Question

3. A carbon tax makes the individuals and firms to pay for the full social cost of carbon pollution. Do you think the carbon tax is a good policy to reduce greenhouse gas emissions in Australia? Why or why not? Whenever appropriate, you should supplement your answers with suitable diagrams.

(Hint: What are the pros and cons of a carbon tax?)

Answer 1

The carbon tax has been touted as the most effective solution to the environment crisis that can soon endanger may countries including Australia. One of the biggest advantages of the carbon tax is internalizing the cost of emitting carbon in air and water. Without the tax, the firms do not care about how much pollution they will produce (it is a negative externality) as their private costs are lower than the social costs of pollution. Through a carbon tax, we can raise these private costs to a level where the externality is internalized and the amount of pollution greatly diminished. It will also encourage firms to invest in other more carbon-efficient production designs in the long run. It will also drive out the heavy polluters who at the same time do not produce much social good. The government will also raise revenues which they can use in environmental cleaning.

However, there can be certain cons as well. Carbon is one of most important inputs in the production processes of many industries contributing heavily to growth and employment, especially in developing countries. A lot of Australia's GDP as well comes from industries which use large amount of carbon. These industries will certainly slow down with the carbon tax and the economy is going to be adversely impacted in the short run. If the impact is large enough, costs may outweigh the benefits. it will also impact small scale industries who do not have the resources to shift to alternatives to carbon. This can put excess pressure on alternatives to carbon, especially of they have not been developed or are scarce.