The carbon tax worked. Proof of what economists always knew.

Australia is a pariah for its callous disregard of the global warming crisis. While it is fashionable within Australia to believe that the government is acting in the best interests of Australia's standard of living the rest of the world looks on them as bigots.

An example of the extraordinary behaviour of Australia is the repeal of the carbon tax. Various reasons were given including 'it didn't work'. (The other reasons are beyond the scope of the space we have.)

Taxes work by raising the price of a good and so changing the relative price of the good. As a result some consumers move to relatively cheaper substitutes and consumption of the taxed good falls.

The practical difficulties of taxing a good like carbon are significant. Demand for energy is price inelastic and so small rises in price have only a very small effect on demand. Demand is inelastic partly due to the lack of substitutes, the fact that energy is a necessity and it takes a long time to be able to switch to alternatives. Therefore the effect of the carbon tax was difficult to detect.

The chart below shows the changes in electricity generation, coal's share of that generation and emissions. Notice this shows percentage changes in totals, not absolute amounts. This is much more useful in tracking the effect of the policy changes.

 

The chart clearly shows that coal's share of electricity generation falls after the carbon tax was introduced in 2012 and that emissions fell even faster. Since the carbon tax was scrapped in 2014 coals share of generation has risen and so have emissions.

It is important to concentrate on the economics rather than the politics of this policy. Taxes do work (a Pigovian tax - see a post form last month) because changing relative prices will alter the allocation of resources. The problem is that it does take time to work.

The Guardian Australia covers the story here

As an extra here is a chart of how each state was generating their electricity on 7th April 2016.

 

Brown coal is the dirtiest fuel in terms of CO2 emissions. 

This article is relevant to both VCE and IB students. It can be used as an example for IB students and an Australian environmental policy is required knowledge for VCE.