Purpose of a Carbon Tax

Many commentators seem to think the purpose of a carbon tax is to reduce consumption. This is only part of the story, as many uses of energy have inelastic demand, i.e., the amount you use is independent of price up to the point where you can’t afford it, and go out of business or have to make major changes in your lifestyle. The increasing price of oil and the consequential change in price of petrol is a case in point. Car usage hasn’t changed much. It can’t for those who do not have access to public transport and have no other option for commuting.

While some of the problem can be addressed by infrastructure changes (e.g. spending more on public transport rather than roads), those changes don’t rely heavily on a carbon tax.

The bigger purpose for a tax that is seldom mentioned (but is a key component of economic models) is narrowing the price gap between clean and dirty energy. That has the biggest effect on large-scale investments, such as new power stations, and it is hence critical that we put the scheme in place soon and have a realistic plan for ramping up the price.

In the meantime of course we should still address the other components of the problem including changes in infrastructure, mandatory renewable energy targets and promoting energy efficiency (where but in Brisbane do shopkeepers air condition the streets, I ask with tears in my voice).

Any alternative to a carbon tax or emissions trading scheme needs to fit in with the big picture. It must at very least include a mechanism for promoting clean energy over dirty energy.