The production of carbon dioxide is widely held to contribute to social / environmental problems such as global warming. This carbon pollution is a negative externality. It is a cost imposed on the whole of society and not just the individual who consumes a certain product. e.g. if you drive a car, the external costs are felt by everyone else.
Because certain carbon intensive industries create negative externalities, the social cost of production is greater than the private cost.
In a free market, these negative externalities are not included in the price leading to overconsumption and social inefficiency. We can say there is a missing market, because the external cost of carbon emission is ignored.
Diagram to show Welfare loss of Negative Externality
SMC = Social Marginal Cost (total cost to society)
PMC = Private Marginal Cost (cost to individual)
PMB = Private Marginal Benefit (benefit to individual)
The Purpose of A Carbon tax
The purpose of a carbon tax is to internalise the externality. What this means is that the final price of the good should include the external cost and not just the private cost.
In theory, the tax should equal the external cost. Therefore, the price consumers pay will be the social cost.
Demand will fall and the new equilibrium will be socially efficient because at this output, the marginal social cost equals the marginal social benefit.
Diagram to Show Carbon Tax
Revenue Neutral
In theory a carbon tax should be revenue neutral. This means the tax raised from taxing carbon emissions can be used to reduce other taxes. There should be no overall increase in the tax burden.
Benefits of Carbon Tax
1. Encourages Alternatives. Encourages firms and consumers to develop more efficient engines or alternatives to consuming carbon emissions.
- This might encourage more people to cycle or walk to work. This would have health benefits such as lower risk of heart attack.
- This could make it more feasible to generate electricity from green sources (e.g. solar power). If we develop more green sources it will also make us less reliant on oil.
2. Raises Revenue. The revenue raised from carbon tax could be used to subsidise alternatives such as green electricity.
3. Leads to a socially efficient outcome. It makes people pay the social cost.
Problems of Carbon Tax
- Production may shift to countries with no or lower carbon taxes.
- Cost of administrating the tax.
- Difficult to know the level of external cost and how much the tax should be.
- Possibility of tax evasion. Higher taxes may encourage firms to hide carbon emissions.
- If demand is price inelastic, the tax may have to be very high to reduce demand significantly.
- Consumers dislike new taxes and often don’t believe that they will be ‘revenue neutral’. This is not an economic argument, but it is a political reality and explains why it is often difficult to implement.
Carbon Tax vs Cap and Trade
See: Carbon Trading
Related
It’s not global warming. Its climate change, meaning not that our globe is beginning to warm, but also that we’re experiencing extreme temperatures from cold to warm. And not only that but also that it’s causing disruptions in ocean currents, and wind currents. You may not think this is serious but it’s changing the way the world even functions. Furthermore, climate change is causing the molecular formula of the ocean to change and become more acidic which is then causing reefs and aquatic life to deteriorate. Climate change is also causing the rising sea level, and thousands of species to be lost because they have to migrate to the poles where it’s cooler. You can choose to believe that climate change isn’t happening, but it is, and faster than anyone could have ever predicted.
Greenhouse gases create a barrier around the ozone layer. Normally the the sun’s says are able to mostly bounce off the clouds and go back into space. However, these greenhouse gases create this barrier and instead of allowing the sun’s rays to escape they are bounced back into the earth once again. One of the most significant greenhouse gases is carbon dioxide because it has increased so much. Yes, the world needs carbon dioxide to function, but you don’t want too much of a good thing. Our human influence on the earth is causing the carbon dioxide amounts to increase. People who believe that most of the carbon dioxide is naturally made, you should check you stats because I’m pretty sure that’s impossible with the increase in industrial factories all around the world. Are you aware of just how much carbon dioxide is released from the industrial world? How can you say we’re not impacting our world?
