Oh dear, this is not what
we want to see! Energy Secretary Amber Rudd was on Sky News earlier talking
about the necessity of carbon tax as a means of reducing emissions down to a
state-mandated nominal level. Now I’ve argued before that carbon tax has its
uses, and is not to be entirely frowned upon – but frankly, Rudd’s definition
of the goal of carbon tax is remiss. Ruddy confused, in fact.
A carbon tax is not a means of reducing emissions down to a nominal figure; it is supposed to be a tool for maximising utility. That is, carbon taxes help us incorporate negative externalities into the price system of a free market whereby polluters carry the costs of their negative externalities, but also whereby the price reaches equilibrium as the costs of pollution are measured accurately against the benefits.
That way, those negative
externalities are compensated for by the fact that they increase utility to a
level greater than their costs. For example, a timber factory and a roadside diner
on the outskirts of a city add some pollution to the environment, but they make
up for those negative externalities by providing goods and services that people
want.
Where they are a benefit
is when carbon taxes intervene in the price system to ensure that future costs
of transactions are thought to be worth paying for present benefits. The rate
of carbon tax is roughly commensurate with the future cost of pollution,
incorporated into the price system to justify the benefits now – it is a tax that
attempts to ascertain the benefits of pollution.
Carbon taxes are far from simply being about lowering emissions, although as I argue here,
they will likely change future behaviour as businesses innovate to be greener
with improved technology.
