“A ‘Pigouvian’ tax is set at a level where the damage from distorting the economy, which any tax inevitably causes, is offset by the rectification that it brings about. Such a tax is generally considered superior to having the government centrally determine measures to redress inadvertent damages resulting from production. This is because it incentivises firms to seek out the cheapest solutions and avoids governmental failures inherent in ‘winner picking’. …

Devising a ‘Pigouvian’ tax requires not only measuring the damage but then estimating the level of tax required. This presents difficulties. These are compounded by the issue at hand (if it exists) being a problem that can only be resolved with a universal adoption of mitigatory policies. The core issue becomes impossible to resolve when, as is presently the case, countries taking serious abatement action represent only 30 per cent of global emissions. …

This aside, the idea of tax neutrality entails the carbon tax replacing other, less efficient measures presently in place. These include the renewables targets, subsidies from the government’s Clean Energy Finance Corporation and direct from the budget, as well as myriad measures in place at the state government level.”

Originally published here at Spectator Australia on 27 June 2022.