The carbon tax, costs vs benefits

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.





  1. Climate change and global warming hasn’t been a prioritised issue in many countries at all. If people in power are trivialising the issue, the public may not even see at as a real issue. Additionally, this habours misinformation, and the negative connotations of ‘tax’ prevent the public from taking a stand.

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  2. Companies like tesla are really pushing the boundaries of renewable power storage and power storage. They are making them more efficient and cheaper and it can actually be used as a good and reliable alternative to fossil fuels.

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  3. Great article Dylan. I think that economists have had their ‘economic growth’ blinders on for too long, and haven’t realised that damage to the environment is bad for economic prosperity as well. I hope it’s not too late to change the trend of global warming! Myself, I will be investing in an electric or at least hybrid car in the future to do my part.


  4. If the free market was left to decide on its own carbon tax, it wouldn’t be very effective as it would impact on profits, so government intervention is necessary

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  5. I dont really think a carbon tax is the most efficient way to go about promoting green energy. Production of energy using coal would be very cheap for us, much cheaper than building new infrastructure for green energy so the tax would probably just end up going straight to consumers due to the to the lack of competition.

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  6. Wouldn’t it be better to subsidies production of clean energy, rather than having a carbon tax? Instead of making it unnapealing, shouldn’t it be better to make clean energy more attractive?

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    1. One problem with that is that established organisations such as coal plants will have no incentive to switch in that case, as almost all of their existing capital would need to be replaced and even with subsidies it would likely be more profitable to continue burning coal.

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  7. I think the carbon tax would have been a good idea in theory but many people don’t like the idea of having to pay more tax to keep the environment from being further damaged.

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  8. I think the biggest issue is going to be the economic issues faced if other countries do not adopt a similar tax, but the likelihood of that happening is very slim. Furthermore, any Australian government that does impose a carbon tax will not be popular with voters, as the word tax is seen as negative, and jobs will potentially be lost, once again reinforcing the difficulty of applying a carbon tax

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    1. If other countries arent doing anything why should we?? Our economy is more important then theirs and we shouldnt have to sacrifice out living standards if they arent.

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  9. The carbon tax will probably make a return either by having a Labour government voted back in, or Malcolm Turnbull ignoring his party. It didn’t have a large economic impact


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