Benefits of the Carbon Tax

by David Taylor

I was recently asked to look into the benefits of the carbon tax (by an A-political organisation). I do have a view on the tax, but at this juncture it would be inappropriate of me to express those views. Having done some research on the topic though (purely on the basis of "being in favour of the tax") I thought I would add some of my insights to this blog.

Let’s be frank about this - it’s simply not possible for a government to please everybody. The Prime Minister and Treasurer (in consultation with the Cabinet) make decisions that clearly favour one group of Australians over another. Part of that’s because there’s an unequal distribution of wealth in this country, and that creates all sorts of distortions. The carbon tax has raised eyebrows because it’s a clear transference of wealth from big business to working and lower-middle class Australians. If the science on climate change is right though, it’s a very positive step forward.

At the outset, I should acknowledge three positive initiatives created as a result of the introduction of this policy.

The first is the establishment of a Clean Energy Finance Corporation. The government’s throwing $10 billion at this. Apart from being a positive step toward managing future environmental initiatives, it’ll certainly create more jobs.

The second is that Families with two children will receive up to $220 in extra assistance through Family Tax Benefit A, and other families will receive $110. Overall, some families – in the short term – will be financially better off as a result of the price on carbon. That’s direct stimulus for the economy.

The third is that the tax aims to reduce emissions to 5 per cent below year 2000 levels by 2020, and 80 per cent below 2000 levels by 2050. Essentially it’s giving the environment an opportunity to breathe a little easier in the longer term.

So what you end up with is a price on carbon, or a revenue grab, that works in a similar way to a tax on cigarettes. That is, the science tells us that the final outcome from engaging in a particular exercise is dangerous to our overall well-being: One is called pollution; the other is an addiction to nicotine. In both cases the government is using the revenue raised from ‘polluters’ to pump into solutions or cures for the underlying problems.

The government tells us that global warming is doing damage to the world (and Australia). It’s also understood that by reducing greenhouse emissions we can manage the problem and potentially limit its impact. The economics tells us that by raising the cost of polluting, companies will do it less, thereby moving towards a clean energy future. In the short term, polluting businesses will pass the extra cost on to consumers through higher energy bills. The government has anticipated this though by providing families and singles with extra benefits (see above). In the longer term, it’s hoped, businesses will eventually be incentivised to cut their emissions and contribute positively to the community and to the environment. That’s in an ideal world.

Stepping back a bit though, it’s important to recognise the significance of climate change for Australia in particular. We live on a hot and dry continent. Our agricultural sector will grow more and more important to our economy. For example as China’s economic growth slows, it may diversify away from Australian resources to demand more service-based products (like legal services) and potentially agricultural products as well. Helping to limit the damage we do to the environment is crucial to ensuring we can work on delivering internationally competitive organic products that are the envy of the world. That may end up being our competitive advantage.

The other crucial service Australia exports is the country itself (tourism). The Great Barrier Reef is a key part of that package. It’s understood that global warming is having a negative influence on the reef. The more effective we are at managing the change to the climate (by reducing our carbon emissions) the quicker we can rescue this crucial part of our offering to the rest of the world.

End note:

As an economic s and finance commentator I am A-political. I’m not attached to a political party being in government. My only bias is that, as an ‘economist’, I would prefer the government of the day to be the most effective of all the alternatives at managing the economy. This piece of legislation (the imposition of a price on carbon) has both positive and negative economic implications attached to it as a policy. My aim in this commentary piece is simply to highlight what I perceive as the benefits. Of course there are negative implications of the policy too.

This article also assumes the latest scientific research on climate change accepted by the current government is accurate.

David Taylor


The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.