Wednesday, 14 December 2016

Amber Gets The Red Light On Carbon Tax

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.