Carbon tax: the cheapest way to reduce greenhouse emissions

Tim Colebatch has a good opinion piece in this morning's Age, advocating a carbon tax for Australia:

To be pragmatic and rational in this debate, the starting point is that if the scientists are right, then global warming implies colossal risks for mankind, and policies should actively try to minimise them.

Then the task is to achieve the most effective response at the minimum cost. Governments can help foster technology development, as the Howard and Bracks governments are doing - but the real job is to put in place a structure that will see those technologies used...

Suppose we test the technology, we find it works, but (inevitably) at a higher cost than doing things the old way. What happens then?

With the policies we have now, nothing would happen. Companies will not make philanthropic gestures by choosing new expensive technologies over old cheap ones. Without a price mechanism to give firms an incentive to choose (and retrofit) new low-emission technologies, they won't be used.

By harnessing market forces, a broad carbon tax gives you more bang for your buck than alternative policies: it's cheaper, more effective and - I would argue - fairer.

It's cheaper than, say, subsidising renewable energy or research into 'clean coal' because, by simply setting a price on carbon emissions and letting industry take whatever measures they like to respond to that price incentive, industry will take the cheapest measures. As Colebatch says:

[A report commisioned by the Victorian government] ranked renewable energy as the most expensive option apart from carbon capture and storage(!). Far more cost-effective are improving the efficiency of energy use, making existing generators more energy-efficient, switching from coal to gas, and shutting down heavily polluting plants (such as Hazelwood) to install energy-efficient ones.

Instead, we have Hazelwood given an extended lease of life, with no retrofit to use clean coal technologies, while Victorians will subsidise the development of a wind industry here.

It's more effective because you're providing an incentive to reduce emissions whatever their source. Setting a minimum target for the use of renewable energy is good but promoting renewable energy is only one part of the equation. Using our existing energy more efficiently is at least as important.

And it's fairer because it looks at all sources and equally penalises emissions from all industries. Rather than targeting renewables or coal, it provides a price incentive that applies to all energy sources and all energy uses.

Essentially it allows people to make their own choices about how best to reduce their emissions. If carbon is priced equally across different energy sources, sectors and industries, consumers and businesses can ultimately choose how to respond without the costs of those choices being distorted by different policies applied to different sectors.