Are you, or have you come across, someone who is against the carbon tax proposed by Julia Gillard? People oppose the carbon tax for a number of reasons—some strong, some weak, some simple, some complex. They may oppose any attempt to put a price on greenhouse gas emissions, or they may oppose Julia Gillard’s carbon tax in particular. Three major reasons underlie general opposition to greenhouse gas emission pricing: (1) opponents believe the full cost of a product should not be included in that product’s price; (2) opponents believe global climate change does not exist; (3) opponents believe that global climate change exists but that human action cannot mitigate it. This post will deal with the first reason, which is also the easiest to rebut.

So, to deal with the first reason. At the moment products such as gas, electricity, steel and copper, for example, cost x dollars. With the carbon tax (ct) added, the price of those products will be $x + ct. For example, say that an Australian made stainless steel kitchen scourer now costs 70 cents. Once the carbon tax is introduced you can expect the price of the scourer to rise by $23 for every tonne of carbon dioxide (CO₂) emitted to produce it. If 1kg of carbon is emitted to produce the scourer you can expect the price to rise by 2.3 cents to around (let’s round up) 73 cents. To many people this appears as a simple 3 cent price rise. Scourers now cost 70 cents. Once the carbon tax is introduced, scourers will cost 73 cents. Arms fly up in the air, people complain, indignation abounds, and politicians start to recite lines about ‘cost-of-living pressures’. But the question of whether the indignation at the increased price is justified comes down to whether the cost of scourers truly represents the cost of their production.

Some carbon tax advocates argue that scourers only cost 70 cents because scourer manufacturers avoid paying the full cost of production. Some of the cost that should have been incurred during production has been avoided. Think, for example, about rubbish disposal. We accept that manufacturers have to pay to dispose of their refuse. They can’t just dump their waste products into a river or your local park. This cost is then passed on to you, the consumer, as part of the product price. But when the manufacturer doesn’t pay to dispose of their waste, the price you pay for the product doesn’t include the cost of waste disposal. Someone else is bearing the cost of disposal, as lost water quality or some other burden or inconvenience. Economists call these costs ‘negative externalities’.

Negative externalities are costs that should have been incurred by a manufacturer during production but which the manufacturer avoided paying by shifting the burden for that expense onto someone or something else. At present, when producing our stainless steel scourers the mining company doesn’t pay for the carbon dioxide emitted into the atmosphere when digging iron ore out of the ground. The smelter doesn’t pay for the carbon dioxide emitted into the atmosphere when heating the furnaces to turn that iron ore into stainless steel. The manufacturer doesn’t pay for the carbon dioxide emitted into the atmosphere when that stainless steel is turned into strips and rolled up into tight little balls. The transport company doesn’t pay for the carbon dioxide emitted into the atmosphere when delivering the finished scourer to your local supermarket. And the supermarket doesn’t pay for the carbon dioxide emitted into the atmosphere while generating electricity to power the fluorescent lights that illuminate the isle where you purchase your scourers at 70 cents each. A carbon tax is a way to make everyone within the complex process of producing your kitchen scourer pay for the carbon dioxide that they emit into the atmosphere — a cost that until now they have avoided paying. So, until now scourers have cost 70 cents because that price did not reflect the true cost of the product. When the cost of carbon dioxide emissions is factored in, the price of scourers will be 73 cents.

Arthur Pigou

This increase in price is called a ‘Pigouvian tax’. Named after the philosopher-turned-economist who came up with the idea of economic externalities, Arthur Pigou, a Pigouvian tax is a tax imposed by a government in order to recoup negative externalities. Pigouvian taxes gained popularity during the 1990s as politicians began to address the problem of industrial pollution. Throughout this period Denmark, Finland, Germany, Norway and Sweden all introduced environmental taxes in some form, to varying degrees of success. While Sweden reduced its carbon pollution by 9 percent between 1990 and 2006, Norway’s per capita emissions increased dramatically over roughly the same period (see here). Despite the different outcomes, industries in both countries now pay to emit carbon dioxide. The cost of emitting carbon dioxide is no longer externalised. Julia Gillard’s carbon tax is a similar attempt to make manufacturers pay for externalised environmental costs.

You could only object to a Pigouvian tax for two reasons. The first reason: you don’t believe that the price of a product should reflect the cost of its production. The second reason: you don’t believe that emitting carbon dioxide has any detrimental effects. As a reason for objecting to a carbon tax, the first is pretty weak. If the true cost of production is not reflected in the price of a product, then who is paying the externalised cost? In the case of CO₂ emissions, those who are affected by global climate change will end up bearing the ‘cost’ in the form of the burden or inconvenience that arises because of increased atmospheric carbon dioxide.

Now, if we’re not going to accept externalised costs in the case of carbon dioxide emissions for the simple reason that the cost of a product should reflect its true cost, we shouldn’t accept it when it comes to other products. But there are cases in which we accept that the price of a product does not reflect its true cost. A great example is postage. In Australia you can post a letter to anywhere in the country for 60 cents; however, the true cost of sending a letter to a remote location can be upward of twelve dollars.[1] Technically, in such cases the extra cost has been ‘externalised’. In this case the burden is taken up by people who live in cities, where economies of scale (i.e. the delivery of large amounts of mail simultaneously) make the true cost of postage much lower than 50 cents. Carbon dioxide emissions as the externalised costs of manufacturing may fall into the same category as under-priced postage. In both cases someone is picking up the extra burden; in neither case should we take it for granted that this is a just way to spread costs.

As mentioned, however, a second reason to oppose the type of Pigouvian tax proposed by Julia Gillard is that you don’t believe that emitting carbon dioxide should incur a cost because emitting carbon dioxide has no detrimental effects. I’ll deal with this reason and the claims underlying it in the next instalment. Until then, try the following response whenever you come up against someone who opposes Gillard’s carbon tax. When you hear someone say ‘This is just another great big tax, so I’m against it’, try responding with ‘What? You don’t think the price we pay for goods should include the full cost of production?’

Notes

[1] Thank you to the kind reader who pointed out that postage is now 60 cents, not 50 cents as I had initially claimed. It’s been a while since I posted a letter. [↑ Back to text]