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How to make a bad argument for a good idea

08 Aug 2009 - Bruno Prior

There are lots of good arguments for a carbon tax. Trust -The Economist- to come up with a bad one.

"A tax on carbon is hardly going to stop the lights going out in a few years, but it would provide a floor price for power, giving investors a clearer sense of likely profits."

Is that just a typo? Did they mean "a floor price for carbon"?

If not, they are confused. A carbon tax will only give investors a clearer sense of likely profits by removing one component of their costs that has a volatile price - the cost of carbon, particularly under the EU-ETS (if they replace these mechanisms with a carbon tax, rather than supplement them as companies like EDF would prefer). To the extent that it increased the minimum price at which power could be produced from the cheaper, fossil-fired technologies, it would increase the confidence of producers of low-carbon energy, but not the confidence of those who must pay the carbon tax, who would have to raise their prices accordingly, aiming to retain similar margins, but more exposed to competition from volatile producers like wind energy, and just as exposed to other inherently volatile components, such as fuel costs and demand.

What a carbon tax would do would be to make alternatives to fossil fuels relatively more competitive, displacing the use of fossil fuels in the most marginal applications, reducing demand, prices and dependence on imports of fossil fuels. That is all good and wise, but it is related only peripherally to a floor price for power and greater certainty about profits, other than for low-carbon producers.

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