Carbon Tax for Dummies

Listening to the tenor of the debate over our upcoming Carbon Tax is a bit depressing. Nobody seems to want to explain it in simple terms. Allow me.

Up until now, anyone can spew out pollution into the air we breathe at zero cost to them. Whether or not you believe climate change is real*, polluting the air is no good. Economists call this an “Externality”. This is a fancy word for a cost that a business doesn’t pay. Cost to mining company of polluting waterways and land in third-world country? Zero. Externality. Cost to cigarette companies of smoking-related disease or litter? Zero. Externality. Cost to coal-burning power station of the CO2 and other gases belched into the air? Zero. Externality. Of course all of these things will have to be paid for later, by society as a whole (and maybe our species in the end). So it’s not that these things have no cost, it’s just that the cost is pushed onto someone else.

Let’s say we have two electricity retailers: Green Energy and Dirty Power. Green Energy uses Hydro, Wind and Solar and has almost no emissions. Electricity from them costs $105. Dirty Power has a coal-fired power station and plenty of emissions. Electricity from them costs $100. So most people buy electricity from Dirty Power.

The Carbon tax comes in at $10 and now electricty from Dirty Power costs $110. Electricity from Green Energy still costs $105. With the $10 the government has collected, $5 is given back to consumers so they can now buy electricity from Green Energy, leaving the consumer no worse off. The other $5 goes to creating and improving clean energy production. So now more people will buy their energy from Green Energy because it’s cheaper, and less from Dirty Power because they’re more expensive (and polluting).

And the managers of Dirty Power will start investing in clean energy because if they want to stay in business and remain competitive, they need to lower their emissions so their product is cheaper.

* If you don’t believe climate change is real, please stop being an idiot and do some research.