supply curve and what would be the impact on the equilibrium price and quantity?
- To what extent might this “stealth tax” (i.e. withdrawal of subsidy) adversely affect (a) businesses in the UK; (b) the economy more generally?
- Why will firms have to re-look at their cash flow, costs and revenue following this change? How might this affect business strategy?
- By taxing firms using more gas and electricity, what problem is the government trying to solve? (Think about market failure.)
Reforms and budget cuts seem to be the norm across the world. In the UK, we’ve seen announcements about substantial cuts in government spending and reforms to our welfare state, including child benefit and pension reforms. But how will people react? Perhaps, we should look to France to see what could be to come. People across the country are protesting against the plan to raise the pension age from 60 to 62.
Workers at French oil refineries have ceased work and, as as a result, shortages of petrol across France look set to continue. There has been mass disruption to various transport markets, including cancelled flights and lorry drivers using ‘go-slow tactics’.
Furthermore, it’s not just workers at oil refineries who are on strike. Rubbish remains uncollected; oil tankers are floating off the coast; rail strikes and postal strikes have disrupted daily life; and even the school system has been affected. But, what are the costs of these strikes? Will the French economy suffer? Will economic growth be affected? It’s certainly an inefficient use of resources and will undoubtedly cost money.
Yet, despite these strikes, the President has said that the reforms will still go ahead, as he looks forward to a Senate vote on the pension bill. But what are the problems necessitating pension reform, not just in France, but across the world? And will it be France’s turn to experience a ‘winter of discontent’?
French strikes force petrol stations to shut BBC News (18/10/10)
Defiant Marseille, heart of France’s social unrest Reuters (18/10/10)
French Fuel Crisis: Protests turn violent Sky News, Huw Borland (18/10/10)
JPMorgan says French strike will cut demand for oil next year Bloomberg, Grant Smith (18/10/10)
French strikes hit airlines, trucking, gas pipes Philippine Star (19/10/10)
French riot police clash with students as petrol stations run dry Telegraph, Henry Samuel (18/10/10)
French based for another day of strike action Guardian, Angelique Chrisafis (18/10/10)
France strike: flights cancelled, airlines told to carry enough fuel for return journey Telegraph (18/10/10)
Questions
- What action other than striking is open to workers? What are the costs and benefits of each?
- Why are strikes by groups of workers likely to be more effective than protests by individual workers?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
- What are the efficiency arguments against strike action?
- How are oil prices determined? What will be the impact on oil prices of these strikes in France? Will there be an impact on the rest of the world?
- What are the key issues necessitating pension reform? Are these issues worth the price of the strikes?
Blockbuster US has become the latest in a long line of companies filing for bankruptcy. With huge debts and a need to restructure the business, given the huge competition in America, Blockbuster has made agreements with its creditors to cut its debts from $1 billion to $100 million. Blockbuster has suffered from mail-order and online film rental services, in particular in America.
Blockbuster is a worldwide phenomenon with stores ranging from the UK to Mexico. However, as legally separate entities, the non-US branches of Blockbuster are protected from the bankruptcy. While the UK branches will remain unaffected, there are concerns that they may suffer from a lack of new DVD stock, especially with the approach of Christmas.
As news of Blockbuster’s bankruptcy spread, Netflix – a key competitor – saw its shares soar. Netflix was a catalyst in the demise of Blockbuster US and it has seen its market share increase rapidly over the past few years, with subscribers increasing from 1 million in 2002 to 15 million in 2010. Blockbuster responded by ending late fees and started its own online services, but it has been unable to compete effectively in this competitive market. Although restructuring of Blockbuster has begun, only time will tell what the future is for this once dominant movie rental firm.
Blockbuster files for Bankruptcy in US BBC News (23/9/10)
Blockbuster fizzles in US, but renters overseas haven’t switched to Netflix – yet The Christian Science Monitor, Stephen Kurczy (23/9/10)
Blockbuster files for Chapter 11 protection Guardian, Richard Wachman (23/9/10)
Blockbuster wins Court’s approval to draw $20 million from bankruptcy loan Bloomberg, David McLaughlin and Tiffany Kary (23/9/10)
Fitch lowers debt rating on Blockbuster Bloomberg BusinessWeek (23/9/10)
Netflix shares hit high after Blockbuster bankruptcy Reuters, Sue Zeidler (23/9/10)
Debt, changing media habits topple Blockbuster The Associated Press, Mae Anderson (23/9/10)
Questions
- What are the key factors behind Blockbuster’s decline?