Now, I’m not saying I completely agree with the carbon tax. I believe it is a good idea because big companies are moved by money. Therefore if they’re losing a lot of revenue because of this carbon tax they will find a way to produce power without producing so much carbon. However, I don’t believe this will be effective unless countries all around the world make this decisions together. It won’t be effective if Canada introduces this tax but the United States doesn’t when they’re neighboring countries. In conclusion, I believe that the carbon tax could be very impactful if many countries band together.
Clearly life won’t be worth living after July 2012, so I’ve entered into a suicide pact with my family. The Labor government listening to scientists and economists instead of experts like John Du Bois on this page. They seem hell bent on depriving me of my god given right to degrade the planet.
Hey you guys are idiots, the carbon tax is great… learn to respect the planet who cares about where the money goes its more important that we save the planet it will reduce carbon emission by a little bit, and every little bit counts.. im in grade 1
You’re an idiot! The carbon tax is a con. It is a Labour initiative to get the country back into surplus by 2013 in any way shape or form it can. It is also a “greens” tax. Remember The “Greens” are running this country now. If Gillard backed down on Carbon Tax now she would lose the “Greens” support and therefore the Coalition would romp in. The carbon tax is the way for Labour to hang on to its jobs. Talk about self interest. What about the country?
What’s all this talk on global ‘warming’? The winters are getting extremely cold too – there is no warming, the weather’s going totally extreme.
Not sure what a tax will do about that…
But thankyou for the pros and cons and other info about carbon tax. It was really helpful. Its good to be educated on these things.
its really all about a changing of the guard ie., cultural & class
overturning of the paradigm so to speak.
Carbon Tax is more about politics rather than the environment ultimately.
polution has nothing or little to do with it all.
After reading the article along with its many comments i conclude that no one really knows how this trial and error ‘solution’ will pan out, (assuming that there is a problem in the first place). For instance how will the consumers of Australia really react to this proposed tax if it goes ahead?… we don’t know. This is why it is of such controversial nature, people are worried about the implications it will have on them, with such high costs of living i certainly wouldn’t want to start forking out money for a questionable purpose, however this is just one of the many assumptions that we are plagued with in this time of uncertainty.
For this tax to have any credibility certain questions and statements must be answered, am i the only one that thinks this a ‘stab in the dark’ attempt of fixing the ‘problem’, i say ‘problem’ because carbon emmisions are in itself a highly debateable topic, there is yet to be factual solid evidence that co2 emmisions are a direct cause of global warming.
For the people of Australia and indeed the greater world, how will this impact you? will the tax on major producers be handed down to consumers? Will both producers and consumers change their ways in order to make room for an environmentally sustainable world…. can they? Does Australia have the proper policies and guidlines in place to support such a tax proposal?
Everyone is entitled to their own oppinion on the subject, and as such no one person is correct, all i ask is that you do your homework before making a decision, to truly solve this issue (providing there is one) we need to come together as a whole and unite to negotiate for a fairer more stable and secure outcome that will benefit everyone as well as the environment.
Thankyou for your time.
Leon.C
I think everyone should stop blaming CO2 on global warming and carbon tax WON’T encourage us to walk because the tax isn’t on us!!
Who wrote this? I need to reference in an assignment. Thanks.
Tejvan Pettinger, Oxford, UK
In 1973 I was told by lecturer at LaTrobe University that CO2 was warming up the globe. We are currently having a normal cold and wet winter. Four weeks ago Ms Gillard told Parliament that at present there is the greatest concetration of CO2 in the atmosphere for the last million years. Really, when is the globe going to start to warming up?
Your economic theory is very simplistic and does not take into acount the variables which are part of the real world. The modelling done by evironmental scietists is just as simplistic. The carbon tax is a regressive tax. The government wants expand the tax base and, like the GST, it will fall more heavily on low income earners. Economic theory is irrelevant for MS Gillard. She needs the money to reduce the deficit, pay for the things she promised the indipendent MPs and the Greens, who are keeping her in power.
