We can all agree that the world is warming, due to human activity. It is not too late to do something about the impact we will have on the earth. Prevention of the cataclysm makes much better economic sense than trying to fix it after it has happened. If the world warms by more than 2 degrees it is almost certain we would see more extreme climatic conditions, more floods and droughts. All other aspects aside, this is sure to increase the costs of production and as such shift the AS curve to the left. Among other things we would see cost push inflation, increased unemployment and reduced economic growth. All this on top of the loss of unique habitats and species, and of course the loss of life. What we need to do as a nation is decide how to deal with this problem on a long-term scale and still maintain our rate of economic growth.
One proposed idea was the carbon tax. Quite simply, this aims to reduce the production of carbon dioxide by directly taxing the companies that produce it, by ton. However, this idea was short lived and never really had a big effect before it was taken of the table. Let’s have a good look at the carbon tax, with an economic eye, and decide if it is a good way to discourage the emission of co2 and maintain the goal of strong economic growth.
First, let us look at the theoretical benefits of the carbon tax. The idea would be that as the cost of producing carbon dioxide increases, firms would be incentivised to switch their sources of energy from dirty methods such as coal and oil to green ones, such as photovoltaics or wind power. The effect of this would be to decrease the overall production of green house gases. Even if the firms didn’t switch their sources of power, they would be forced to raise their costs and thus push away some of their customers, who will be attracted to the lower prices of those firms who use green energy and aren’t paying the carbon tax. As such, this tax would allow the forces of supply and demand put pressure on the firms to change their ways for the good of the environment.
However, there are some legitimate concerns. The first is probably the most important- how much should be charged? This question could may never have a correct answer. Along the same lines, how will the carbon output of companies be measured. These points are the main obstacle of such a tax and limit how effective it will be. Another common worry is that our international competitiveness will be undermined, especially if other countries do not impose similar measures. This could have a profound negative impact on the economy, as exports decrease and imports increase, increasing our CAD and undermining our goal of international stability. Final, this is likely to have a negative effect on the economy, at least in the short term. It takes time for firms to make massive changes like this and in the mean time this tax will just decrease productivity and costs.
All in all, it is my personal opinion that the carbon tax was a good idea. Most people think that the free market should make these types of decisions. However, the negative externalities of pollution is currently not incorporated to the bottom line of most companies. This mean that the free market is blind to it and it doesn’t factor into supply and demand. As such, I think that a carbon tax just allows the invisible hand of the market to do it’s job. However, I am more than happy to be convinced there is a better solution. Please, share your ideas below.