- New competitors have entered the market for movie rental. Illustrate this on a diagram. How can we use this to explain Blockbuster’s problems?
- Online services and mail-order have become increasingly popular services in this market. Is the extra competition in the market in the best interests of consumers?
- What type of market structure is the rental movie industry? Explain your answer.
- What type of legal structure does Blockbuster operate under? What are the key advantages and disadvantages of this?
- Why are the non-US chains not affected by the bankruptcy of Blockbuster US?
- Have a look at the share prices of Blockbuster and Netflix. What has happened to them over rthe past year? Is this consistent with recent developments?
The price of gold has hit a record high of over $1282 per ounce. By contrast, in 2007 it was trading at under $700 per ounce and in 2001 at under $300 per ounce. Various uncertainties in the world economy have led to large rises in the demand for gold by both central banks and investors in general.
But why has the gold price risen so dramatically and what is likely to happen to the price in the coming days and months? Some commentators are saying that the gold price has further to rise. Others are saying that it is already over priced! The following articles look at the explanations and the arguments.
Articles
Monetary easing fears lift gold to record high Financial Times, Javier Blas (17/9/10)
Five-fold rise in gold price ‘is not a bubble’, claims industry body Independent on Sunday, Mark Leftly (19/9/10)
Gold Prices Today Are Increasing to Record Levels Business and Finance News, Aidan Lamar (18/9/10)
Gold hits new peak of $1,283 Telegraph, Richard Evans (17/9/10)
Gold hits new record high Guardian, Julia Kollewe (17/9/10)
Gold prices – the highs and lows since 1971 Guardian, Julia Kollewe (17/9/10)
Gold is overpriced, so be wary of those ads to buy it Idaho Statesman, Peter Crabb (17/9/10)
Data
Gold prices World Gold Council
Commodity price data (including gold) BBC Business: Commodities
Questions
- Why has the price of gold risen? Illustrate your arguments with a demand and supply diagram.
- How are these demand and supply factors likely to change in the near future?
- What is the role of speculation in the determination of the gold price? What particular factors are speculators taking into account at the moment?
- Why have actions by the Bank of Japan (see A Japanese yen for recovery) influenced the gold price?
- Why have possible future actions by the US Federal Reserve Bank influenced the gold price?
Rising costs of cloth and a rise in VAT could mean that clothes prices are set to rise. Does this spell the end of cheap fashion from the likes of Primark and H&M? Or can they absorb the cost increases?
The following articles look at the causes of the rise in costs of clothing and what the cheap fashion chains can do about it.
Articles
Primark follows fashion rivals as it warns of rising costs Guardian, David Teather and Zoe Wood (13/9/10)
Primark warns on costs as growth slows Telegraph, James Hall (14/9/10)
Is this the end of cheap clothes era? Price of cotton has rocketed because of floods, Primark warns Mail Online, Sean Poulter (14/9/10)
Fashion chains far from cheerful about future of cheap chic Observer, Zoe Wood, David Teather and Julia Finch (19/9/10)
Data
Commodity prices (including cotton) Index Mundi
Cotton futures BBC Business: Commodities
Questions
- Why have cotton prices been rising? Illustrate your arguments with a demand and supply diagram.
- Would you expect a rise in the price of cotton of 45% to lead to a rise in the price of cotton clothes of 45%, or of more than 45% or of less than 45%? Explain.
- For what other reasons are the prices of clothing rising?
- How did the process of globalisation keep the price of clothing down?
- Next’s chief executive, Lord (Simon) Wolfson said that if prices of Next’s clothes go up 8% then the number of units sold will fall by 10%. What is the value of the price elasticity of demand that he is assuming?
- Why is the ‘Fairtrade system so important’?
- “Some retailers have already increased prices but there is more to come. The products most under threat are T-shirts, underwear and socks. More complicated garments such as heavy jeans will be less affected.” Why are the prices of more complicated garments likely to rise by a smaller percentage than those of simple garments?
- What has been happening to the demand for cheap fashion clothing and why? Combine this effect with those of costs on a demand and supply diagram.
- What type of market structure is the market for fashion clothing? What are the implications of this for the profits of retailers?