Hi, I just wanted to thank you for providing the pros and cons of carbon tax. You helped me alot for my essay (it’s being sent to a selective school I am applying for). If I got good marks, I owe you credit, but don’t worry because I didn’t copy and paste. Thank you; it was very thorough and well arranged.
So if i throw a bit of oil on that 1km of road it won’t have any effect but if i constantly throw oil on it what would happen to that road and to the people who will drive on it?
Fat is natural eating a bit is no problem but what happen if you keep eating it? So is all the doctors wrong about eating to much fatty food is bad for you?
Best analogy ever!
When are the thickheads ever going to get it through their skulls??
In the light of the fact that the volcano in Iceland put out more pollution than for the whole of time, and now the volcano in Chile not much less, saying nothing for the hundreds of other volcanoes
…
blowing their tops, Humans have a long way to go to beat mother nature.
Australias contribution [see below] is really significant!! NOT!!!
MAKES ONE ASK WHAT DO THEY REALLY WANT TO DO WITH THE EXTRA MONEY THEY WILL TAKE FROM THE TAX PAYERS .
Subject: Carbon Facts vs. Carbon Tax
Let’s put this into a bit of perspective for laymen!
ETS is another tax. It is equal to putting up the GST to 12.5% which would be unacceptable and produce an outcry.
Read the following analogy and you will realize the insignificance of carbon dioxide as a weather controller.
Pass on to all in your address book including politicians and may be they will listen to their constituents, rather than vested interests which stand to gain by the ETS.
Here’s a practical way to understand Julia Gillard Carbon Pollution Reduction Scheme.
Imagine 1 kilometre of atmosphere and we want to get rid of the carbon pollution in it created by human activity. Let’s go for a walk along it.
The first 770 metres are Nitrogen.
The next 210 metres are Oxygen.
That’s 980 metres of the 1 kilometre. 20 metres to go.
The next 10 metres are water vapour. 10 metres left.
9 metres are argon. Just 1 more metre.
A few gases make up the first bit of that last metre.
The last 38 centimetres of the kilometre – that’s carbon dioxide. A bit over one foot.
97% of that is produced by Mother Nature. It’s natural.
Out of our journey of one kilometre, there are just 12 millimetres left. Just over a centimetre – about half an inch.
That’s the amount of carbon dioxide that global human activity puts into the atmosphere.
And of those 12 millimetres Australia puts in .18 of a millimetre.
Less than the thickness of a hair. Out of a kilometre!
As a hair is to a kilometre – so is Australia ‘s contribution to what Julia Gillard calls Carbon Pollution.
Imagine Brisbane ‘s new Gateway Bridge , ready to be opened by Julia Gillard. It’s been polished, painted and scrubbed by an army of workers till its 1 kilometre length is surgically clean. Except that Julia Gillard says we have a huge problem, the bridge is polluted – there’s a human hair on the roadway. We’d laugh ourselves silly.
There are plenty of real pollution problems to worry about.
It’s hard to imagine that Australia ‘s contribution to carbon dioxide in the world’s atmosphere is one of the more pressing ones. And I can’t believe that a new tax on everything is the only way to blow that pesky hair away.
And they want you to accept this snake oil. Stand Up be counted and tell your MP its all hot air
Good job i am a grade 5 and are copying and pasting for my Plus Minus and Interesting project thanx!!!
There are no pros to the carbon tax. IT is negative to EVERYONE except those producing these so-called poisonous gases. (carbon of course is an essential element for life to exist on earth – ask any tree or bush what photosynthesis is all about).
The large polluters will end up profiteering from the implementation of such a tax as they will pass their costs onto the consumers down the line and we will all end up paying a lot more for EVERYTHING.
This government MUST GO
You should talk bout the truth of carbon tax.
please.
Why is it that the pro carbon tax advocates either can not or will not provide a clear simple answer as to why we need a carbon tax and how it will help the environment. I personally believe there are many more things to help the environment that are more important, are proven effective and can be willingly done by everyone. Enough of the smoke and mirrors and other BS.