Why we needed a carbon tax yesterday.

For starters, I’m not a big fan of taxes. I don’t know anyone who is. But I am a rather big fan of logical approaches to solving problems, so I find myself supporting the notion of a carbon tax rather enthusiastically (which, in a province like Alberta certainly puts me in a minority). This post explains why a carbon tax (and other consumption taxes) are a great idea, from a couple of different angles. First, I’m going to make the assumption that you don’t belong to the small percentage of the population that still denies that climate change is a reality and that it’s human-caused. Still though, if you are a climate change skeptic, you probably would agree that using less fossil fuels would result in a net-benefit for humanity and the environment. If neither of those is true, feel free to go read this piece of journalistic drivel by a British columnist.

Let’s consider something commonly known as “free market economics”. You know, supply and demand type stuff. Let’s start with a look at cigarettes, which for some time have been subjected to heavier and heavier taxation as society recognizes the high “externalized costs” (more on those in a minute) of tobacco smoking. In 2002, Alberta increased taxes on 25-packs of cigarettes by 2.25$, and smoking rates dropped 24%. Youth smoking rates dropped from 24% to 19% the following year. Pretty effective, no?

Externalized costs: No proper discussion on taxes and free markets is complete without recognizing that businesses that cause problems, be they cigarette manufacturers or oil producers, benefit immensely by externalizing many of the costs of production, consumption and the clean-up that ensues from their operations. If cigarette manufacturers were on the hook for every case of lung cancer, they would quickly go out of business. Oil companies pay nothing for the air pollution caused by the consumption of their product…society at large is on the hook for that. A related idea to externalized costs is the “tragedy of the commons”.

Let’s get back to the economics for a second, and look at something called the “marginal cost of abatement”. Basically what this means is that there is a certain level of pollution (for all pollution) that is most cost effective, for both society and polluters. Once you move beyond that most efficient point, each additional “unit” of pollution that you’ve prevented costs more to the producer than the damage that it causes. For example, if it was going to cost a company more to eliminate the pollution (through technological upgrades) then it was going to cost them to pay the fine for emitting the pollution, chances are they’d go the fine route. Wouldn’t you?

How do we decrease (abate) pollution? We can either increase efficiency (buy a prius) or, alternately, use less of the pollution-causing substance (ride our bike). Both of those scenarios (efficiency increases and usage reduction) are influenced most heavily by price. An increase to the price of carbon incentivizes manufacturers to make more efficient products, and would encourage a decrease in consumption among consumers. Won’t a carbon tax drive up the costs of everything else? Yes. Which will have an adverse effect most notably on people who can’t afford it, people who spend a high proportion of their income on non-discretionary things like heating their house and buying groceries. Which is why, for a carbon tax to be socially acceptable, it should be accompanied by changes to the tax structure as a whole to ensure that it’s not implemented in a regressive manner (good definition of regressive taxes here).

Regardless of your stance on the environment, it’s tough to make the argument that we don’t need to reduce the amount of carbon that we’re currently burning.

Because it turns out that the air we breathe might be the largest “commons” left in the world. And unless smog induced “nuclear winters” are part of your desired future, we should probably figure out a way to manage it.

What do you think?

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